Greece's leftist populist party, Syriza, says European countries are overburdened with debt. Its leaders are proposing a high-level conference to decide how to reduce and restructure that debt. What are their options?
Syriza is leading in Greek polls ahead of this Sunday's national election. The leftist populist party has vowed to reverse the austerity policies imposed in recent years by the country's international lenders - the so-called troika of the International Monetary Fund, European Central Bank and European Commission.
It has also called for a Europe-wide cut in the burden of accumulated public debt.
"Too much debt is a European problem, not merely a Greek one," Stelios Pappas, Syriza's coordinator of European policy, told DW.
That's a useful political position - because it avoids Greece asking for debt forgiveness in a way that's clearly at everyone else's expense. By proposing a European-wide debt writedown, which could benefit many countries, Syriza might be able to entice other Europeans to support its policy goal of imposing a partial debt write-off, or "haircut," on Greece's creditors.
"Greece's debts have become a European problem," said Philip König, a monetary economist at the German Institute for Economic Research (DIW) in Berlin. "Any debt write-down for Greece is now effectively a transfer payment from other European states to Greece. Syriza doesn't want to say that openly, which is why it's calling for a 'European solution' for all public debt. But Greece is certainly meant to profit from it most."
That's because Greece's government debt-to-GDP ratio is the highest in Europe, at 175 percent in 2014, up from 89 percent in pre-crisis 2007, before the global financial crisis. For comparison, Germany's ratio is 77 percent, up from 64 percent in 2007. The euro area as a whole had a public-debt-to-GDP ratio of 93 percent in mid-2014, up from 66 percent in 2007.
Risks were transferred to taxpayers
A few years ago, most Greek government bonds were held by banks and other private institutional investors. But after Greece's public debt problem became critical in 2010, eurozone states bought most of those bonds from private investors, as part of the troika's bailout program, which propped up Greece's private creditors. European taxpayers will take the loss in the event of future Greek bond haircuts.
But how much European public debt does Syriza propose be written off? By what mechanism would the haircut be imposed? And which creditors are expected to take the attendant losses?
Syriza parliamentarian Giannis Milios, a senior member of Syriza's economic policy team, has said there are "many techniques" for how a European debt write-down might be achieved. But an economist who advises Syriza's economic policy team told DW that Syriza didn't have a fixed policy position on these questions. Instead, the party - if it wins the election - would call for a European conference on debt where the member states could negotiate the issues.
Any such negotiations, if they occur, would face a very sizeable challenge.
In 2013, according to the European statistics agency Eurostat, the eurozone had a population of 335 million people, an overall GDP of 9.6 trillion euros and per capita GDP was at 28,600 euros. The accumulated debt owed to holders of sovereign bonds by European national governments amounted to 8.9 trillion euros - an average of 26,600 euros of public debt for everyone in the eurozone.
Now, the EU's monetary union imposes a set of "convergence criteria" on eurozone member states. One of those criteria is that each member state's public debt-to-GDP ratios is expected to "converge" over time to no more than 60 percent. Achievement of the eurozone's debt ratio convergence target might be a natural basis for negotiations in the context of a European conference on debt.
Using 2013 figures for the euro area as a whole, some 3.2 trillion euros in debt would have to be either written off or paid back to get from the current 93 percent debt-to-GDP ratio to 60 percent.
But how can that much money, which amounts to a third of the eurozone's GDP, be written off without destabilizing Europe's financial system?
"When a euro of debt is cancelled, so is a euro of credit," according to Dirk Ehnts, a Berlin lecturer in monetary economics and author of a recent book on how money and debt arise and circulate in the banking system.
When a given amount of debt is deleted, so is an equal amount of creditor's money. At the end of a trail of credit and debt contracts, one will ultimately find creditors who can be expected to fiercely resist any debt forgiveness.
Three main options
Fundamentally, there are only three ways in which European governments could unburden themselves of hundreds of billions of euros of debt: Default; debt repayment using tax revenues; or repayment by means of central bank money-printing.
If major European states were to default, it would plunge the financial system into turmoil, wreck the credibility of sovereign bonds and break European law concerning the sanctity of contracts. It's not a realistic option.
"A debt write-down even just for Greece is economically unnecessary and politically dangerous," said Gustav Horn, director of the Macroeconomic Policy Institute in Düsseldorf (IMK).
"What Greece needs is an end to austerity, which is depriving the economy of spending and growth. If I were advising the Greek government, I'd have them tell the troika that there are two realistic options: If there's no loosening of austerity, there'll have to be a partial write-down of Greek debt. If austerity is ended, and major investments are made in Greece, no write-down will be necessary."
Taxes - but on whom?
The second and third ways to reduce Europe's public debt burden involve repaying debts to creditors in full. But European states have only two possible sources of the money with which to repay debt.
One source is taxation. Taxes can be imposed any number of ways, but ultimately, the key issue is whether they are imposed on the wealthy or on the middle class.
Raising the money for an accelerated repayment of Europe's debt load either by taxing middle-class incomes or by a hike in value-added taxes, or some combination of the two, would be self-defeating, Horn said. It would reduce the purchasing power of the middle and lower classes - people who spend nearly all the money they earn each month. That would further slow down the already stagnant European economy - and would likely send Europe into recession and deflation.
That's one reason why leftist populist parties like Syriza in Greece or Germany's post-communist Left Party have long advocated a wealth tax on the wealthiest members of society. They argue taxing away a portion of the income or accumulated wealth of the rich tends to reduce overall economic demand much less than taxing the same amount of money away from the middle class or the poor.
Whether a European wealth tax is politically feasible, and if so, in what magnitude, is a question that can only be answered experientially. But influential interests could be counted on to oppose such a tax.
The central bank's magic wand
There remains only one other possible source of debt-free money with which Europe could pay back a substantial fraction of its accumulated public debt. That source is the balance sheet of the central bank.
The European Central Bank, or ECB, belongs to eurozone member states - and through them, to the European public. Last week, a senior advisor for the European Court of Justice (ECJ), Advocate General Pedro Cruz Villalon, gave a formal opinion that it is legally permissible for the ECB to buy sovereign bonds from private investors on secondary bond markets - something Mario Draghi, the ECB's chief, has hinted at wanting to do for several years now.
In principle, according to economist Dirk Ehnts, the ECB could buy up hundreds of billions of euros' worth of eurozone government debt, in the form of previously issued sovereign bonds - and then simply declare that it will unilaterally lengthen the maturity date of those bonds to infinity, and reduce the coupon rate to zero. In plain English, that would amount to cancelling the bonds. They wouldn't have to be repaid.
This would avoid having to tax money away from anyone - whether the middle class or the wealthy - to repay those bonds. However, it would break a taboo against 'monetizing' the public debt, and it would likely be challenged in the courts. Last week's legal opinion by the ECJ's Advocate General could, however, make this scenario more feasible.