By Philip Pilkington, a writer and journalist based in Dublin, Ireland. You can follow him on Twitter at @pilkingtonphil
We’ve already seen how, paraphrasing Archimedes, that financial instruments can move the world in a bad way. We have an opportunity to reverse that. Warren Mosler and I have just published a policy note at the Levy Institute that would, if implemented, bring an end to the Eurozone sovereign debt crisis.
The ‘tax-backed bond’ or ‘Mosler bond’ is based on the MMT idea that fiat money gets its value because the government accepts it in the payment of taxes. As the MMTers have been saying since the Eurozone crisis began the reason that the European periphery nations are having such a hard time with their sovereign debt burdens is because they do not issue their own currencies. The policy note we have just published outlines a new approach to the problem. The country will issue new tax-backed bonds that in the event a sovereign proves unable to meet its financial obligation to its creditors can be used to repay taxes in the country in question.
The policy note itself is short and readable enough (I hope), so for further information I’d ask the reader consult the document in the original. Here I would prefer to deal with the politics of the tax-backed bond approach and the chances we have of getting it accepted.
First of all, the reason Warren and I published this paper is because I have been able to drum up some interest from one of the main opposition parties in Ireland. In the coming weeks our hope is to present the idea to them and then, if all goes well, to the government themselves. I cannot promise this however and much will rest on my own lobbying abilities. I can, however, speculate as to how the plan might be perceived by those involved.
The Irish government should love the idea — and so should any other peripheral country considering it. If successful it will mean that they will be able to return to the international credit markets straight away. Given that this is what the Irish government currently aspires to above almost all else they should have few objections to immediate implementation of the plan.
If the plan works the government that adopts it will also see their austerity burden instantly relaxed. While it will be up to them what type of fiscal policy they run after the adoption of the scheme with interest rates held steady they will have a lot more policy space than they currently have.
We all know the lobbying power of the banks, of course — both national and international — so what about them? Well, they should adore the idea too. After all, many of them hold large amounts of government debt from Ireland and the periphery that is currently at risk of default. Many have also taken rather large losses on the recent Greek PSI deal (the haircut, in finance-speak). If the tax-backed bonds were deployed and yields fell the banks would see their balance sheets improve overnight as previously toxic assets became liquid once more.
But what about the rest of Europe? What about those that are currently pushing austerity? My thinking is that they will like the plan too. Ask yourself this: why is it that other European countries are so mad at the periphery right now? Well, its because they’re seen as leaching off the rest of the European system. The core countries today feel like they’re bailing out the periphery. They feel like they are racking up government debt and shouldering risk because the periphery countries cannot keep their own fiscal houses in order.
But if the tax-backed bonds work there won’t be any more bailouts! The periphery would become solvent on their own. They would no longer be seen as a burden on the rest of Europe. This would mean that Ms. Merkel and others could go back to their populations and honestly tell them that the periphery countries are no longer relying on them for support. Instead they would have have shouldered their own debt burdens and taken responsibility for their own balance sheets.
Furthermore, if the tax-backed bonds work we will see an easing of tensions within Europe. While the economic crisis will not come to an end without further policy actions the political crises will slowly but surely dissolve. The air of panic that is currently stifling Europe will be removed and everyone will be able to breath easy. With the crisis gone leaders will be able to sit down and have an adult conversation about the future of Europe; about trade imbalances and budget deficits; and about democratic accountability and capital flows. Only then can we put all the childishness of the past few years behind us and focus on the real issues.
One final note — for posterity. If this plan gets implemented and it works MMT will have won a major victory. How many economists and commentators have poo-pooed the ideas of MMT as being fanciful and needlessly contrarian? Well, if these ideas can be used to solve what has become a major financial, economic and even geopolitical problem MMT will have more than proved its worth as an area of serious study. If this plan were to work and the economics departments continue to shun the MMT approach we will then all know for sure that those working within them are not merely incompetent but criminally ignorant.