28 July 2015

Financial Times / Yanis Varoufakis: Something is rotten in the eurozone kingdom

A paradox lurks in the foundations of the eurozone. Governments in the monetary union lack a central bank that has their back, while the central bank lacks a government to support it.

This paradox cannot be eliminated without fundamental institutional changes. But there are steps member states can take to ameliorate some of its negative effects. One such step that we contemplated during my tenure at the Greek ministry of finance focused on the chronic liquidity shortage of a stressed public sector and its impact on the long-suffering private sector.

In Greece, where the central bank is unable to support the state’s endeavours, government arrears to the private sector — both companies and individuals — have been a drag on the economy, adding to deflationary pressures since as far back as 2008. Such arrears consistently exceeded 3 per cent of gross domestic product for five years.

The phenomenon is both the cause and consequence of delayed tax payments to the state, reinforcing the cycle of generalised illiquidity.

To address this problem, our simple idea was to allow the multilateral cancellation of arrears between the state and the private sector using the tax office’s existing payments platform. Taxpayers, whether individuals or organisations, would be able to create reserve accounts that would be credited with arrears owed to them by the state. They would then be able to transfer credits from their reserve account either to the state (in lieu of tax payments) or to any other reserve account.

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Suddenly, an economy such as Greece’s would acquire important degrees of freedom within the existing European monetary union. In a second phase of development, which we did not have time to consider properly, the system would be made accessible through smartphone apps and identity cards, guaranteeing that it would be widely adopted.

The envisaged payments system could be developed to create a substitute for fully functioning public debt markets, especially during a credit crunch such as the one that has afflicted Greece since 2010. Organisations or individuals could buy credits from the tax office online using their normal bank accounts, and add them to their reserve account. These credits could be used after, say, a year to pay future taxes at a discount (for example, 10 per cent).

As long as the total level of tax credits was capped, and fully transparent, the result would be a fiscally responsible increase in government liquidity and a quicker path back to the money markets.

Handing over the reins of the finance ministry to my friend, Euclid Tsakalotos, on July 6, I presented a full account of the ministry’s projects, priorities and achievements during my five months in office. The new payments system outlined here was part of that presentation. No member of the press took any notice.

But when a subsequent telephone discussion with a large number of international investors, organised by my friend Norman Lamont, and David Marsh of the London-based Official Monetary and Financial Institutions Forum, was leaked — despite the Chatham House rule we agreed with listeners, under which speakers are not identified — the press had a field day. Committed to unlimited openness and full transparency, I granted OMFIF permission to release the tapes.

While I understand press excitement about elements of that exchange, such as having to consider unorthodox means of gaining access to my own ministry’s systems, only one matter is of significance from a public interest perspective. There is a hideous restriction of national sovereignty imposed by the “troika” of lenders on Greek ministers, who are denied access to departments of their ministries pivotal in implementing innovative policies.

When a loss of sovereignty, arising from unsustainable official debt, yields suboptimal policies in already stressed nations, one knows that there is something rotten in the euro’s kingdom.

© Financial Times