Greece Still Has a Fighting Chance

Anatole Kaletsky (2015) has a take on Europe vs. Greece confrontation. He notices that, since coming to power in January, the Greek government has believed that default on its debt would be a strong enough threat to the Eurozone, which would force Europe to choose between two alternatives: either Grexit (with potentially disruptive consequences for the euro) or unconditional debt relief. Kaletsky argues that the European authorities, in fact, have a third option in their cards: if default occurred, the EU could trap Greece inside the Eurozone, instead of Grexit, and starve it of money, pure and simple. So that Europe would showcase Greece as the ‘no-alternative-to-our-rule’ banner, for all to see, and herald that its rules may not be broken.

But the Greeks are not bound to passively accept this gloomy destiny. We have recently argued in this blog about a possible way for Greece to avoid this trap (Bossone and Cattaneo 2015).

Our proposal would help the economy recover, repay its debts, and still remain in the euro. As we explained, it does not rely on the oft-invoked alternative of Greece resorting to issuing IOUs that the government would use instead of euros to pay for public salaries and pensions. We have argued that this solution would not be sustainable, inter alia, because it would do nothing to boost demand and GDP expansion.

Our alternative is the issuance of Tax Credit Certificates (TCC), to be assigned to workers and enterprises at no charge.[1] For readers’ convenience, we briefly remind the essence of the proposal. In addition, addressing some relevant comments from readers, we point to key safeguards of our proposal that would make the TCC robust against fiscal risks.

TCC would entitle the bearer to a tax discount of an equivalent amount maturing in, say, two years after issuance. Such future entitlements could be liquidated in exchange for euros and be used for immediate spending purposes. Liquidation of TCC would take place against purchases of TCC by those who would want to acquire the right to future tax discounts. Put it differently, for investors TCC would be a safe investment paying an interest comparable to a two-year zero-coupon bond. Not being a debt instrument, TCC would in fact be safer than bonds.

Through liquidation, TCC would allow future tax discounts to be transformed into current spending. Under conservative estimates of the income multiplier (even less than 1), simulations show that the new spending would generate enough fiscal revenues to compensate for the euro shortfalls that the government would incur by receiving TCC for tax discounts at their maturity.

TCC assignments would supplement disposable incomes and add new spending power to income earners, thus stimulating demand. The Greek government could use them to increase net monthly salaries, reduce actual gross labor costs (by allocating a part of them to enterprises, in proportion of labor costs), and even to fund humanitarian actions, job guarantee programs, and the like. TCC assignments would constitute net additional spendable resources and, by cutting labor costs, it would support exports, balance the effects of stronger demand on imports, and make Greece attractive for investment and production relocation from abroad.

Unlike the IOUs, TCC would create new spending power, which in a depressed economy would stimulate demand and trigger economic recovery. Also, as long as the total amount of TCC in circulation was not too large as a percentage of GDP and gross fiscal revenue, TCC would be well accepted by the general public and trade at not too high a discount vis-à-vis the euro.

A number of escalating ‘safeguard’ clauses should be introduced in the event that fiscal revenues would not grow in line with the primary surplus targets:

  • First, the Greek government could announce a commitment to pay a fraction (presumably, just a small one) of its public expenditure with TCC.
  • Second, taxpayers could be entitled to receive TCC as compensation for additional euro tax payments: basically, this is equivalent to replace a tax raise with a compulsory TCC-for-euro swap.
  • Third, TCC holders could be incentivized to postpone use of TCC for tax discounts by receiving an increase in their face value (equivalent to an interest being paid in TCC).
  • Fourth, the government could raise euros in the market by placing TCC with longer maturities instead of debt bonds.

Notice that these safeguards would be much less pro-cyclical than those imposed by the EU to secure budget targets through spending cuts or tax hikes. One or more of them, used in combination, would easily accommodate for even significant shortfalls in primary budget surplus targets. Think about how easily a 2-3% budget shortfall would be manageable through the flexibility provided by these safeguards, and compare it with the huge recessionary impact of trying to achieve a similar adjustment via cutting expenses and / or raising taxes.

As Europe’s leadership intends to use its win over Greece as a lesson on its great orthodoxy, the EU and ECB might not appreciate an innovation like the TCC. In trying to corner Greece the way Kaletsky is arguing, they may oppose it and even take punitive action, such as cutting Greece off the ELA facility. But this would precipitate Grexit, which is what Europe doesn’t want. In our opinion, the ELA cutoff is a “nuclear option” the ECB just cannot pursue. It could easily trigger a total meltdown of the Euro monetary system, and it would even be dubious from a legal standpoint.

Greece’s fighting chances are still strong: Tsipras, give it a try, for God’s sake!


Bossone B and M Cattaneo (2015) “Greek Parallel Currency: How to Do it Properly”, 21 April 21

Kaletsky A (2015) “Why Syriza Will Blink”, Project Syndicate, 17 May

[1] See our full proposal at

One Response to "Greece Still Has a Fighting Chance"

  1. Aegean1972   May 27, 2015 at 7:18 am

    Greece definatly has a chance, as long as the leftist gvmnt doesnt shoot itself in the foot every time. Greece (with the previous conservative gvmnt) was getting out of recession at the end of 2014. They also had a surplus. And then the leftists overthrew the conservative gvmnt and totally messed things up, taking the country back to "2012". That was a seriously iresponsible move. What can u do now? Obviously cant cry over spilled milk. Greece can still rebound as long as Tsipras does a coalition gvmnt with the other euro-friendly political parties. That will give investors a good reason to feel "safe". If he does that by fall, then Greece has a very good chance of rebounding by Christmas 2015.

    Greece right now has huge investment opportunities. The stock-market is way underpriced and long-due a serious uplift. Infastructure is on sale, real-estate gems are on sale and so forth. If Tsipras acts like a capitalist and attracts foreign investors, Greece could see a major economic and investment boom in the next 1-3 years.