Bearer Bonds: the Optimum Transition Strategy for a
Eurozone Breakup to Minimize Costs
“If member states leave the Economic and Monetary Union, what is the best way for the economic process to be managed to provide the soundest foundation for the future growth and prosperity of the current membership?”
The Wolfson Prize implicitly assumes, in its question, that some member states will leave the Economic and Monetary Union. Because of unsustainable debt and spending, some Eurozone countries who have agreed to use the Euro will assert their national sovereignty, leave the Euro, and begin to issue and print their own currencies.
It is evident that there are strong political forces and desires which seek to invalidate that assumption, and to save the Euro. It is possible, even likely, that policies taken in the next few months which are justified to save the Euro will make the costs of a near term breakup even higher. In order to avoid bad policies, it is important to identify the root causes of the problem–Too much government debt, caused by too much government spending.
There are only four ways to handle any government debt:
1) Increase taxes
2) Reduce government spending
3) Print money, monetizing the debt
4) Borrow money
Voters dislike taxes, and dislike government cuts. Politicians like to raise taxes, but this almost inevitably reduces economic growth. Printing money is risky, with Zimbabwe today, like the Weimar Republic in the past, showing the social collapse with hyperinflation. Eurozone countries today can’t print money, only the ECB can print Euros. Yet the ECB is not legally allowed to bail out governments which have been over spending. There are no easy answers; “somebody” has to pay more or get less.
The purpose of this paper is to propose an alternative “Euro saving” policy that can be implemented immediately in every Eurozone county, other EU countries, the USA, and in fact in every deficit spending tax-collecting jurisdiction. Because of the current excessive debt of many Eurozone countries, the excessive spending crisis is hitting the Eurozone first, but all governments with growing deficits would benefit from a program of domestic, sovereign, Bearer Bonds.
The policy is relatively simple: Germany and Greece should both issue Bearer Bonds, rather than conventional bonds, to cover their deficits. These would be 1 year, 0% interest. They would be issued in an amount equal to the prior year’s deficit plus 1% of GDP. They would be used by the government to pay portions of government salaries, entitlement benefits, and other costs. These Bearer Bonds would not be legal tender, but the government would agree to accept such Bonds at 100% par value for the payment of any taxes or fees.
Because they are not legal tender, no private business would be required to accept them in payment of some monetary obligation, but neither would they be forbidden from accepting such bonds, with whatever discount rate is mutually agreeable – there would be established some local market rate discount. Similarly, they would not be prohibited by the Maastricht Treaty.
Through this policy, the government would transfer ownership of debt to domestic bondholders, rather than international financial markets. This allows the Greek government at least two more years of low cost money, loaned by Greek government employees and beneficiaries, so that the Greek economy can do more restructuring to either bring spending down to a sustainable level, or to be prepared to leave the Eurozone.
If Gresham’s law of “bad money drives out good” means that Greek bonds replace Euros for most cash transactions, that also means the Greek people will be well prepared to leave the Eurozone and convert their Drachma-Bonds into legal tender Drachmas.
Similarly, and more optimistically, German D-mark Bonds would prepare Germans to leave the Euro. This would allow an immediate assumption of a currency likely to grow slightly stronger – but also allow the ECB to greatly increase the money supply and the monetization of so much Eurozone debt, including that of Greece.