From Yanis Varoufakis Blog. Very long guest post by MMTer Marshall Auerback. We don’t often see friendly collaboration amongst economists.
A(nother) PROPOSAL FOR SAVING THE EURO ZONE: Guest post by Marshall Auerback
…But there is a better and more transparent way: The proposal is for the ECB to create and then distribute trillions of euros annually to the national governments on a per capita basis. The per capita criteria means that it is neither a targeted bailout nor a reward for bad behavior. In fact, as the largest economy, Germany would get the largest distribution of euros from the ECB. This distribution would immediately adjust national government debt ratios downward, which eases credit fears without triggering additional national government spending. This serves to dramatically ease credit tensions and thereby foster normal functioning of the credit markets for the national government debt issues.
The trillions of euros distribution would not add to aggregate demand or inflation, as member nation spending and tax policy are in any case restricted by the Maastricht criteria. The SGP should be upheld in order to prevent the ‘race to the bottom’ whereby the most fiscally profligate derive the largest benefits. Furthermore, making this distribution an annual event greatly enhances enforcement of EU rules, as the penalty for non-compliance can be the withholding of annual payments. This is vastly more effective than the current arrangement of fines and penalties for non-compliance, which have proven themselves unenforceable as a practical matter.
There are no operational obstacles to the crediting of the accounts of the national governments by the ECB. What would likely be required is approval by the finance ministers. In theory, there should be no reason why any would object, as this proposal, which will enhance the SGP, serves to both reduce national debt levels of all member nations and at the same time tighten the control of the European Union over national government finances.
Additionally, it’s not inflationary, as it mere substitutes national bonds with reserves in the banking system and building banking reserves is not inflationary. This is confirmed by no less an authority than the BIS. So an essential part of the argument is the build-up of bank reserves is inflationary.
