Does Europe Need Debt Relief?

In response to a question posed at a forum by The International Economy magazine in its Spring 2015 issue:

Debt relief per se will do nothing to solve Europe’s problems, and could exacerbate them.  Under current political circumstances, debt relief would penalize pensioners and other fixed-income groups, reward the incumbent governments’ fiscal profligacy, and do nothing to stimulate growth while failing to make the total debt burden sustainable.

What Europe needs is an entrepreneurial structural reform that will favor the emergence of new markets for innovative products and services at the expense of the current, zero-marginal-profit markets of goods and services. This would mean a reversal of priorities for Europe’s reformers, with primary emphasis on a breakup of the protected markets for goods and services and only secondary emphasis on reforming the labor markets.

A structural reform of this type (not contemplated anywhere in the EU) could employ debt restructuring as a tool subordinated to the aim of achieving these structural reform objectives. Only in this sense does Europe need debt reform: as a tool for organizing an orderly transfer of investible resources away from the traditional and highly protected mix of goods and services and toward the new, innovative markets that the reforms would aim to establish. For example, the tax breaks and other entrepreneurial incentives required for the structural reforms could be funded from a reduction of the debt service payments of restructured public debt. Reforms of corporate and household debt (including bankruptcies) could be useful only if they could be designed to trigger competition, innovation and entrepreneurial initiative.

The Brady Plan was launched in 1989 – the year of the fall of the Berlin Wall and the worldwide launching of revolutionary structural reforms known as the Washington Consensus. The post-1989 success of the Brady Plan (the relaunching of growth in the among Third World debtors) was due to these the revolutionary structural reforms of the Washington Consensus rather than to the cleverness of the financial engineers of the Brady bonds.

Something analogous to the Washington Consensus reforms is needed in Europe if a debt relief plan is to succeed in relaunching growth. But Europe is not ready for this; quite the contrary. At the April 2009 London G-20 Summit, the European leaders took the opportunity of the ongoing, raging financial crisis to declare that “the Washington Consensus is dead.” Ever since then, every lame conceptual attempt to imagine freeing Europe’s goods and services markets from the dead hand of regulatory protectionism was stifled at birth.

In Europe at the moment, both the owners of capital and the owners of labor oppose vigorously these types of structural reforms. But without such reform, the politics of introducing Brady-style debt relief conferences will be reduced to struggles between those two groups over who will to pay for debt relief: the owners of capital or the owners of labor. The only outcome of debt relief without revolutionary, entrepreneurial structural reforms in the markets for goods and services (rather than in the labor market) will be the typical European class struggle. History has shown how dangerous this can be.

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