On Some Recent Proposals of Public Debt Restructuring in the Eurozone

Abstract

This paper considers the issue of sovereign debts in the Eurozone. The reasons for the reduction of public debt, which are quite strong in the present circumstances of slow growth, are briefly discussed with reference to EMU countries. Then the different possible strategies to reduce the public debt/GDP ratio while avoiding any form of debt restructuring are considered. The choice to cut public debt by means of a violent and unexpected upsurge of inflation, which in the past has often been the preferred solution, is not viable today in the Union. On the other side, alternative option for reducing the public debt by means of extraordinary finance instruments, such as wealth taxes, privatization of public companies and sale of public assets can assure only limited results. Thus the policy presently adopted in the EU, relying on the progressive accumulation of surpluses in the general government’s primary budget (the austerity solution), seems to be the only practicable exit. However the alternative of restructuring has been investigated with growing attention in the last few years. Two distinct perspectives have been followed. On one side a number of proposals deal with the issue of existing (legacy) debt. On the other one, several projects have been presented aimed to establish a permanent insolvency mechanism for sovereigns. The former group of projects wants to avoid the private sector involvement and are based on complex mechanism of securitization of future revenue of member states (seigniorage and taxes). There are reasons to doubt that they are something substantially different from the policies currently followed and, especially, that can be more favourable to growth. The latter group of proposals, concerning the institution of an ordered procedure of insolvency for sovereigns, are meant to make effective the no bail out principle, whose compliance has proved very difficult so far. The question is raised if this perspective is really realisable in the absence of any element of fiscal union.