Stephen Capsaskis recently penned what is thought to be the most widely read letter ever addressed to the Financial Times. In it, he castigates the FT editor for promoting the works of Yannis Varoufakis, given the damage the latter's negotiation caused.
The issue I take is not that the FT has given space to Vraoufakis's arguments per se, but that it has failed to critically analyse them. In particular, one of the articles referenced by Mr. Capsaskis says:
"The former Greek finance minister, Yanis Varoufakis, had plans to introduce a parallel payments system that would have allowed Greece to default on its debts while formally remaining a member of the eurozone. It was a daring plan, and in my view would have produced a better outcome than capitulation."
The issue I take is not that the FT has given space to Vraoufakis's arguments per se, but that it has failed to critically analyse them. In particular, one of the articles referenced by Mr. Capsaskis says:
"The former Greek finance minister, Yanis Varoufakis, had plans to introduce a parallel payments system that would have allowed Greece to default on its debts while formally remaining a member of the eurozone. It was a daring plan, and in my view would have produced a better outcome than capitulation."
This plan has not been examined at all by the FT; instead, we are meant to take the author's assertion that it would have produced a good outcome on faith. This is shoddy journalism, very uncharacteristic of the FT.
I started writing this post with the intent to analyse Varoufakis's plan myself, but I realised I lack the necessary knowledge of economics to do a good job; instead, I will summarise the plan as I understand it, and list my questions on it - questions that the FT's journalists ought to be answering, if they are that keen on discussing Varoufakis.
I started writing this post with the intent to analyse Varoufakis's plan myself, but I realised I lack the necessary knowledge of economics to do a good job; instead, I will summarise the plan as I understand it, and list my questions on it - questions that the FT's journalists ought to be answering, if they are that keen on discussing Varoufakis.
The plan proposed by Varoufakis would work as follows: the government creates a special tax account for each citizen and company in Greece. The government then starts paying anyone to whom it owes money, not in actual cash, but in units deposited to these accounts. These units cannot be exchanged for Euros, but they can be transferred from one person or company to another; they can also be used to offset any taxes owed to the state.
For example, if the government owes me 100,000 Eur, instead of paying me this money, it deposits 100,000 units in my tax account. If my tax bill comes up to 200,000 Eur, I now only need to pay 100,000 EUR out of my pocket. If I owe 10,000 Eur for a mortgage payment, I can deposit 10,000 units into my bankers' tax reserve account.
I am not 100% clear on how the government would kick-start this parallel payments system: in an excerpt from his latest book that he posted on his blog, Varoufakis says the state would use these units instead of cash to cover its liabilities towards companies and citizens; he also mentions that the government could allow citizens to buy these units, incentivising them by giving a 10% discount to anyone who pays for their taxes using the units; finally, Glen Kimm, Varoufakis's advisor, claims that the system would start with the government paying 10% of civil servants' salaries in units instead of Euros.
Either way, Varoufakis envisions every Greek participating in this payments system by issuing micro-chip enabled ID cards, linked to the citizens' tax reserve accounts - so that the ID cards would function, in effect, like credit cards.
My questions on the scheme are:
Would the units issued by the government be enough?
The objective of this parallel system is to alleviate the effects of a liquidity squeeze. A liquidity squeeze arises when a company cannot access enough cash to meet its short-term obligations. It is bad for the economy, because companies are often forced to sell their assets at a discount to meet their short-term obligations, often depressing a market and causing it to enter a vicious cycle. Furthermore, a liquidity squeeze by definition means there is no money for investment.
If a government wants to alleviate these effects, it must inject money into the economy. That's what quantitative easing does: a central bank prints new money and introduces it into the economy by buying securities in the market. Clearly, the success of such an intervention depends on how much money is injected.
Now, this is a bank of the envelope calculation, and I may be missing a few things, but in Greece
I am not 100% clear on how the government would kick-start this parallel payments system: in an excerpt from his latest book that he posted on his blog, Varoufakis says the state would use these units instead of cash to cover its liabilities towards companies and citizens; he also mentions that the government could allow citizens to buy these units, incentivising them by giving a 10% discount to anyone who pays for their taxes using the units; finally, Glen Kimm, Varoufakis's advisor, claims that the system would start with the government paying 10% of civil servants' salaries in units instead of Euros.
Either way, Varoufakis envisions every Greek participating in this payments system by issuing micro-chip enabled ID cards, linked to the citizens' tax reserve accounts - so that the ID cards would function, in effect, like credit cards.
My questions on the scheme are:
Would the units issued by the government be enough?
The objective of this parallel system is to alleviate the effects of a liquidity squeeze. A liquidity squeeze arises when a company cannot access enough cash to meet its short-term obligations. It is bad for the economy, because companies are often forced to sell their assets at a discount to meet their short-term obligations, often depressing a market and causing it to enter a vicious cycle. Furthermore, a liquidity squeeze by definition means there is no money for investment.
If a government wants to alleviate these effects, it must inject money into the economy. That's what quantitative easing does: a central bank prints new money and introduces it into the economy by buying securities in the market. Clearly, the success of such an intervention depends on how much money is injected.
Now, this is a bank of the envelope calculation, and I may be missing a few things, but in Greece
- 2016 public sector salaries = 19 Billion EUR;
- 2014 money overdue by the state = 4 Billion EUR;
So, Varoufakis's plan would introduce = 19 Billion *10% + 4 Billion = 6 Billion units. Would this injection be large enough to be meaningful? For perspective, Greek bank deposits have dropped by about $130 Billion since 2010... so to me, 6 billion does not look very significant.
Furthermore, I am not sure we should include the public sector salary portion: this is money that would be injected into the economy anyway - all this plan does is introducing them in a new format.
Furthermore, I am not sure we should include the public sector salary portion: this is money that would be injected into the economy anyway - all this plan does is introducing them in a new format.
Is the scheme legal?
It's one thing to assume that every Greek will magically get an updated ID card that they can use as a credit card; it's quite a different thing to put such a system in practice. First of all, Greeks are not super-into technology - only 67% of the population uses the internet, and only 2.7 million Greeks have credit cards. So it's a bit of a stretch to imagine that the population will enthusiastically adopt this new way of doing things.
What if a company that is owed money by the state doesn't want to be paid in units? Is it legal for the government to force it to accept payment in something that is not legal tender? Similarly, what if a civil servant would rather be paid in cash, rather than in units?
How would the system work in practice?
Even if they did, how would Varoufakis enable people to use their cards to buy groceries, as he writes? Who will design the system for accepting such payments? Who will run it? Who will pay for it?
What about companies? In Varoufakis's narrative, if company A owes money to company B, it can simply pay it in units. But that's easier said than done: how would such units be treated on an income statement? How would they be reflected in the company's systems? Varoufakis says this system could be implemented at a touch of a button - but for most companies, this would take thousands of man-hours of hard work - if it's possible in the first place.
How would these units permeate society?
The average citizen is not owed money by the government. And, though we do have more civil servants than we need, they still represent only 6% of the population. How would the remaining 94% get units, so that they can then spend them on groceries, petrol &c as Varoufakis suggests?
(Yes - he did say people might be able to buy units directly from the government; but remember that the incentive for doing so is that using these units to settle a tax bill would lower it (the tax bill); so you may buy units to settle your taxes, but why would you buy extra units to then use to buy groceries?)
Furthermore, even if citizens somehow got these units, trading at the scale Varoufakis imagines would only take place if people trusted that the units would maintain their value. The current Greek government has a pretty poor track record of keeping its promises; that, in conjunction with low financial literacy rates in Greece, means that trust in a novel and exotic system is far from guaranteed.
How is this system different to a parallel currency?
Varoufakis writes
"in reality, I had rejected a parallel currency from the outset, opting instead for a parallel payment system. (Nb. journalists incapable of distinguishing between a payments system and a currency should perhaps disqualify themselves from this debate!)"
But if these units can be used to buy groceries, discharge debt &c, in what way do they differ from a currency - besides the fact that they cannot be converted to foreign currencies? Is this distinction enough to disqualify their classification as fiat?
Conclusion
How is this system different to a parallel currency?
Varoufakis writes
"in reality, I had rejected a parallel currency from the outset, opting instead for a parallel payment system. (Nb. journalists incapable of distinguishing between a payments system and a currency should perhaps disqualify themselves from this debate!)"
But if these units can be used to buy groceries, discharge debt &c, in what way do they differ from a currency - besides the fact that they cannot be converted to foreign currencies? Is this distinction enough to disqualify their classification as fiat?
Conclusion
Overall, this parallel payments scheme sounds like an elegant solution to a liquidity scheme; however, it very much sounds like an academic exercise that would not be easily implemented in reality. It is quite sad that even credible newspapers like Kathimerini or the FT have taken to either dismissing or praising Varoufakis's ideas without bothering to look into his proposals in depth and educate their readers on their feasibility.
