No solution is yet in sight for the Greek crisis. Both the EU and most of the Greek people do not want a breakup from the Eurozone. But for the country to achieve a meaningful recovery, austerity must be reversed: a combination of lower taxes and higher social public expenditure is needed to reduce unemployment, mitigate the humanitarian crisis, and improve Greek companies’ competitiveness.
This requires money, which Greece does not have. And European partners are unwilling to subsidize other countries’ deficit spending policies.
A very effective solution would be for Greece to issue a domestic currency, not replacing the euro but circulating in parallel with the euro. Greece could issue two-year, zero coupon Tax Credit Certificates (TCC), which the bearer could use, upon expiration, to pay taxes and whatever financial obligation is due to the Greek public sector at large.
Greece could start issuing € 7 billion (face value) of TCC during the first year of the program. TCC would be given for free (helicopter-money-wise) to individuals and companies (linked to gross labor costs, so to improve competitiveness). TCC would also fund social expenditure, possibly including job-guarantee programs.
TCC would be freely negotiable, so as to allow the initial recipient to convert them in euro, based on a financial market discount. Presumably, use of TCC as a mean of exchange for direct transactions would also quickly develop.
As TCC uses include reducing gross labor costs for domestic enterprises, recovery in Greek internal demand would not create foreign trade imbalances.
TCC issues could increase eg by 7 billion per year up to € 49 billion at year 7 of the program. Assuming a 1.2 fiscal multiplier, at that stage Greece’s GDP would increase – other things being equal - by almost € 60 billion, thus offsetting the fall from the pre-crisis € 240 billion peak to the current € 180 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 spillover benefit from the much more benign economic environment), the program would be totally self-financing, as Greece’s primary surplus would be higher in each single year. And this would come together with a strong recovery and a massive increase in employment. See below for an estimate of the TCC program benefit, compared with a base case scenario where austerity causes zero growth and zero inflation, while allowing (at the cost of permanent, huge unemployment and social unrest) to achieve a 3% primary surplus / GDP ratio.
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. And definitely much more interests and debt would be repaid than under the current austerity-extend-pretend framework: based on the assumptions above, cumulated primary surplus in nine years would be more than € 110 billion instead of less than € 50 billion.
In case a minimum, agreed-upon primary surplus (e.g., 3% of GDP, as in the base case above) is not achieved in a specific year, a “safeguard provision” could be contemplated calling for certain government expenses being made in (additional) TCC instead of in euros; or transitory additional taxes being levied while entitling the taxpayer to receive TCC of equivalent value (actually, not a tax but a compulsory euro-for-TCC swap). It is unlikely that those measures would be necessary if the TCC reform is properly designed, but even then, those safeguard provisions would be far less contractionary than procyclical austerity measures requiring outright taxes and / or expenditure cuts to offset a budget shortfall.
Basically, national TCC would allow Greece to end austerity and reflate the economy while neither breaking off the euro nor asking anybody for more money. Greece would instead recover full employment while strongly improving its creditors’ position.
A properly designed TCC system would be a stable one. Not only Greece, but each Eurozone country should introduce it as needed to recover full employment and moderate, positive inflation, while avoiding trade unbalances (as TCC would be partially allocated to reduce corporations’ gross labor costs, thus improving competitiveness).
A group of Italian economists and researchers (Biagio Bossone, Marco Cattaneo, Luciano Gallino, Enrico Grazzini, Stefano Sylos Labini) is currently promoting such a project to thoroughly reform the European Monetary System. See here.
Eurozone peripheral countries should enter in national TCC programs with a view to achieving, each year, a zero euro outflow / inflow balance and to gradually reducing public debt (the “real” one, to be reimbursed in euro) as a percentage of GDP. It should be noticed that the TCC outstanding are not part of the debt stock, since they must not be reimbursed and cannot create a default event.
The EU and the ECB should recognize the viability of the TCC reform to make the EMS sustainable, to end the depression and to remove the euro break-up risk.