A modest proposal for resolving the Eurozone crisis

DOI: 10.1007/s10272-012-0424-9

Sovereign Debt Crisis

Yanis Varoufakis and Stuart Holland

A Modest Proposal for Resolving the Eurozone Crisis

This paper presents three simple policies for overcoming the crisis that can be implemented immediately and require none of the moves such as national guarantees or scal transfers to which many Europeans are opposed, nor moves towards federation that entail Treaty changes, which electorates are most likely to reject. The logic behind these policy proposals is juxtaposed with the false dilemmas that currently impede clear thinking and immobilise Europes policymakers.

Caught up in a crisis of its own making, Europe is fragmenting. A euro in a Greek bank has a lower expected value than a euro in a Spanish bank, which, in turn, trails the value of a euro in a German bank account. There can be no better sign of the common currencys disintegration than this.

And it is not just a matter for the eurozone. The fallout from a eurozone disintegration will be so severe, and the rise of nationalism so cataclysmic, that it is pure wishful thinking to believe that the European Union can be preserved, except perhaps in name, if the euro system succumbs to the centrifugal forces it is now experiencing.

Following a sequence of errors, delays and shenanigans, Europes leadership has stunned the world with its failure to take joint action. Most commentators lament the incapacity of Europes political and bureaucratic elites to act speedily and in a coordinated fashion. While there is truth in this, the recent double-edged ECB intervention vis--vis Europes banks1 shows that Europe can act decisively. The problem, however, is that, so far, its political leadership has pursued policies which it justi es on the basis of (a) a poor diagnosis of the nature of the crisis and (b) two false dilemmas.

The Nature of the Eurozone Crisis

The eurozone crisis is unfolding on three interrelated terrains.

Banking crisis: Sparked by events across the Atlantic and the English Channel, the problem with the euro-zones banking crisis was never properly addressed. The reason was the terribly odd arrangement whereby governments which lack the backing of a national central bank maintain national control over global banks within a transnational currency union. At a time when forced recapitalisation of essentially...