No solution is in sight for the Greek crisis. And, while the EU and most
of the Greek people do not want a breakup from the Eurozone, Greece and its
partners should realize that they are at a dead end and that the time has come
for them to consider a wide range of alternatives, including a consensual and orderly
exit.
However, we question that leaving the euro via a break-up is the only
option left. Another solution is possible, which could help the Greek economy
to recover fast, and enable Greece to honor most if not all of its debt
obligations.
Greece should issue a special bond, called Tax Credit Certificate (TCC),
which would give to its holders the right to a tax reduction in two years from
its issuance. The TCC would be a two-year zero coupon bond, which the bearer
could use, upon expiration, to pay taxes and whatever financial obligation is
due to the Greek public sector at large. The TCCs would be negotiable, so that
recipients would be able to convert them in euro at any time, at a market
discount, and use the euro proceeds to finance any sort of expenditure.
Presumably, the use of TCCs as a mean of exchange for direct transactions would
also quickly develop. The TCCs might eventually evolve into a kind of domestic
currency, which would not replace the
euro but would circulate in parallel
with it.
The TCCs would be distributed free of charge (helicopter-money-wise) to
individuals and companies (based on each company’s gross labor cost bills). In
particular, since TCCs would reduce gross labor costs for domestic enterprises,
this would enhance their external competitiveness and support the recovery in
Greek internal demand without creating foreign trade imbalances.
TCCs would also be issued to fund social expenditure, possibly including
job-guarantee programs.
Annual TCC issues could start from, say, € 10 billion and gradually
increase thereafter. Assuming a conservative fiscal multiplier of 1.2, annual
TCC issues of € 50 billion would cause Greece’s GDP to grow – other things
being equal – by almost € 60 billion, thus offsetting the fall from the
pre-crisis € 240 billion to the current € 180 billion level.
Based on the current (gross) Greek 44% government revenues / GDP ratio,
and further assuming nominal GDP to grow (in addition to the TCC impact) by 2.5%
per year (due to inflation plus some additional effect deriving from the more
benign economic environment), the program would be totally self-financing, as
Greece would generate a much higher cumulated primary surplus.
This positive fiscal outcome would come together with a massive
resumption of employment and growth. See below for an estimate of the TCC
program outcome, compared with a base case scenario where austerity causes zero
growth and zero inflation and a 3% primary surplus / GDP ratio (at the cost of
permanent, huge employment and social unrest).
The primary surplus would fund interest payments and debt principal
amortization. While some rescheduling would still be necessary, a debt
write-off could be avoided. Importantly, Greece’s debt repayment capacity would
be much higher than under the current framework, where austerity is supposed to
improve it while it actually reduces GDP and debt just keeps growing: based on
the assumptions above, cumulated primary surplus in nine years would be almost
€ 90 billion instead of less than € 50 billion.
It is worth noting that debt repayment capacity would be as good as in
the base case even under much more conservative assumptions as concerns the
fiscal multiplier (such as, for instance, assuming a multiplier of 0.95 – 1),
while GDP and employment dynamics would still turn out to be much better.
In case a minimum, agreed-upon primary surplus (e.g. € 5.4 billion, as
in the base case above) were not achieved in a specific year, a “safeguard
provision” could be contemplated whereby certain government expenses would be
made in additional TCCs rather than in euros. Alternatively, additional taxes
could be levied while entitling taxpayers to receive TCCs of equivalent value
(this would actually not be a tax but a compulsory euro-for-TCC swap).
It is unlikely that such measures would be necessary if the TCC program is
properly designed, but even then, those safeguard provisions would be far less
contractionary than procyclical austerity measures requiring outright tax hikes
and / or expenditure cuts to offset a budget shortfall.
In case safeguard provisions are triggered more frequently than
expected, TCCs might end up circulating (in Greece) in an amount such as to
exceed euros. If this happens, Greek TCCs would de facto (and possibly de
jure) become the Greek national
currency, gradually displacing the euro. This would provide a “soft exit” or
“velvet exit” option for Greece, should keeping the euro as a predominant
currency proves impossible for the economy.
Again, this option would be a positive one, since it would avoid a
disruptive break-up and prevent financial turmoil as well as bank runs, contract
redenominations, legal quagmires and massive losses to foreign creditors.
A national TCC program would allow Greece to end austerity and reflate
the economy without breaking the euro or asking anybody for more money. Greece
would recover full employment and
strengthen its debt payment capacity (to the benefit of its creditors).
A properly designed TCC program would be conducive to economic and financial
stability. In fact, not only Greece but any Eurozone crisis country should
introduce it to recover full employment and to achieve moderate, positive
inflation, with no trade imbalances.
The TCC program for Greece is part of the project for the Eurozone that we are currently promoting with a group of other Italian researchers. Eurozone
peripheral countries should enter into national TCC programs with a view to
achieving, each year, a zero euro outflow / inflow balance and gradually
reducing public debt (the “real” one, that is the one to be reimbursed in euro)
as a percentage of GDP. It should be noticed that the TCCs outstanding are not
part of the debt stock, since they must not be reimbursed and cannot create
default events for the issuing state.
The EU and ECB should recognize the viability of
the TCC program as a policy framework to make the Eurosystem resilient to major
shock, to end the economic depression, and to remove the euro break-up risk and
its consequences. This framework would be a way to re-introduce within the
European monetary union the flexibility that has been sinfully lost to the
current architecture of the euro. Such flexibility would help Eurozone member
countries to navigate through even extremely critical circumstances, without
having to face the trade-off between intolerable austerity and currency exit. Ultimately,
for those cases where exit would become unavoidable, the TCC program would
create an efficient path for a soft withdrawal.
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