Yanis Varoufakis: Have Merkel & Macron Just Announced a Eurobond-Funded Godsend for the EU?

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Yves here. It’s gratifying to see what I think of as the old Yanis Varoufakis back. As much as it made sense on one level for him to throw his lot in with Syriza, and Greece was in such desperate straits that it wasn’t entirely crazy to try for what amounted to a Hail Mary pass, the new government managed to have its bad situation worse. Its efforts to overplay a very weak hand managed to unite the usually not-all-that-well aligned EU against Greece, resulting in even tougher austerity terms than were originally on the table.

And there was a narrow path to at least a less terrible deal. The EU was terribly frustrated by corruption and the lack of tax collection in Greece, save for government employees. Syriza as the new kids in town, and self-styled radicals, in theory could have cracked down on the oligarchs. Syriza went early on to US Treasury officials, and initially got a sympathetic hearing (and recall the US has some sway at the IMF). I’m told by DC insiders who were party to the discussions that had Syriza looked serious about tackling the broken tax system, Treasury would have twisted arms in Europe to cut them slack, and some European countries independently would have been sympathetic.

What was the play Syriza failed to execute? They could have threatened to yank the licenses of the major broadcasters unless they paid their taxes due. But I am also told Syriza felt it depended on favorable coverage to stay in power and didn’t feel it could afford to alienate them.

Now to today’s topic, a proposed EU recovery fund. An overview from CNN:

German Chancellor Angela Merkel and French President Emmanuel Macron proposed the creation of a recovery fund worth €500 billion ($543 billion) that would help the EU countries and industries hit hardest by the coronavirus pandemic….

“To support a sustainable recovery that restores and enhances growth in the EU, Germany and France support an ambitious, temporary and targeted Recovery Fund,” Merkel said, speaking at a video news conference….

Divisions among member nations have slowed progress on a recovery fund that the European Commission had hoped could raise at least €1 trillion ($1.1 trillion) to rebuild regional economies.

Charles Michel, president of the European Council of EU national leaders, had called for the package to be operational by June 1. But the Commission failed on May 6 to finalize its proposal.

Differences over whether the fund should provide loans or grants to the hardest-hit countries such as Italy and Spain stalled progress. Grants, or direct money transfers, would imply a degree of debt sharing that states such as the Netherlands, Austria and Germany have long resisted…..

Macron said the EU recovery fund would enjoy the backing of the European Central Bank. While the fund would have to be repaid over time, that burden would not fall solely on those who need the help most.

“These 500 billion euros will have to be repaid,” Macron said, but “not by the beneficiaries,” he added.

The Financial Times has more detail on how the plan might work:

No one should think their joint proposal for a €500bn spending plan funded by EU debt issuance unlocks a quick and easy resolution to negotiations among national governments. All 27 member states need to be on board, as does the European Parliament, for their plan to turbo-boost the EU budget to reach fruition.

But Germany’s decision to back the idea of the EU borrowing money on a large scale and then handing it out as budgetary transfers to hard-hit parts of the bloc marks a huge shift by Berlin. Ms Merkel and Mr Macron’s announcement applies pressure on the so-called frugal states in the north to concede that at least part of the recovery fund should be distributed in the form of grants, rather than loans, to beleaguered countries…

There are two key elements to the deal. Firstly, both countries want to empower the European Commission to borrow unprecedented quantities of money on the financial markets to create the €500bn recovery fund that will help support economic reconstruction efforts across the union.

The commission already has the ability to borrow money, but it has never been permitted to do so on this scale. Henrik Enderlein of the Hertie School in Berlin calls it a potentially “Hamiltonian moment”.

Secondly, Ms Merkel’s confirmation that the money would be treated as EU “budgetary expenditure” marked an important concession by Germany, which previously sided with those advocating loans to beleaguered states.

But many of the most difficult questions have been left open pending Ms von der Leyen’s expected announcement of a full set of budget proposals from the commission next week. Chief among them: if the money is paid out in grants, how exactly does the EU’s borrowing get repaid?

Mr Macron said that the answer is still — to put it gently — a subject of negotiation. The money “could be reimbursed by the member states by a repartition key that depends on their weight in the budget, by contributions that we could choose to decide on later, or by another mechanism”, he said.

Our David had already dampened down expectations for it by pointing out how early stage it was:

It’s a declaration, not a decision or even an EU policy statement. All such declarations are laboriously negotiated, and are interpreted in different ways by different parties. It’s not really a question of believing Macron (who is essentially untrustworthy anyway) so much as accepting that the game the French are probably playing is, firstly to get a joint statement with Berlin that commits the Germans to certain things, and secondly to count on the general atmosphere of crisis to push them towards the French position subsequently, with help from other members of the 27. It may or may not work ; we’ll see.

But as you’ll see, it’s even less of a step in the right direction than the hype would have you believe. Varoufakis’ statement is terse, so listen up!

By Yanis Varoufakis. Originally published at his website

On Monday 19th May 2020, Chancellor Merkel and President Macron announced a joint proposal for a 500 billion euro common fund, to be financed by allowing the European Commission to borrow from the money markets. The fund will, according to the Merkel-Macron proposal, finance directly businesses across the EU – by means mainly of transfers. Is this a breakthrough? Here is my answer on behalf of DiEM25.

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  1. Wycombe

    The irony of USA officials asking for better tax collection from other countries. ? You lot really are one of the least self aware countries in the world. Makes for great entertainment.

  2. Susan the other

    The EU’s Achilles heel. There is no sovereignty anywhere. I don’t follow the logic of the EU bonding for 500 bn euro with the “money markets” – and the proportion that each recipient of this money must pay back is not an express amount. What “money markets” are these? What are their sources – just a huge surplus of money since the rest of the planet is is deep depression for decades? Will these clever loans be negative interest? That’d be a good way to prolong the pain of worldwide bankruptcy resolution – let it take 4 generations and then we’ll decide what to do next. Since when are money markets so flexible? It’s probably a scheme to shore up Deutschebank and big corporations at the expense of future national taxpayers who will be earning negative interest. If the EU cannot conjure up something better than “shared sovereignty” in a squabbling union of nationalists and mercantilists then they have a plan even worse than our congress of incompetents, and they want to deliberate who gets the money and who pays the debt at some unspecified future time.

    1. Susan the other

      The reason the EU cannot spend directly into the EU economy and share the revenue in cooperation is because it has no sovereignty. All the EU needs is sovereignty and it can do whatever it needs to do.

  3. Biologist

    I wondered about the role of the ECB. As I understand (but am not sure!), the EU treaties forbid the ECB from directly buying member states’ government bonds, though they are free to do so in the secondary market. But is there anything in the treaties forbidding the ECB from buying these new EU-level bonds? I suppose direct financing of EU expenditure by the ECB is out of the question..?

  4. chuck roast

    I’m trying to figure out what a “Hamiltonian moment” is. Is it where Hamilton throws in his lot with Robert Morris, the Jamie Dimon of his day? Or was it when the boy took a well deserved ball from Aaron Burr? Maybe it is as described by brother Yanis…more bogus theatre…just like the play.

    And debt…the horror of horrors…we all know that only Deutsche and the Landesbanken are allowed to pile up unpayable debts. It’s all good. In another year or so they’ll be about ready for Hartz V.

  5. RBHoughton

    Yanis says its the usual thing. There is little reason and no history to suppose otherwise. Let’s all go out on the front door step and clap for Diem 25

    1. Dirk77

      In a way. Yet, I learned some things. Yanis’s prediction that a big wave of austerity is going to hit Europe starting next year is interesting. In other words, he expects the now usual 1-2 plan for disaster capitalism (for the developed world) to play out as it did for the GFC: crisis erupts, bailout rich but not anyone else. Newly destitute sell their assets to the rich for a song. Shackles are tightened some more until the next crisis. In other words, not helping the non-rich is the second element that makes this plan work best.

      1. skippy

        Consider if you would … these bonds don’t represent price [time and space issues] but – LEGAL – rights into an uncertain future … all things considered … E.g. per Robinson et al Capital is not steady state, but rights or legal claims to HPM is another thing.

        I would proffer that not unlike Hudson’s views on IMF loans bailing out bond holders, whilst the deed is done, dovetails with this on some level.

          1. skippy

            High powered money – is the net or total liability of the monetary authority of any nation, where my focus is on bonds issued in this case.

            It gets wonkish after that but its used to curb or induce inflation. My reference to Hudson focuses on the IMF bailing out Brazilian bond holders before austerity is imposed amounting to a legal claim wrt rights on price – relative to everyone else.

            Hence my views that these bonds are not issued as a means to facilitate any broad social good.

        1. Dirk77

          It may be because it’s the end of the week, but I think I get what you are driving at. Thanks. And this comment should go under your one from 5:40, but my new browser seems to be having issues with JavaScript.

  6. Robert

    Varofakis claims that the tax evasion investigation agency he set up, while he was the Greek finance minister, was disbanded with the blessing of the EU. The implication being that the EU was more interested in protecting its oligarch friends in Greece than in fixing structural problems with tax evasion in Greece. That seems to run contrary to your painting of the picture that Varofakis and Syriza were not genuinely interested in dealing with these problems.

    1. Yves Smith Post author

      My sources were at meetings of top Syriza officials with Treasury.

      And Varoufakis has not been a truthful reporter on other matters when he was Finance Minister, such as his plans to launch a parallel currency. I have pointedly avoided him for a while because some of his claims about that time are verifiably incorrect and self serving.

      Moreover, what is the point of a “tax investigation agency”? Syriza could have yanked the licenses of broadcasters for outstanding and past due tax bills of some of their major owners. There was nothing to investigate. You seize assets (here the licenses). Happens all the time here. Tax authorities garnish wages, seize bank accounts, houses, etc. The important thing was to establish credibility and take action. Go after low hanging fruit. “Investigations” are all well and good but they could never be the first line of action.

      1. hemeantwell

        Was Syriza’s hesitation to impose currency controls another factor inhibiting their moving on tax avoidance? If they signaled they were going strongly after unpaid taxes, would that have led to massive capital flight because tax avoidance had been so extensive?

        1. Dirk77

          If I recall correctly, the capital controls were needed for currency flight at least before Syriza decided to dump the Euro. Cracking down on tax avoidance could be another reason. But them not putting these controls in place before talking about dumping the Euro essentially killed that option. My takeaway was that Syriza and/or Yanis were just too inexperienced.

      2. Robert

        Interesting to know, though sad. He seems to be one if the better voices in the EU currently on the topic of reform within the block.
        Also although the EU is taking a slightly more aggressive stance towards multinational and oligarch tax evasion than the US or the UK, it is certainly still allowing the theft in Luxembourg, Ireland, and The Netherlands to continue unabated, so I am hesitant to believe their stated intentions regarding the prevention of Greek tax evasion.
        Do you have any links regarding his untruthful retelling of events? Would be interested to know more.

  7. Ignacio

    Thank you very much for this. At least there is a good thing with the statement: it has been registered. This is better than nothing! there is something apart from TINA.

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