Federalising the Debt.
“Federalise the Debt” has become a mantra and a “meme” in recent weeks.
There are many people in the world who hope that someone else can, with a few waves and strokes of an implement, make all their troubles go away. The vast majority of these people are children and they grow out of believing in fairy-godmothers and genies by the age of eight.
There is no entity that can make our sovereign debt go away, nor is there one that can assume responsibility for it.
The right to borrow money is granted to those who have demonstrated legal and economic capacity to repay it. People (investors, speculators, call them what you will) buy bonds from entities that have:
1) assets that produce an income;
2) a track record of repaying their debts;
3) are not currently overburdened with debt.
There is NO entity in the EU that matches any one of those criteria, let alone all three.
Now, we could create one but that would imply tax gathering powers granted directly to some arm of the EU, probably, the Commission because tax-gathering is the only way for sovereign or supra-national bodies to raise revenue in a reliable or efficient fashion. Other ways have been tried in the past which usually employed the legions of Rome or the pisions of the Wehrmacht but this was not only inefficient but was exactly what the EU was founded to prevent.
Further, such a debt-management body would not have a track record of repayment and would probably be seen as being overburdened with debt and so would worsen the situation rather than improve it.
The history of this entire crisis from American sub-prime mortgages onwards has been one of the commingling of good debt risks with bad ones to the eventual and ever more rapid deterioration of both. A classic example of “Gresham’s Law” in action and red in tooth and fang.
A further lumping of the good with the bad and the ugly will only make it harder for debt-buyers to distinguish good from bad. It would therefore, most likely, cause bondholders to seek a higher return or abandon the Euro altogether.
So, please, would those advocates of ‘debt federalization’ be so kind as to complete the circle of their prognostication and tell us what institution they see as being in charge, how much of their taxes they want to send to it, what they see happening to the yield on current debts and, lastly, how would they arrange the disbursement of new debt to the huddled masses of the EU?
First published on the Progressive Economy blog of TASC on Fri, Aug 11th, 20113