Scott Sumner has a post pointing out a proposal Greece is floating to swap its debt instruments with NGDP-linked bonds. It’s good news on the NGDP front, indicating that NGDP is entering the conversation at a much higher level than we’ve been aware of so far. Though I wish it had a better messenger.
Sumner doesn’t opine on the merits of the proposal, though I think that it would be a good deal for Greece because if NGDP is allowed to fall, the value of the debt falls. If NGDP stays on a stable path, Greece will presumably be able to make the payments. The only sticking point would be, as Nick Rowe pointed out in the comments section of Sumner’s post is some standard measurement of NGDP that could be agreed upon in advance that can’t be tampered with.
In the bigger picture I don’t think that the EZ should be cutting deals on a case by case basis. The PIIGS have debt problems that in some cases arose from having to bailout their respective financial institutions in the chaos of massive disinflation. Greece had a debt problem prior to that that was further magnified by the related economic crisis. In a basic sense, it can be expected for tax revenue to fall during a recession; and this, of course was not the run of the mill kind of recession.
In large enterprises that are in my area of expertise, and probably in a loose federation of states too, major infrastructure policy changes, especially monetary ones, should be well thought through, well communicated and understood in advance, agreed upon by the stake holders, and prepared for prior to their implementation as a good governance best practice. In my profession, this practice of governance means the difference between longevity and bankruptcy. I don’t believe that was even remotely the practice with the ECB’s shift to a tighter monetary policy stance in the latter half of the last decade and early in this one from what had been the norm. As far as I can tell, there hasn’t been anyone taking responsibility for springing a tight money stance on the EZ unsuspecting and unprepared. And since the EZ was intended to be a currency confederation, I believe it would be fitting for all of the rescue deals to be revisited and restructured at the same time.
The restructuring should not stop there. What I see to be a major factor in the downfall of the EZ is the notion of central bank independence that suggests a certain amount of unaccountability baked into the structure, likely from the fact that the ECB funds the national central banks at least in part with its profit. The resulting arrangement is opaque with nobody in particular accountable to the national governments representing individual national interests in an equitable collaborative effort. In that regard, it is really a wonder that the EZ took so long to implode.
Each government should fund and govern its own central bank and the structure of the ECB should be revised so that each member nation has a vote on policy at every meeting. One member nation, one vote for each question. Just this one change would go a long way to fixing what’s broken.
PS; Sorry, Mr. Weidmann, but the independence of the central bank in Germany should not extend outside of Germany’s borders and should be paid for entirely by Germans.