The draft Eurozone plan

It is here (and further detail here), via Paul Krugman, who rightly slams it.  Matt offers comment, so does Wolfgang, many more details and updates here.  If you had told me it was an Onion-like satire of all the previous plans, and not an actual serious plan at all, I would have believed you.  Here is one of the stranger, funnier, sadder, and more Straussian paragraphs:

6. All other Euro countries solemnly reaffirm their inflexible determination to honour fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms. The Euro area Heads of States or Government fully support this determination as the credibility of all their sovereign signatures is a decisive element for ensuring financial stability in the Euro area as a whole.

In other words: “We know you are worried about Italy and Spain so we promise you that they are fine.”  There is a good deal of ah, optimism about the real side of these economies:

9. All euro area Member States will adhere strictly to the agreed fiscal targets, improve competitiveness and address macro-economic imbalances. Deficits in all countries except those under a programme will be brought below 3% by 2013 at the latest…

Here’s an important sentence, and I view the exclusive reference to “Member States” as throwing in the towel:

As a follow up to the results of bank stress tests, Member States will provide backstops to banks as appropriate.

It is also promised that the bailout model for Greece won’t be used again.

Time to blast the Brahms!  In all fairness to the plan, maybe that’s the only disc in anyone’s collection these days.

Addendum: “The proposed expansion of the EFSF’s role would have to be ratified by national parliaments, and could fall foul of critics in Germany, the Netherlands and Finland.”


Uh, 3% deficit targets are nothing new in Euroland and have consistently been ignored.

If the Growth and Stability Pact can be ignored, so can the daft [sic] eurozone plan. It's all just kabuki theater.

This is an important point. This document isn't the plan. It's an exercise for the eurocrats; it has no relevence. The actual plan is being worked out between Merkel and Sarkozy, and the only relevent part of that plan is its answer to the question: the default -- how big?

Point 6 reminds me of the scene in Fargo when William H Macy is trying to convince his father-in-law to loan him some money:

Macy: "OK, I guarantee you your money back"

Father-in-law: "I'm not talking about your damn word, Jerry"

I was thinking this Simpson classic:

Homer: "and by the Sacred Parchment, I swear that if I reveal the secrets of the Stonecutters, may my stomach become bloated and my hair be plucked of all but three hairs.”

Moe: Um... I think he should have to take a different oath.

Are you laughing at other countries' fraudulent clowns? Please wake up and read Yale's Law Professor Stephen Carter's column

He is right. Your fraudulent clowns --starting with the one on duty-- should be in jail. They are even worse than my Argentina's fraudulent clowns.

And remember: your Great Leader will sign any piece of paper about raising the debt ceiling. Yesterday Tom Maguire wrote:
"Oh for heaven's sake - is Obama really going to hold the economy hostage if Congress can't deliver him a bit of legacy by early August? If the Gang of Six claims they need a three month extension while they search for votes in the House (Good luck!) will Obama veto it? Please. Obama will sign anythig that reaches his desk, and smile and say thank you. Then the press will hail his leadership."

I still hope that at that time you will not join the press.

The Fraudulent Clowns are the ones who enact tax cuts that CBO shows will lead to a deficit within ten years, and most certainly and dramatically lead to a deficit thereafter, and then on top of it, having two unfunded wars.

But, I don't think that's what you mean.

Now, if Greece wanted to be Fradulent Clown in the US tradition, they would cut taxes and claim the cut would stimulate the economy and trickle down.

Maybe we can send them Laffer.

By all means read Fair's piece; pay attention to table 3 which shows what a dramatic effect the Bush tax cuts had on the debt and look at the discussion about how taxes have to be raised.

I have looked at the chart and I see a decline in revenues that coincides with the recession that began in March, 2001. How are you separating the impact of that recession from the impact of the tax revisions of 2001 and 2003 to conclude that the tax law changes had a dramatic impact on revenues? Put another way, how do you know that the decrease in revenues wasn't simply a result of the recession?

txslr, I think the chart speaks for itself: it shows the delcine in revenues from the tax cuts relative to 2000. In case you disagree with the assessment, here is what the author says describing the chart: "The ratio
of federal net taxes (as defined above) to Y H is plotted in Figure 3 from 1952:1
through 2020:4, where the observations for 2011:2 on are from the base run. There
was a large rise in the ratio between 1995 and 2000, an even larger fall between
2000 and 2004, a modest rise between 2004 and 2007, and then a dramatic fall
between 2007 and 2011. The observations in 2009, 2010, and 2011 reflect various
stimulus measures." The stimulus measures referred to from 2007 forward are tax cuts that were supposed to stimulate the economy.

I don't think so. The first Bush tax cut was passed in June, 2001 and was to have been phased-in over a period of years. The major impact on revenues would have begun in 2002. So decreases that began in 2000 couldn't have been caused by a tax bill that didn't even get signed into law until 2001. The phase-in was accelerated in new legislation signed in 2003. Net revenue then climbed relative to Y H from 2004 to 2007. The fall from 2007 coincides with the beginning of housing price declines. The stimulus measures certainly refers to the Recovery Act of 2009, which involved massive transfers as well as some tax cuts, mostly for 2009, 2010 and 2011.

Please note that Fair refers to NET taxes, defined as tax revenues less transfer payments. Naturally, when the economy slows and ultimately goes into recession, as it did when the tech bubble burst and again when housing prices began to fall, tax revenues fall and transfer payment rise. This used to be called an "automatic stabilizer". The observation in Chart 3 of the Fair paper can be explained entirely by reference to this phenomenon coupled with increases in transfer payments from the stimulus and retirements of early baby-boomers. The data neither support nor reject the hypothesis that the 2001 and 2003 tax laws, on a net basis, caused net revenues versus Y H to fall more than they would have anyway.

Sorry, tslxr, that's not what the paper says in describing the chart. In addition, you attribute the decline in taxes later as from just the decline in the economy, ignoring two things: first, we had additional tax cuts in 2007 forward as part of stimulus; and second, you assume there were no additional tax cuts since 2001--not true either. Go to Mankiws blog and look at the growth of tax expendutires (ie, tax cuts) during the period and the stability of government expenditures relative to the growth of tax earmarks or other expenditures.

Sorry Bill. You misinterpret the chart and the associated explanation. You assign all of the decrease in NET tax to marginal rate cuts. Fair does not. Indeed, if that had been his intention, why did he not just plot tax receipts over time rather than NET tax? I do not claim that lowering marginal rates had on impact on taxes. You claim that the ONLY factor needed to explain NET taxes is marginal tax rate. Logically this means that economic downturns do not impact tax revenues or transfer payments. You may be the only person on the planet who believes this.

Which Strauss are you referring to in the "Straussian paragraphs" comment? (Forgive me, but I'm not an economist.)

Leo Strauss taught that scholars hid "esoteric" meanings in their writings and it was a mistake to take the "exoteric" message at its word. One piece of evidence that there is a hidden message are obvious mistakes which an intelligent scholar makes in their writing. The idea made more sense when there was less freedom of thought and protection for free speech.

Another title for this post could have been "The daft Eurozone plan".

On the substantive issues of how to solve U.S. fiscal crisis, I suggest to read Ray Fair's latest paper

This paper estimates how large fiscal-policy changes have to be to solve the U.S. government deficit problem. This question is complicated in part because of endogeneity issues. A fiscal-policy change designed to decrease the deficit has effects on the macro economy, which in turn affects the deficit. Any analysis of fiscal-policy proposals must take these effects into account: one needs a model of the economy. This paper uses a macroeconometric model of the world economy to examine the deficit problem. A base run is first obtained in which there are no major changes in U.S. fiscal policy. This results in an ever increasing debt/GDP ratio. Then net taxes (taxes minus transfers) are increased by an amount sufficient to stabilize the long-run debt/GDP ratio. The increases are linearly phased in over a three-year period beginning in the first quarter of 2012.
The estimates of the needed net tax increases are large. Compared to values in the base run, net taxes after the phase in need to be about $650 billion higher each year in 2011 dollars. In percentage terms this translates into about 45 percent of personal income taxes, 51 percent of social security taxes, 24 percent of transfer payments to state and local governments and to persons, 44 percent of purchases of goods and services, and 176 percent of corporate profit taxes. The output loss is 1.38 percent of real GDP over the 9 years analyzed.

Indeed, Ray shows that your crisis it's not a laughing matter.

It's far too late to fix anything, E. Barandiaran.

The earthquake has already struck and the wave is headed this way. Time to seek higher ground before the tsunami of debt insolvency hits and washes away every trace of the Ponzi.

I have an idea -- though I owe President Obama for the inspriation. Okay, declare that they're going to pay off the Greek bonds. BUT, publicly demonize anyone actually holding Greek bonds as "speculators" who are "trying to profit off the banks of hardworking people to create a new Greek tragedy where there otherwise would have been none". (I'll let the politicians and speechwriters optimize the demagoguery.)

Get it to the point where people are too scared to actually redeem their bonds/coupons as they come due, and just "miss" the payments from an accounting error or some other B/S excuse. Continue the intimidation against anyone who makes a peep about not getting paid.

Then, to top it off, encourage acts of vigilantism and vandalism against European ratings agency offices if they so much as suggest that this is a default. (I mean, no one will stand in public and claim they weren't paid, right?) Arrest such vigilantes, but quietly drop the charges on grounds of "police misconduct".

Obama writ large.

Wow, I must not be keeping up with the news. I missed the part where Obama called for public uprising against bankers. I also missed where there were widespread acts of violence or public intimidation against the finance sector. And I completely missed when the ratings agencies were scared to mark down US debt because they feared vandalism!

Thanks for waking me up!


I'm no mindreader, but Silas's reference might have been to the bondholders of Chrysler, who I understand were paved over.

That is correct.

There's a very very curious piece in that deal/plan. The text says:

"9. Where appropriate, a collateral arrangement will be put in place so as to cover the risk arising to euro area Member States from their guarantees to the EFSF."

Evidently, someone is contemplating the EFSF becoming less than solvent 8-0. But EFSF is just a temporary special-purpose vehicle for distributing money to the indigent. -- what kind of collateral *can* it provide?

As is well known, banks spin the credit (book money) creation wheel. But, as Keynesian credit theory shamefully neglects, all book credit sponsors a d u a l claim. The creditor claim and the claim of n vendors (starting with the debtor paying bills) along a long chain of transactions that all are claims in central bank cash in the banking system. This brings the Reserve Ratio RR down in t+1 (the Reserve Ratio is thus a variable, not a constant). Since banks spend nearly all the central bank cash claim they "earn" (from credit returns of money they have themselves created, look at their palaces), there is little scope left to keep up with reserves at times of repo overleverage based on inflated assets (assets that are inflated to increase leverage ratios). The tier-2 claim burden thus falls down on the banking system q.e.d. in 2008. Now, politicians are nowadays people that create money by having central banks print money to buy government debt. As they live on financial promise based on governments fiscal privilege, they always create more claims than fiscal income. Both, frictional reserve banking, and democracy based on political parties are legal Ponzi schemes that, however, are blatantly unlawful judged by Hobbesian and even Humian social contract theory. Just watch how the two Ponzi`s stick together. Wallstreet and Washington are inseperable. Joe Ackermann (CEO of Deutsche Bank) and yet-another-chancellor-failure Angela Merkel (Bismarck was the first one) hammered out the first Greek package - banks being bailed out and the taxpayer asked again! This is Ponzi talking to Ponzi. As long as frictional reserve banking is not completely out of the way and as long as the state´s check book remains in the hands of party politics that use it to stay in power, the Greek tragedy has an ironic twist to it: It symbolizes the downfall of the whole of western civilisation which originates in the antique republics of the Peleponnese. You will see the United States, for the time being, come to sober conclusions after they have realized that it`s a financial World War III for them. You will see Europe go down. The European Union is a misconception from the beginning. French cock-pride and German checkbook peace. It`s downright dishonest. The Euro is a track record of public lies. None of the liars was ever sued for having squandered billions of tax money. Forget, once and for all, the European Union.

I can't believe how wrongheaded the comment from the US is on this agreement. Even if it isn't the "grand bargain" that some might have been expecting (eurobonds and major expansion of the EFSF), it is clearly a substantive step forward:

- Greece receives debt relief, with which debt sustainability becomes a realistic (albeit not easy) objective. The incentives for the Greek Government (and the political situation in the country) clearly improve, as reforms and cuts become a means to improve their own financial situation and not merely to pay off foreign creditors
- The idea of some sort of "default" for Greece is finally accepted and sold as such to the ECB. This gordian knot is therefore untied (or cut as in the original tale). The implications on liquidity for Greek banks (unable to discount defaulted Greek bonds at the ECB) are addressed through a specific guarantee to the ECB
- The private sector will have a significant part in this debt relief (details lacking, however, which will need to be clarified), which was necessary to prevent the forthcoming official assistance from mainly benefitting Greece's creditors
- EU countries also provide some relief in their rescue packages for Greece and others
- The EFSF will have greater flexibility, including the possibility (with restrictions) of buying debt in the secondary market. With this, another step is taken towards a future common European Treasury (there is not much difference between issuing common "eurobonds" and devoting money to buying bonds of other euro area-countries in the market)

These are major measures, unthinkable only a few weeks ago. This is by no means the end of the saga and substantial problems will certainly yet arise, but it is definitely a key turning point in which important taboos have been lifted.

On Mr Cowen's specific points, there are clear arguments (fudged numbers, an obviously unsustainable debt level) why Greece is a different case than Ireland and Portugal, and deserves an exceptional solution. Italy and Spain have their own troubles but possibly the main one right now is lack of access to external finance, which this agreement should do much to alleviate (you may have noticed that upon the draft being leaked yesterday, markets in both countries rebounded strongly). Deficit targets for both countries are ambitious but reachable. And, as you may also know, responsibility for backstopping the domestic banking systems lies with the respective countries (until the EFSF expanded powers come into play), so a reminder of that is not "throwing in the towel" in any conceivable way; furthermore, the potential capital shortfalls identified in the stress tests are comparatively small (the assumptions in this exercise, while arguable, include haircuts on Greece's debt which are clearly within what was agreed today).

Wolfgang Munchau (renowned pessimist btw) has a much more informed and balanced take on this. Paul Krugman's reaction is just incomprehensible (focusing on the macro policy sections which were merely declaratory rather than on the very important financial decisions taken); incidentally, his opinion that peripheral countries should do fiscal expansion to get out of the present mess is cosmically wrong (starting with "who will finance such expansion")

The Brahms is an optimistic view of the end of time. Perhaps they should be blasting Verdi?

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