A paradox lurks in the foundations of the eurozone . Governments within 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 we contemplated during my tenure at the Greek ministry of finance focused on the chronic liquidity shortage of a financially stressed public sector and its impact on the long-suffering private sector.
Given the absence of a central bank to support the state’s endeavours, the Greek government’s arrears to the private sector (individuals and companies) have been perpetually deflationary since 2008. Indeed, arrears — due to significantly delayed returns from value added and income tax, and payments to suppliers — consistently exceeded 3 per cent of gross domestic product for five years. Meanwhile, a feedback effect boosts tax arrears which, in turn, reinforce the cycle of generalised illiquidity.
Our simple idea was to allow for multilateral cancellation of arrears between the state and the private sector using the tax office’s existing web-based payments platform. A reserve account could be created per tax file number on the tax office’s web interface and be credited with arrears owed by the state to that individual or organisation. Tax file number holders would be able to transfer credits from their reserve account either to the state (in lieu of tax payments) or to any other tax file number reserve account.
Suppose, for example, Company A is owed €1m by the state and owes €30,000 to an employee plus another €500,000 to Company B, which provided it with goods and services. The employee and Company B also owe, respectively, €10,000 and €200,000 in taxes to the state. In this case the proposed system would allow for the immediate cancellation of at least €210,000 in arrears. Suddenly, an economy like Greece’s would acquire important degrees of freedom within the existing European Monetary Union.
In a second phase of development that we did not have the time to consider properly, smartphone apps and citizens’ cards could add a degree of flexibility and accessibility guaranteeing wide adoption. The envisaged payments system could be developed to substitute for the absence of fully functioning public debt markets, especially during a credit crunch such as the one that has afflicted Greece since 2010. Private sector agents could be eligible to purchase credits from the tax office’s web interface, using their normal bank accounts, and to add them to their reserve account. These credits could be used after, say, one year to extinguish future taxes at a discount (for example, 10 per cent).
As long as the total tax credits were capped, and their magnitude fully transparent, the result would be a fiscally responsible increase in government liquidity and a quicker path back to the money markets to which governments, such as Greece’s had lost access.
As I was 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 official monetary and financial institutions forum, was leaked despite the Chatham House rule that we agreed with listeners, the press had a field day. Committed to unlimited openness and full transparency, I granted OMFIF permission to release the tapes.
While I understand the press’s excitement emanating from elements of that exchange, such as having to consider unorthodox means of gaining access to my own ministry’s systems, there is only one matter of significance from a public interest perspective. There is a hideous restriction of national sovereignty imposed by the troika of lenders upon Greek ministers who are denied access to departments of their ministries pivotal in implementing innovative policies. When sovereignty loss, due to unsustainable official debt, yields suboptimal policies in already stressed nations, one knows that there is something rotten in the euro’s kingdom.
The writer is the former finance minister of Greece.