When, in the autumn of 2008, George Papandreou assumed the government in Greece he found that the public accounts had been falsified by the previous conservative government of Karamanlis. He informed the Commission that the actual deficit was around 12 per cent of GDP and declared himself ready to take the necessary steps for a gradual return within the European parameters.

Except that the technocrats of Brussels, even though they had at best been negligent or at worst condoned this  to please the previous conservative government, and despite allowing for exceptional conditions in the ‘reformed’ stability pact after both France and Germany had breached it, insisted that the Pasok government, without any recognition of what its ‘seniors’ had deemed exceptions for themselves, should meet  the three percent deficit of the of Maastricht criteria, in the next three years.

In this, following Friedmanite and Washington Consensus inspired “structural adjustment” the Commission demanded public sector layoffs, salaries and pensions cuts without thinking through even the most basic principles of the circularity of expenditure and income. For the expenditure of the periphery of Europe is the income of its core. Three fifths of Germany’s exports are to other European economies.

Yet, “structural adjustment” is not working for Europe any more than it did for the developing economies in the 1980s. Almost without exception, economists are now agreeing that Greece is bound to an unavoidable default for the simple reason that, constrained in a no growth perspective, it will not be able to repay the debt. So the train of the Greek crisis continues to run into default in the midst of a popular protest verging on uprising. The anticipated default risks disintegration of the entire eurozone, given the interconnection within the bank’s system and the steadily downgrading of sovereign debt, as it is the case for Portugal. Unless there is prompt and strategic change very soon the outcome will not only be deemed the "Greek tragedy", but the suicide of Europe

Is it still possible to avoid a eurozone breakdown? Economists have proposed several solutions, whose major difficulty is not technical but political. The most recent has been published in the international edition of The Finamcial Times  (July, 4th, 2011) - A plan to save the Euro, and curb the speculators *– which was signed by Giuliano Amato and Guy Vehofstadt formerly heads of government of Italy and Belgium, and co-authored, among others, by Enrique Baron, Stuart Holland, Michel Rocard, former prime minister of France and  Mario Soares, former prime minister and president of Portugal. ( Versione italiana ; Versión en español )

The proposal, inspired by ideas that Stuart Holland made in his 1993 report to Delors and which Delors endorsed in his foreword (The European Imperative: Economics and Social Cohesion in the 1990s, Nottingham: Spokesman Press) and has presented in these columns and that re-outlined in the Paper ( European Bonds, Eurobonds and a new New Deal for Europe ), is not lacking in technical subtleties.

The opening lines of the declaration are politically significant: "Europe is losing a war between its elected governments and unelected rating agencies. Governments are trying to govern, but the rating agencies still rule. Electorates know this, which is why some European Union member states oppose fiscal transfers to others”. The default on the part of the nations most debt-exposed, they add, would hit banks and pension funds not only in the periphery but also in the core of Europe. The crisis would have a devastating effect, and no one would be immune.

If this is a realistic analysis, and it is hard to argue otherwise, it is possible to create a stabilisation tool to avoid the crash? The response of the authors is that a conversion of a share of national debt to EU bonds would stabilise the current crisis.

A comparable proposal was developed by The Bruegel Institute in May last year, but there is something new. The authors write that “the conversion of a share of national debt to the EU need not be traded. It could be held by the EU itself. Since it was not traded, this debt would be ringfenced from rating agencies, and its interest rate could be decided on a sustainable basis by Eurogroup finance ministers. In this way it would be immune from speculation. Governments would govern rather than rating agencies rule”.

This conversion of national debt into EU bonds, according to this proposal, would not necessarily need a new institution, given that they could be held by the existing European financial stability facility. Neither such a decision would need to be unanimous, since “It could be by a voluntary process of enhanced co-operation, as was the case with the creation of the euro itself. States that wished to retain their own bonds could do so”.

At the same time, bonds directly issued by the EFSF “could be globally traded, and attract surpluses from the central banks of emerging economies and sovereign wealth funds. These financial inflows into the eurozone would strengthen it and could fund growth and cohesion without fiscal transfers between member states”. The neglected legitimation that they claim for this is that the European Investment Bank “has issued bonds successfully for 50 years without debt buy-outs, national guarantees or fiscal transfers”.

The authors stress that bonds are not printing money. They are not deficit finance. They do not need fiscal transfers between states. Net bond issues would see new inflows of funds to finance recovery, rather than austerity. They urge Europe’s leaders to recognise this case,”both to stabilise the euro and deliver a New Deal for Europe”.

Insight considers this proposal an important step forward in the attempt to avert the announced crash of eurozone and calls for a frank discussion about it. 

*  (http://www.ft.com/intl/cms/s/0/1c6c3d0c-a59c-11e0-83b2-00144feabdc0.html#axzz1RJlRjW8E)