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Warren Mosler’s Big Fat Greek MMT Exit Strategy

By L. Randall Wray

This post first appeared at "Great Leap Forward”, my EconoMonitor blog.

It is beginning to look like a Greek exit is ever more likely, which means that the end of the EMU could be near.

Even if exits and a break-up are not inevitable, countries should have a plan on the shelf. It is clear that Germany is going to insist on the maximum austerity it can squeeze from nations facing a run on their debt. Hence, if nothing else, an exit strategy is required for negotiations. The best strategy would be for all the so-called PIIGS to band together with a believable threat to exit together. That could finally break the logjam.

I’m not optimistic about that. In any event, it is time to examine proposals for dissolution. Warren Mosler has formulated what looks like a nice, clean exit strategy that EMU members can adopt. I am reprinting here with his permission.

Enjoy!

Warren Mosler:

  1. The Greek government would announce that it will begin taxing exclusively in the new currency.
  2. The Greek government would announce that it will make all payments in the new currency.

    That’s it, deed done! The government can now provision itself and continue to function on a sustainable basis.

    Now some Q and A:

    Q. How will the new currency exchange for euro?

    A. The new currency will be freely floating, with exchange between willing buyers and sellers at market prices.

    Q. What about the existing euro-denominated government debt?

    A. Announce that government will consider it on a ‘when and if’ basis with no specific payment plans.

    Q. What about existing government contracts for goods and services?

    A. They will be redenominated in the new currency.

    Q. What about euro bank deposits and euro bank loans?

    A. They remain in place.

    Q. What about foreign trade?

    A. Market forces will function to adjust the trade balance to reflect foreign desires to accumulate financial assets denominated in the new currency.

To maintain full employment and internal price stability, I would further recommend the following:

  1. The government would fund a minimum wage job for anyone willing and able to work.
  2. For any given size government, taxes should be adjusted to ensure the labor force that works for that minimum wage be kept to a minimum.
  3. I would recommend the govt. levy only a tax on real estate for the following reasons:

    a. Compliance is maximized and compliance costs and related issues are minimized- if the tax isn’t paid the property can be simply sold at auction.

    b. Everyone contributes as either an owner of the property or as a renter as the owner’s costs are ultimately passed through to renters.

    c. Transactions taxes are eliminated, thereby removing those restrictions on transactions. Freedom to transact is the source of substantial contribution to real wealth.

  4. A zero overnight interest rate policy where government deficit spending remains as non interest bearing balances held by counter parties at the Bank of Greece, and no government securities are permitted.
  5. All bank deposits in the new currency will be fully insured by the government.
  6. Banks will be government regulated and supervised, which will include a 15% capital requirement, government guaranteed liquidity, and a prohibition from any secondary market activity.
Randall Wray

About 

L. Randall Wray is a professor of economics and research director of the Center for Full Employment and Price Stability at the University of Missouri–Kansas City. His current research focuses on providing a critique of orthodox monetary policy, and the development of an alternative approach. He also publishes extensively in the areas of full employment policy and the monetary theory of production. Wray received a B.A. from the University of the Pacific and an M.A. and a Ph.D. from Washington University, where he was a student of Hyman Minsky.

2 Comments

  1. ChrisBern says:

    I have to say this is a very naive proposal from Mosler.  Once free-floated, this new Greek currency (let’s call it drachma2) would devalue tremendously against the euro.  Everyone who is making wages in drachma2 and paying bills (sans taxes) in euro will be insolvent within weeks.  Every time a government employee gets paid in drachma2, he will instantly convert it into euro except for the amount that’s needed to pay taxes at the end of the year.  Who would want to hold a drachma2??  The government debt/GDP and deficit will both rise greatly because tax receipts are in drachma2 and bond payments and all payments to external (non-Greek) entities are in euro.  I realize there are no good options in the current situation, but this one is dead-on-arrival.

  2. ChrisBern says:

    I have to say this is a very naive proposal from Mosler.  Once free-floated, this new Greek currency (let’s call it drachma2) would devalue tremendously against the euro.  Everyone who is making wages in drachma2 and paying bills (sans taxes) in euro will be insolvent within weeks.  Every time a government employee gets paid in drachma2, he will instantly convert it into euro except for the amount that’s needed to pay taxes at the end of the year.  Who would want to hold a drachma2??  The government debt/GDP and deficit will both rise greatly because tax receipts are in drachma2 and bond payments and all payments to external (non-Greek) entities are in euro.  I realize there are no good options in the current situation, but this one is dead-on-arrival.