How to Exit Austerity, Without Exiting the Euro

By Rob Parenteau

First of all, if a government stops having its own currency, it doesn’t just give up ‘control over monetary policy’…If a government does not have its own central bank on which it can draw cheques freely, its expenditures can be financed only by borrowing in the open market, in competition with businesses, and this may prove excessively expensive or even impossible, particularly under ‘conditions of extreme urgency’…The danger then is that the budgetary restraint to which governments are individually committed will impart a disinflationary bias that locks Europe as a whole into a depression it is powerless to lift.

So wrote the late Wynne Godley in his August 1997 Observer article, “Curried Emu”. The design flaws in the euro were, in fact, that evident even before the launch – at least to those economists willing to take the career risk of employing heterodox economic analysis. Wynne’s early and prescient diagnosis may have come closest to identifying the ultimate flaw in the design of the eurozone – a near theological conviction that relative price adjustments in unfettered markets are a sufficiently strong force to drive economies back onto full employment growth paths.

Otherwise, why would policymakers willingly agree to give up much of their discretion in using monetary policy, fiscal policy, and exchange rate policy tools that had conventionally been used to stabilize economic growth? One would only pitch the proposal of expansionary fiscal consolidation if one shared a near theological conviction in the stabilizing properties of markets left to their own devices.

The failure of this neoliberal experiment is now all too obvious. Greece, for example, has traveled an economic trajectory over the last half decade that in many respects rivals that of the US in the Great Depression. While the immediate response of policymakers to such a failed live experiment might be to exit the euro, the short run costs of doing so can be very high. The sharp declines in newly introduced currencies on foreign exchange markets would be likely to sharply raise the cost of imported goods, and foreign investors would likely go on strike, at least until the currency had hit bottom. In the case of Greece, with fuel, food, and medicine making up a large share of the import bill, further economic disruption and destabilization would likely result from a choice to exit the eurozone. Exiting the euro does not appear to be an option – at least not one without a large risk of introducing further turmoil.

The task then becomes to thread the policy needle – namely, to exit austerity, without exiting the euro. The following simple proposal introduces an alternative financing mechanism, along with safeguards to minimize the risk of abuse of this mechanism, which may accomplish this threading of the needle.

If we can agree with the late Wynne Godley that the separation of central bank monetary policy from fiscal policy is one of the core design flaws of the eurozone, and we can acknowledge that the expansionary fiscal consolidations promised five years ago have proven anything but expansionary, then it is clear that effective demand must be revived by other measures. If private sector investment demand is going to continue to prove to weak (especially relative to private saving preferences), and if the increase in trade balance is going to continue to be made largely through import contraction (on the back of weak final domestic demand), then economic growth can only return if countries abandon austerity measures. Simply put, peripheral nations in the eurozone must regain control of their fiscal policy, and must actively pursue full employment growth policies.

To accomplish this, the following alternative public financing instrument may need to be unilaterally adopted in each peripheral nation in the eurozone. Federal governments will henceforth issue revenue anticipation notes to government employees, government suppliers, and beneficiaries of government transfers. These tax anticipation notes, which are a well known instrument of public finance by many state governments across the US, will have the following characteristics: zero coupon (no interest payment), perpetual (meaning no repayment of principal, no redemption, and hence no increase in public debt outstanding), transferable (can be sold onto third parties in open markets), and denominated in euros. In addition, and most importantly, these revenue anticipation notes would be accepted at par value by the federal government in settlement of private sector tax liabilities. The revenue anticipation notes could be distributed electronically to bank accounts of firms and households through some sort of encrypted and secure system, or they could be sent as certificates, preferably in denominations of 50 and 100 euros, to facilitate their possible ease of use in other transactions, should private agents elect to do so. Essentially, the government is securitizing the future tax liabilities of its citizens, and creating what amounts to a tax credit that will not be counted as a liability on its balance sheet, and will not require a stream of future interest payments in fiscal budgets.

One advantage of this alternative financing approach is that day one, the government issuing these tax anticipation notes (we could call them G Notes for Greece, I Notes for Italy, S Notes for Spain, etc.) can pursue the fiscal deficits that are required to return their economy to a full employment growth path. Fiscal austerity can be abandoned without abandoning the euro.

The explicit cost of this approach could involve the imposition of fines for violating the 3% fiscal deficit to GDP ratio of the Growth and Stability Pact. However, Germany openly violated this threshold in the last decade with no fines imposed, and so what is good for the goose, must be good for the gander. Moreover, if renewed fiscal stimulus is successful enough to revive the economy, tax revenues will rise, and public debt to GDP ratios are likely to fall. After all, the outcome of recent episodes of fiscal consolidation has been rising, not falling debt to GDP ratios, as fiscal restraint has held back nominal GDP growth, or led to outright declines in nominal incomes. Finally, in countries with current account deficits that are in excess of 3% of GDP, the rules of double entry bookkeeping imply countries will need to violate the 3% fiscal deficit to GDP rule if their domestic private sectors are to be kept off of deficit spending paths.

In addition, the use of these tax anticipation notes will tend to free up more euros for payment of externally held public debt. Euros may also be freed up to pay for imports of essential goods like food, fuel, and medicine as well, at least until fiscal policy can help develop domestic production in these areas. With both the ECB and eurozone commercial bank balance sheets shrinking over the past year, the supply of euros may be contracting. This contraction of bank balance sheets may be making it more difficult for each country to acquire more euros by selling assets or tradable goods to holders (and more importantly, creators) of euros.

Of course, to make this alternative financing mechanism, enforcement of tax collection will need to be improved in some nations. A more equally distribution of the tax burden across citizens would also help in the issuance of these notes. To accomplish this, citizens will also need to take back their democracies from what Jamie Galbraith has termed the predator state. Otherwise, there is a risk that programs facilitated by the issuance of tax anticipation notes will just become another vehicle for political patronage.

A second criticism of this alternative financing mechanism is that it would offer a quick route to accelerating inflation, if not hyperinflation, as some of the constraints on government budgets would be reduced or removed. To address this, it might be helpful for the central bank of each country to be held responsible for not only monitoring inflation conditions, but also for creating early warning systems for the possible acceleration of inflation. Both exercises could be overseen and validated by an independent third party – say IMF or ECB staff.

Hard rules could then be set in place along the following lines: should inflation accelerate through say a 4% YoY ceiling for more than six months in any nation, the Treasury of that nation would have to implement an across the board sequestration on government spending of 5%. This sequestration would remain in effect until the inflation rate dropped below 4% for at least six months. A schedule for ratcheting such measures if inflation continues to accelerate above the ceiling could surely be devised. Alternatively, taxes could be increased on households to create a deferred savings pool, much as Singapore currently employs, and much as Keynes proposed for WWII England.

In addition, public/private inquiries into the specific location of supply bottlenecks in the chain of production could trigger the redirection of infrastructure spending to help clear those bottlenecks. Inquiries into sectors with above normal profit margins or real wage growth persistently in excess of labor productivity growth could also be launched. Excess profit taxes designed to incentivize higher reinvestment rates, as well as collaborative bargaining in cases of aggressive labor demands, could be required to address any such inflationary pressures on the supply side. Using these tax anticipation notes to implement an employer of last resort approach to labor market improvement could also have a stabilizing effect on inflation. It is not hard, in other words, to create the demand and supply side policy mechanisms that could reduce the odds of an ever-accelerating inflation once fiscal policy is liberated.  After all, the fear of this outcome is one of the reasons the eurozone was designed with precisely the division between central banks and fiscal policy that Wynne Godley identified in the opening quote.

Austerity has proven to be a disaster on nearly all fronts. It is time to abandon the fatal conceit of the neoliberals. Economies are not naturally drawn to full employment growth paths when prices are free to adjust . We know this from the theories of Keynes, Fisher, and Minsky, and we know it from historical and direct experience – yet this was the central premise, as well as the fundamental design flaw, behind the European Monetary Union. This theology of “markets uber alles” has been demonstrated to be very questionable, if not deceitful, both in theory and in practice. The human cost of the neoliberal conceit has proven both tragic and unacceptable. Furthermore, this live and misguided experiment in neoliberalism has set in motion dynamics of political and social polarization and dissolution – dynamics that are blatantly antithetical to the original unifying intention supposedly behind the eurozone project.

Yet countries can, in fact, exit the hell of enforced austerity policies without having to take on the very significant challenges of exiting the euro. It is possible to thread the needle. Through this alternative financing mechanism, the tax anticipation notes, countries can regain control of their fiscal policy, and mend the design flaw that Wynne Godley identified well before the first euro had even been issued. Perhaps there would be no better tribute to the man, as well as to the powerful and useful insights of heterodox economics, as the foundation and relevance of mainstream economics is increasingly in question. Another world is possible. There is, in fact, contrary to Lady Thatcher, an alternative. That alternative may very well be within reach, but only if current policymakers are willing to embrace innovative policy measures like the tax anticipation notes proposed herein.





81 responses to “How to Exit Austerity, Without Exiting the Euro

  1. Nichol Brummer (@Twundit)

    When the Euro was designed, I don’t believe all countries that signed up to it realised that its maastricht rules would be enforced so strictly. And at the start, both Germany and France simply broke the rules without getting into any trouble. It was only later that these rules were slowly canonized into something that could not be broken.

    But in the mean time everybody knows that somewhere a loosening mechanism must be created. The only problem was how to divide the profits in a fair way. And not just pay support to ‘lazy’ countries that don’t work hard enough to make their economy competitive. There were great ideas of e.g. Eurobonds, or paying out ECB ‘profits’ to all countries proportional to the number of inhabitants. But none of those were politically viable.

    .. some kind of central EU fiscal power is necessary. But this mechanism seems a great idea to also give some initiative to the separate countries and their central banks. Since this idea would give the political initiative in the hands of the ‘south’, could it be politically viable where the ideas based on central ECB-based monetary sovereignty failed? The idea is also clearly limited, since you would probably not limitlessly ‘print’ local currencies that can only pay the local taxes. But will the ‘north’ consider this new money as a new type of debt? Money is a social contract, and it depends totally on perceptions of reality, and political will to believe in them.

    • Nichol: The advantage of the above proposal is it does not require the cooperation or the approval of other countries or other transnational institutions, like those comprising the Troika. It does not require a central fiscal or monetary authority, and as we have seen, getting the cooperation to occur at that level is very problematic, and in some cases, anti-democratic All this requires is the introduction of another form of public finance. The tax anticipation notes are used by state governments across the US. They are not money – they are fixed income instruments. It is conceivable that private agents will, on their own initiative, agree amongst themselves to use the tax anticipation notes as a means of settling transaction in private markets. However, that is not the intent. The government is simply issuing what amounts to a tax credit in order to increase their ability to finance socially useful projects that employ unutilized (i.e. wasted) productive resources, at a time when fiscal consolidation has demonstrably failed to lead to that outcome in country after country. The only limits to this proposal are on the demand side, as in the demand for tax anticipation notes will, at least initially, be proportional to the size of tax payments, and there is of course a political limit to how high tax rates can be raised.

  2. This is a great plan, and it’s exactly the kind of thing I would (and do, regularly) advocate, but (hate to throw cold water on this as the first comment) I just can’t see it being agreed to within Europe (I don’t think countries can do this on their own?), especially as Germany seems hard-set in keeping things exactly as they are.

    I’ve followed other alternative policy frameworks as well, such as from Yanis Varoufakis’s Modest Proposal (which is another excellent framework for EU recovery), but again, the problems are political, and primarily with Germany.

    I’ve personally lost hope of there ever being any kind of political agreement within Europe, that would lead to a real economic solution – as bad and as painful as a Euro breakup would be, is it not at least time to start looking at non-Euro solutions, such as splitting Europe into smaller monetary unions, or just straight-out exits? (well past time to start being cynical of the idea/hope, of any political resolution)

    These options may be bad, very bad, in the present – but after 10+ more years down the line stuck in the current situation, how bad would not taking that course really look, in retrospect?

    I’m starting to think more and more, that countries regaining full sovereign control over their politics/finances and exercising damage control, before the next crisis (and the next, and the next…) hits, is of critical importance, before so much of states and the public’s assets are stripped away, and so much power accumulates in the hands of a few, that democracy gets irreparably eroded.

    • JohnB – Can you please help me understand what you perceive the political problem would be with this proposal. Each fiscal authority in each nation is free to choose its means of public finance within the strictures of the various treaties governing the structure of the eurozone, right? So where is the violation? This is a euro denominated bond. It is a tax anticipation note. US state governments issues these all the time as a means of public finance. Yes, the Troika will howl bloody murder, and yes, the Stability and Growth Pact restrictions on 3% limits on fiscal deficits to GDP will, at least initially, be violated and fines may be administered (though again, remember Germany got away with it, as did France, last decade) but so what? Once citizens and policy makers experience the benefits of renewed economic growth, falling unemployment rates, an end to income and price deflation, a return to prior health care services, and on and on, there will be no turning back. People, in other words, will come to see that not only was expansionary fiscal consolidation an unlikely outcome ever in the eurozone, but the 3% deficit limit is not only an arbitrary one, but a deadly one – literally, as in rising suicide rates, falling health care services, etc. So please help me understand the political impediments to this proposal. From my perspective, the only political impediment is whether policymakers in the peripheral nations have the courage to stand up against those elements enforcing austerity, especially when they are given an approach that does not require they take on all the pain and distress that will arise, at least in the early stages, if they exit the euro. Thanks!

      • I think the political problems I see, would largely be limited to the “Troika will howl bloody murder” part you mentioned, so yes, maybe I’m wrong, and this can be done without any political agreement with Europe first.

        If it really is as feasible as you describe, and if the political reaction and subsequent political/economic consequences of that political reaction, are predictable and manageable, then yes I think it is doable; a discussion (or another post) on the likely political outcomes/reactions and potential economic fines/sanctions that could result from it, would help me and others judge better I think.

        I’m all in favour of EU nations taking matters into their own hands like this, instead of looking at a full exit vs continued stagnation, so if this really would work, it should be lobbied for heavily.

        • Rob Parenteau

          JohnB – Yes, I am looking for legal experts on the various Treaties that can help me anticipate the types of challenges the Troika (or incumbent policy makers, who so far have proven fairly timid in challenging the Troika) might try to mount so they can be properly addressed. If anyone out there knows any one they can refer me to that is familiar with both the public finance and the monetary provisions of the various treaties governing the EMU, I am all ears.Thanks JohnB for your feedback.

          • Sounds good, I’ll be eager to hear more on that 🙂 thanks for your replies.

            I mentioned Yanis Varoufakis in my original comment, and asked him what he thought of this, and it looks like he has previously proposed something similar:

            He has done a lot of work on alternative recovery policies with his Modest Proposal, and seems to know a lot about EU treaty mechanisms and such, so may be a good person to ask for sources (or even chat to directly about this).

            • Rob Parenteau

              Thanks for the link, JohnB. I believe Jamie Galbraith sent my proposal on to Yanis, though I never heard back from him before I went to print with this this blog. Am familiar with their proposal, and will certainly look at this link to see the similarities. I believe Marco in this thread has also identified an Italian proposal very similar to the one I cobbled together, so maybe, if necessity is indeed the mother of invention, we are all starting to land on the right inventions – finally – to break the death grip of the Troika and their neoliberal theology which has unfortunately promoted a terrorist economics as the only alternative.

    • I agree with JohnB

      It seems, at least to me, that the Germans have so much political capital invested in the current policy arrangement that short of armed conflict, they are not going to consider changing.

      For example; why can’t the Germans inflate their economy rather than force others deflate theirs? The Germans disregarded the rules when it benefited them and escaped any penalties, let alone criticism.

      They are in the monetary union along with the southern European States who apparently have to degrade their standard of living, create massive unemployment, massive poverty and economically forced emigration to maintain the German status quo.

      The Southern European states are already suffering a gratuitous depression with no end in sight. If they exited the Euro and regained their currency sovereignty, they would at least bring this misery to an end on their own terms. Staying within the EMU given the undemocratic Troika’s power, ensures they have no opportunity to escape their imposed misery, let alone hope.

      • Rob Parenteau

        Daniel D- Notice the TAN proposal does not require any changes on the part of German policy authorities. The TAN alternative public financing method can be launched unilaterally by any eurozone government at any time. This is one of its main advantages over other schemes (perhaps short of the Mosler bond approach) that require a high level of cooperation at the EC level, and hence the permission of other nations, particularly core nations like Germany. The problem of simply exiting the euro, as I mentioned in the article, is not trivial, and would probably involve severe hardship for at least 12-18 months given the inability to access international capital markets and the surge in import prices accompanying the likely maxi-devaluation of any newly introduced currency. In addition, at least from what I have seen so far, and in part because of this likely short to medium run economic pain from exiting the euro, the suggestion of exiting the euro is a nonstarter for most policymakers currently in power in the periphery. Perhaps they have been cowed by the Troika, or perhaps they believe the neoliberal lies, or perhaps they just don’t want to be the ones in office when the pain of exiting the euro is being endured. So I have tried to construct an alternative financing vehicle that allows them to regain fiscal independence, admittedly at the cost of Stability and Growth Pact fines, while not having to endure the hardships of a maxi currency devaluation. As I mentioned, in the case of Greece, these are very serious – access to fuel, food, and medicine would, day one, be extremely limited. So while I am sympathetic to your call for a clean and simple exit, I think it may be more problematic than you currently perceive.

        • Rob Parenteau
          I cannot disagree with your argument(s) in theory, as I believe they are well grounded.

          The exercise involved in exiting the Euro, is no doubt complicated and not without some pain. It is however, finite, while continuing their participation in the EMU has no successful political, monetary or policy end in sight.

          Setting that eventuality aside, the current punishment that the southern European nations are enduring will only be repeated and amplified during the next downturn. Greece, for example is now suffering from major deflation, which will inevitably lead to a fall in government revenues, triggering another government debt repayment crisis. Greece already has a dire shortage of medical, food and other critical supplies, therefore, what would be the real difference?

    • I have to agree, though very interesting/sensible proposals, it’s probably politically not possible, given the recent Fiscal Compact and required budgetary approval by the EU commission (not to mention the Germans…).

      And I also have to agree that an exit/breakup makes more and more sense.

      And while I’m certainly not an expert, I’ve never understood the assumption, that a euro country would actually let their currency value freely plunge upon exit, and not simply fix/peg their own currency to the euro for a certain time to avoid the ensueing market turmoil.
      I mean, all they’d technically have to do, is re-enter the ERM II (, where non-euro EU Members fix their currency to the euro and even have to be supported in this by the ECB.
      Then they’d be able to limit the currency decline, make the adjustments more easily and in time return to a free floating currency once the economy is going again.

      What I’m getting at is, that there’s a precedent for currency fixing in the EU, so why not use it.
      It would of course have to be approved by other eurozone members, but once a country is really determined to exit, I would assume it’d be in the best interest of all to do this in an orderly fashion.
      I also think the same basic scenario would be applied if there was an orderly dissolve of the eurozone as a whole. Everyone would simply go back to ERM II.

      If the risks can be limited, surely regaining their sovereign currency is preferable than having to endure these ‘euro contraints’ indefinitly.

      • Rob Parenteau

        JamieS: First, to peg a currency at a fixed rate relative to another currency means you generally need an institution with enough fire power (foreign currency) to maintain the fixed exchange rate. That would probably not be the Greek central bank, as they would need an unlimited swap line with the ECB to maintain a peg, and the ECB is unlikely to be forthcoming, even if it would appear to be somehow in their enlightened self interest. I am prepared to be proven wrong about that, but doubt the Troika will be terribly pleased with an exiting nation given the lengths they have gone to in order to keep the EMU together. Remember, Greece was always supposed to be made an example for other nations as to why you did not want to ignore the diktats of the Troika. Second, with a fixed exchange rate, you generally lose control over your monetary policy, so fiscal policy remains financially constrained. Third, most people who advocate exiting the euro argue that one of the main advantages is the maxi-depreciation that is likely to come with it, which makes your exports cheaper to the rest of the world. Argentina, 2000-1, is the poster child here, or perhaps Iceland more recently. Your proposal would not even deliver that supposed benefit to exports, right? So take a closer look: you are advocating exiting the euro, but without any of the benefits. Oops!

        • on first, if the ERM II status would be approved the ECB has to support it, and as far as i know give unlimited swap lines.
          on second, the fiscal contraint situation is just as bad as now, since they still are fixed to the euro, but certainly not worse.
          on third, they would at least devalue by 15%, making the adjustments easier. In time, they should of course aim to break the fix, but only after things improve.

          • also, if all countries go back to ERM II, you have max exchange rate differences of 30%. For, let’s say Spain or Italy to devalue 30% toward Germany would make the whole forced adjustment process much easier.
            What I’m getting at is, you avoid the market shock, which comes with the re-introducing of the currency and can improve your competitive and overall economic situation before giving yourself over to markets. For the time being, it’s only making a bad situation less severe, and of course realise that the contraints are not completely lifted.

  3. While an interesting idea, it is essentially not much different from creating an alternative currency. I would consider it likely that these tax anticipation notes would immediately devalue against the euro. Hence it would likely have the same effect of exiting the euro: since the state is forced to accept them at par value for tax purposes, this would mean that the state is stripped off its supply for euros, making it even harder for the state to repay its debt. Granted, much of the state’s ongoing expenditures would be in the alternative currency as well, but this would mean a loss for the recipients of the expenditures, since imports would still be unaffordable for the part of the private sector now not getting any euros as income anymore.

    • Spassapparat: This proposal is distinctly different from an alternative currency. It is essentially a tax credit used as an alternative financing mechanism for the federal government. It is denominated in euros. It is a financing mechanism used across the US by state governments, and not treated as an alternative currency in any of those situations. If the federal government is legally required to accept these tax anticipation notes at face value as payment for the future tax liabilities of the private sector, there is very little chance for any large or long term deviation of the euro value of these tax anticipation notes from their face value. In essence, there is a very large market maker, not unlike a specialist in the equity market, that has unlimited capacity to keep the euro price of these financing instruments at or very near par. If you see it differently, please explain what you are seeing and I will try to understand the flaw in this financing instrument. This proposal frees up euros for the private sector to pay for imports by allowing them to pay tax liabilities with the tax anticipation notes. There is no reason why the government will not be paid euros as well as tax anticipation notes if the face value of the notes is preserved by the state’s commitment to receive them in payment of taxes at face value. Again, if anything, the ability to finance government expenditures with the issuance of tax anticipation notes will, as you admit, free up even more euros for the state to pay interest and principal due to any external public debt holder. Thanks for taking the time to think about these issues – I am of course very interested in finding any fatal flaws in it, as well as incorporating any improvements in it that you can propose and that appear to be sound proposals. Best to you!

      • I think the TAN will trade permanently at a slight but stable discount to Euros. TANs will be initially in the hands of government employees and contractors far in excess of their tax liabilities. They would willingly trade them for Euros which can be used for all their expenses, not just taxes. Other taxpayers could pay with Euros, or could make the effort to acquire TANs, but would demand some compensation for their effort and transaction costs. Banks and currency exchanges throughout Europe would have bid and offer spreads on TANs just like they do on dollars or pounds or yen.

        I don’t know what Germany could do within the EMU about Greece deciding to pay in TANs, but I like the idea of telling them explicitly to “lump it”. England is in the EU and not the EMU. Some countries use US dollars for their currency, or peg it to the US dollar, but are not part of the US. Why not Greece? Who can tell them they cannot use the Euro for their official currency?

      • Rob,

        thanks so much for the reply. I think it is very much similar to a currency since it has all the characteristics of a fiat money currency:
        – it is created ex nihilo through government spending
        – it is accepted as payment by the private sector because it is accepted as means of paying taxes.
        – it is non-convertible into anything else in the sense that it does not derive its value from this ‘something else’.

        the rest of my argument hinges on the question of whether it would devalue against the euro. if similar systems have been tried out in the US without devaluing against the $, then i stand corrected. I just thought that people will pay as much taxes as possible with their tax anticipation notes, since they can do everything with euros, while they can only pay taxes and (possibly) buy domestic goods with their tax anticipation notes. If that’s the case, then the Euro should be worth more than the tax anticipation note.

        I would really like for you to go into more detail where you see the differences between the tax anticipation note and an alternative currency.

        • TANs and Revenue Anticipation Notes in the US are very much like ordinary (short-term) municipal bonds. They differ in that they are “backed” by a specific revenue stream, so the default risk and the interest rate are lower than general bonds of the same issuer.

          What is proposed here is more like an actual sovereign currency, with no maturity date, convertible to nothing else, paying no interest, but accepted in payment of taxes.

          • thanks for clearing that up golfer1john. so tans in the us have a maturity date?

            • According to Wikipedia, yes:

              Tax anticipation notes are notes issued by states or municipalities to finance current operations before tax revenues are received.[1] When the issuer collects the taxes, the proceeds are then used to retire debt. The interest is exempt from federal income tax as in municipal bonds. Tax anticipation notes are short term notes, issued at a discount with a maturity period usually less than a year or a stated future date used by municipalities to bridge funding gaps.

              I know of only one corporate bond that is “perpetual”, and have never heard of such in government bonds. I guess it’s possible. I think they would pay interest, though. There are also Revenue anticipation notes. The name in the US is more a description of the purpose of the borrowing, rather than the terms of the offering. There’s no reason that the choice of the name for this idea has to mean that the terms will match.

              Maybe these things should have a different name? Drachmas, anyone?

              • When a US state or city issues a TAN, there is still a small default risk. They promise to redeem them in dollars. When a government promises to redeem them only in payment of taxes, that sort of risk isn’t present. The only “default” risk remaining is that of any monetary sovereign’s obligation – a dollar bill, for instance: that the government that issued it won’t survive.

              • How about Godleys? You could have G-Godleys, I-Godleys, S-Godleys, etc.

          • Rob Parenteau

            golfer1john: Right, the TANs are “backed” by the firm (and as far as I can see, technically fairly unlimited) willingness and ability of the government to accept the issued TANs as an acceptable means of extinguishing future tax liabilities of the private sector. The limit is effectively the ability to tax the private sector without incurring too much of the Bjorn Borg effect of emigration, too much tax evasion, or in the extreme, too much political revolt, a la Boston Tea Party (though that apparently was less about British tax rates on American colonies and more about what currencies were acceptable as a means of payment, or so I have been told by some economists and historians).

        • Rob Parenteau

          Spassapparat – While the TANs could certainly, if citizens so desired as consenting adults operating in free markets, be used as a complementary currency, that is not the main intent of the TAN proposal. The main intent is to free up fiscal policy in a way that will not add to the debt burden of eurozone nations adopting this proposal – hence the zero coupon provision means no interest expense adding to the fiscal deficit, and the perpetual bond condition means no principal repayment, hence no addition to the public debt from TAN issuance . In addition, please remember, the TANs will be denominated in euros, and essentially guaranteed bought back at par (or face value) by the government as the private sector chooses to relinques future tax liabilities. This is not unlike having a huge market maker with unlimited capital prepared to maintain a price on a security, much like specialists in equity markets would maintain a reasonable price range on stock prices. Knowing that, any discount that appeared on the TANs would probably be small and arbitraged away. For example, the proportion of tax liabilities of the private sector extinguished by returning TANs to the government would tend to increase with the size of the discount on TANs. This sets in motion a self-regulating, homeostatic price mechanism, I believe, but I am open to being shown where I may be wrong about this, S, so please let me know if you see it differently.

          • Thanks for the reply again.

            If you want to determine the difference between alternative currency systems and your proposal by saying that their intent is different, then I would deny that. proponents of alternative currency systems for greece do not want them introduced in order to have a second currency for payments – they want them in order to free up fiscal space, just like you want to do it with TANs.

            To put the issue a bit differently another time, what is the difference between your proposal and the introduction of the drachma at an initial exchange rate of 1:1 to the euro, whereby the greek government pays its employees and suppliers etc. in drachmas and accepts them in payment of taxes 1:1 with euros?

            With regards to the discount, I understand that the greek government would be a huge marketmaker for TANs, but i still believe that taxpayers would always pay with the TANs first, even if they are accepted on par with euros and no devaluing would occur. There is just no reason to hold TANs for any longer than needed, and it will certainly be less liquid than euros. While some or even most Greek businesses will come to accept them, I doubt the same will be true for businesses in foreign countries. While the effective difference between TANs and Euros might be small, I believe it will be enough for taxpayers to pay as much taxes in TANs as possible. The fact that the Greek government should deficit spend in the next years (decades?) quite substantially means that the amount of TANs is bound to grow over time, while the supply of euros will tend to fall as Greece has a current account deficit, making it even more unlikely that taxpayers will pay their taxes in euros.

            If this reasoning is correct, then the only way the Greek government will get access to Euros to pay its debt is to take on more debt.

            • Rob Parenteau

              Spassaparrat: Very glad to see you are thinking deeply about the TAN proposal. On your point about why not call it a drachma and fix exchange rate to euro at 1:1, consider the following. What does the Troika do, day 1, when you announce an alternative currency in what was supposed to be the EMU, a common currency project from the start? Second, how does say Greece maintain this fixed exchange rate to the euro? If, for example, for whatever reason market forces lead to downward pressure on the drachma (a depreciation you argue, I believe, is nearly inevitable) where does Greece get the euros to buy up more drachma? You have essentially created yet another fixed exchange rate system for Greece, which going back to Godley’s original critique, means you have many fewer degrees of freedom on fiscal policy. And remember, my primary point is that if without liberating fiscal policy, these economies are likely headed into debt deflation dynamics, a la Irving Fisher. Third, regarding the illiquidity discount, it will surely incentivize taxpayers to receive or acquire TANs, and pay their taxes in TANs, rather than euros…hence creating a larger demand for TANs…hence reducing or removing the illiquidity discount…especially if the ultimate buyer is to extinguish 50 euros of your tax liabilities for one 50 euro denominated TAN certificate…and can do so without any limit on its buying power. Fourth, I am not sure we should assume perpetual fiscal deficits in Greece, or any other peripheral nation that takes up the TAN proposal. If early on expansionary fiscal stimulus is pursued, and lower tax rates and higher income from sales to the government or provision of labor to the government raise business and household spending, then tax receipts may come in above plans/expectations, unemployment related government expenditures may shrink, and profit expectations may improve enough amongst managers and entrepreneurs and investors to get the private sector out of its revenue, profit, output, and employment nosedive. Regarding any government’s access to euros, it is purely a function of 1) the ECB’s willingness to net purchase assets held by citizens and the government, 2) the willingness of banks to extend euro denominated loans (that create euro denominated deposits out of thin air) or buy euro denominated securities from citizens or the governments, and 3) the ability of businesses and citizens in a country to run a current account surplus with countries settling tradable goods accounts in euros, or run a capital account surplus with foreigners investors net buying assets held by citizens or the government in euros. The first two do involve either selling assets or taking on new debt, you are correct to point out, but that is also case with all the members of the EMU, and so is more a critique of the monetary system that was set up, which involves a high degree of what is called credit money creation, than an issue with my TAN proposal. Thanks again for giving this so much thought – much appreciated!

  4. Rob, excellent post. There were reports in Italian blogs saying that Warren Mosler made this proposal to the Italian government, for a smaller scale intervention of fiscal expansion, and that it was examined by EZ authorities and rejected on the ground that it would add to government debt, contrary to what you suggest. I cannot confirm this is true, but it raises the political question of the viability of any anti-austerity plan within the EZ rules

  5. This would seem to be a relatively painless way of exiting the EMU while staying in the EU, and enjoying the benefits of free immigration and trade, as some countries are already doing.

    • Rob Parenteau

      golfer1john: Please help me understand how the tax anticipation note (TAN) proposal would qualify as exiting the EMU. It is an alternative public financing instrument that is denominated in euros. It is accepted by the government to discharge future private sector tax liabilities at face value. So all the TAN does is allow an EMU member nation to exit austerity. As it says in the title, this does not require the exit of the euro or the eurozone in any form or fashion. Yes, it could create the means for openly violating the Stability and Growth Pact (SGP – but truly, this is a misnomer, since it has led to nothing but financial instability and a lack of economic growth) restrictions on fiscal deficit and public debt to GDP ratios, but both Germany and France openly did so with license and without fines last decade. And really, there is no economic basis for believing the 3% and 60% ratios agreed upon initially are anything but arbitrary levels, so the SGP deserves to be renegotiated or dissolved, and as I mentioned in my reply to Dale, I have a strong hunch that the use of TANs to relieve the unnecessary economic suffering would set in motion a political dynamic to do just that – renegotiate the SGP.In any case, plea help me understand how the TAN proposal constitutes leaving the EMU, as I may be missing something here, and am prepared to refine the TAN proposal if it is something as crucial as the issue you identify. The whole point of the TANs is to thread the policy needle – to exit austerity without having to exit the euro. Thanks, and enjoy your day on the golf course!

      • Issuing them would not constitute an exit of the EMU, but if the EMU objected, the penalties could be avoided by exiting the EMU, also avoiding the adverse effects of changing to a new sovereign currency that would likely depreciate against the Euro, at least at first.

        Nothing wrong with the proposal, as far as I can see. I like it.

        • Rob Parenteau

          golfer1john: Not sure how you exit EMU without adopting a new currency that would likely depreciate against the euro. Please explain how you see that working, if you have the time, so I can better understand your point of view.

          • As for treaties, they have been violated or abandoned many times. It may require an act of the legislature, but I’m pretty sure none of the EMU countries gave up their political sovereignty to join the EMU.

            There are countries outside the US that use US dollars as their local currency. Greece could continue to use the Euro as its local currency even if it exited the EMU. Who could stop them, short of an invasion?

            When California had no more dollars to pay its employees, it paid them in tax credits in a way very similar to your proposal. It still used the dollar as its local currency.

            Exiting is an alternative to paying the fine for exceeding the 3% deficit threshold. Maybe they wouldn’t have to pay it, based on the precedents. Or maybe they would prefer to pay it rather than exit the EMU. But it is an alternative. “We rescind our agreement to abide by the terms of the EMU treaty. We retain EU membership.” In any event, if the TANs are judged to exceed the 3% limit and Greece would continue to willfully violate it, I don’t see how they would be allowed to remain in while the EMU continued to enforce the 3% rule against others.

            Britain, Poland, the Czech Republic, and others are members of the EU but not the EMU, so exiting one should not require an exit of the other.

        • I don’t think it’s possible to exit the EMU without a total EU exit in fact – I’m pretty sure that’s how it’s defined in the treaties, but I am not in any means an expert (just recalling this from past debates I’ve had).

          • Rob Parenteau

            JohnB: I recall being told it is possible to to exit the EMU without exiting the EU, though I would not pretend to be intimately familiar with all 2000 pages of legalese in the Maastricht Treaty. Someone else on this thread may be in a better position to confirm or deny this, though.

  6. It amounts to circulating an alternate currency, but so what? It’s what these countries need to do and the sooner the better. And in saying that this plan would be implemented “unilaterally”, the “EZ Authorities” are explicitly invited to lump it. Also an exceedingly good idea. Greeks and others suffering these depressions need hope. They need a reason to believe in their countries’ sovereignty again, no matter how badly impaired by bone-headed EZ-Authority policy.

    Just do it. One time – in any country. The effect will be electric because the new policy will start to work overnight. And this first big public win for the MMT position should / will attract attention from other quarters as well. And the political battle over any fines that are imposed would be welcome too. Since there has been a double standard, better to make it explicit so that public opinion can be mobilized against it.

    It’s clear that the EuroDorks will never learn. If countries don’t start taking steps like the ones outlined here, the next step will be the empowerment of extremists who will promise anything to get into power. Time’s up. Someone has to act.

    And go Warren – if this can be done in a country with the size and influence of Italy – well, it could change things a lot.

    • Rob Parenteau

      Dale – I agree completely, and you get my point. Let’s just do it. If the Troika then presents legal challenges, of course those will have to be addressed. But that will take time, and in the meantime, a whole lot of unnecessary, self-inflicted human suffering and misery will have been reduced by the use of this alternative financing mechanism – which, as you will see in my response to S. above, is not in fact the same as a parallel currency – and if my assessment is correct, politically, there will be no turning back the tide against the idiocy of fiscal austerity when economies are entering what increasingly appear to be the kind of debt deflation spirals the Irving Fisher belatedly identified after he lost his shirt (and his house) during the Great Depression (and this man was a tried and true believer and developer of general equilibrium theory – i.e. relative price adjustments just need to be free and unrestrained, and markets will equilibrate back towards full employment after any disturbance). In addition, even if by some legal twist the TANs are viewed in some courtroom as a parallel currency – and as I have argued above, that is not their intent nor their structure, as these are alternative public finance vehicles much along the lines used by US state governments – please go have a look at the use of Torekes in Belgium, which last I checked, was still a member of the eurozone (further info can be found on Bernard Lietaer’s website about this and other complementary currency experiments underway in Europe, some of which, like Switzerland’s WIR, have been around since the last Great Depression). Thank you for getting it Dale!

  7. Gennaro: In most countries, if a financing instrument is a perpetual bond, meaning the principal is never repaid, then it is not (and legally, cannot) be considered an increase in the total liabilities of the issuing entity. See, for example, the use and treatment of what are called consols in the UK. What is the liability to the government if they do not have to repay the principal, and there is not interest payment? The liability, clear and simple, zero. It cannot possibly be added as public debt. The only “debt” here of the government is the willingness to receive these tax anticipation notes (TANs) as a means of discharging the future tax liabilities of its citizens and firms. So unless I am missing something else, there is no grounds for a political objection to the TANs. Indeed, to the extent the TANs become the main (but not the sole) financing vehicle of the government, total government debt will increase at a much slower pace, and there is a much higher potential to achieve lower public debt to nominal GDP ratios in peripheral eurozone nations using TANs, if we assume that is a worthy goal, politically or economically (and there is, you would surely agree, no reason to think there is anything special about a 60% or even a 90% public debt to GDP ratio, as the Reinhart and Rogoff analysis has been proven to be seriously flawed, and furthermore, the private sectors are generally already operating with debt to income ratios well in excess of 60 or even 90%. Thanks Gennaro for raising this reservation from the Italian experience. I think it tells us a lot more about the courage and allegiance of the existing policy makers, and less about the viability of TANs. Please, however, keep thinking about how best to structure the TANs, and let me know if you see any other problems, beyond the fact the Troika will obviously be howling once Greece or Italy adopt this alternative financing approach. Take care!

    • I would be surprised if these instruments were not seen as liabilities. I’m not that familiar with public sector accounting, but they seem similar to money-off vouchers issued by commercial organisations, which I believe are normally treated as deferred income (a type of short-term liability). However, regardless of their treatment, the issue of such instruments may well be seen as detrimental to the interests of existing bondholders, on the basis that it is equivalent to giving holders of the TANs a preferred interest in the government’s future income stream. This could easily lead to legal challenge or impair the ability to raise normal debt in the future.

      These problems are not insignificant, but in my view that should simply mean that ways must be found to address them, rather than that the idea should be discarded.

      • Existing bondholders knew they were taking a large risk, and should not be surprised at whatever happens. They are being well-compensated, too. Maybe the government could make interest and principal payments in TANs, so as not to treat them too badly. Or, if TANs trade at a discount to Euros, the bondholders could take advantage of the arbitrage opportunity.

        As for issuing traditional debt in the future, it need not be necessary. If the volume of TANs issued each year exceeds the deficit, no additional borrowing in the bond market need occur.

      • I don’t see why TAN’s would make public debt any more onerous – if anything I think they would free up more Euro’s to be spent servicing that public debt’s interest (maybe even paying some of it down faster), since a greater amount of public spending can be done in TAN’s (however, I don’t know what limits there are to using TAN’s – maybe there is a point, other than full employment, where too many TAN’s can cause problems, I don’t know).

        Also, golfer1john, regarding the possible discount:
        Lets say TAN’s get traded on private markets at a discount, a 100 Euro TAN trading for €95: This would allow companies/people who don’t hold TAN’s, to extinguish 100 Euro in tax liabilities for €95 (which is a 5% reduction in tax burden – very nice for corporations), so this would put TAN’s at high demand, and this high demand would reduce the discount, so that TAN’s are very close to parity with Euro’s.

        • Right, the discount would be small, very close to transaction costs. I’m thinking less than 1%, actually.

          If they ran a budget deficit of 10% of GDP instead of 3% allowed, then each year the number of TANs would increase by 7% of GDP, assuming all previously issued TANs were used to pay taxes each year. After several years, all government spending and tax collection would be in TANs, none in Euros, and the number of TANs in circulation would continue increasing, and then the discount could widen. By that time, the economy should be in much better shape, and the deficit should be much lower, perhaps within the 3% limit. Interest rates on their bonds would be back to pre-crisis levels, and perhaps the issuance of TANs could be cut back, or the government could even buy them back. I don’t see why it would be unsustainable.

        • Well, there is an argument that if the government issues TANs and spends the proceeds, then the net result is less cash tax receipts in the future from which to pay bond interest. You and I might argue that this is not necessarily the case, but the point here is that it doesn’t matter what we think; it’s what the bondholders think. Which matters if you want to borrow from them in the future, even if you can address any current legal issues.

          But, I’d agree that funding with TANs would be less onerous than normal funding. And I would stress again that I don’t think these are reasons not to pursue what I think is an idea with merit; they are just issues that would need to be addressed.

  8. Southern European

    Great idea, especially given the current tax burden on labor, however the current governments wouldn’t dare to implement it. The sycophants in the parties are quite happy with the state of things.

    Greetings from across the pond.

    • Rob Parenteau

      Southern Europe – You may be right that the existing Administrations. I remain perplexed at how cowed they appear to be by the Troika, and how they seem to still be buying into the neoliberal worldview, as if there was no alternative. I am trying to demonstrate that there may indeed be a plausible alternative that threads the policy needle of exiting austerity without exiting the euro, in part to give the opposition a policy plank for galvanizing the citizenry, but also to expose the failure of courage and imagination of the existing political administrations. As I mentioned in the article, and as Jamie Galbraith has argued in his book Predator State, what we seem to need is a recapturing and a reinvigoration of political democracy before we can even hope to begin to implement steps toward increasing economic democracy. Maybe that is asking too much, but given the degree of suffering and degradation going on in the eurozone periphery, with no end in sight on current policy trajectories, I feel compelled to at least make some effort to offer plausible solutions. Whether the citizens of the periphery are willing to demand that this approach be taken up is ultimately up to them, though I will certainly do my part to try to publicize the TAN approach if no one can demonstrate a fatal flaw in this alternative financing mechanism.

  9. Here Here ! or Hear Hear !

  10. A detailed scheme to introduce TANs in Italy (under the name of CCF – Certificati di Credito Fiscale – Tax Credit Certificates) is described here, and a draft law proposal is here (in Italian).
    The CCF proposal is described in a forthcoming book (Marco Cattaneo and Giovanni Zibordi, “Una soluzione per l’euro”, Hoepli 2014, with a foreword by Warren Mosler and an introduction by Biagio Bossone).
    Biagio mentioned the solution in a article, here
    A key feature of the CCF solution is to devote a sizable portion of the certificates to reduce gross labor costs (while another portion will increase net wages, resulting in a big reduction of the “tax wedge”).
    This will realign adopting countries unit labor costs with Germany, replicating (via a different avenue) the effect of breaking away from the euro and devaluating the new currency.
    As concerns Warren Mosler’s proposal, mentioned by Gennaro, my understanding is that it was indeed discussed with the EU authorities but not formally submitted.
    The goal was to secure resources to rebuild L’Aquila, a central Italian city badly damaged by an earthquake.
    I was told that a similar scheme was devised in the region of Emilia Romagna (also hit by a quake, more recently). Local authorities did not ask for any permission to the EU, they just implemented it…

    • Rob Parenteau

      Marco, I am very grateful for these links and even more importantly, very heartened to hear that this type of approach is in fact this far along in Italy. I will start digging into these clues, as I am afraid I was ignorant that this effort was already underway, though Jan Kregel informed me earlier in the week that someone else in Northern Europe had contacted him with a proposal similar to the TAN approach, and I did run this by Warren Mosler before publishing this on NEP, though he mentioned nothing of it. Let’s stay in touch – I will be back to you with any questions I have after I get up to speed on the links you provided. Very glad also to hear the Emilia Romagna decided to just go ahead without asking for EU permission, as I think this sets in motion a very important political dynamic of taking back power from the Troika.

  11. roger erickson

    Yes, euro nations could leave austerity w/o leaving the zone, but their elite looters can’t let that happen w/o abandoning the agenda. If the perps don’t hang their populations together, the perps will hang separately. Solidarity is a must, even among thieves.

    “In politics, nothing happens by accident. If it happens, you can bet it was planned that way.”

    • Rob Parenteau

      Roger: Yes, as Jamie Galbraith has detailed, we are dealing with democracies that have been hijacked at plutocracies or in some cases outright kleptocracies by various elites, some of whom appear more concerned with gaining the approval of the Troika, than serving the needs of the citizens that elected them. I may be too naive, but I am willing to suspend my pessimism about the situation to at least try to demonstrate there is a plausible alternative, and to try to persuade at least opposition parties to take the TAN ball and run with it. I’d rather fail trying than not try at all. There is simply too much unnecessary human suffering going on, and I am not prepared to simply stand on the sidelines and watch it all go to hell without at least making some effort to turn the whole thing around.

  12. Mark Robertson

    [1] Stephanie writes {Actually it is Rob Parenteau that writes. Stephanie merely posted – admin}, “Countries can exit the hell of enforced austerity policies without having to take on the very significant challenges of exiting the euro.”

    There are only two ways for this to happen…

    A. The ECB in Frankfurt gives (not lends) euros to all EZ member states, in sufficient quantities to strengthen their respective economies.

    B. Every EZ member state enjoys a mammoth trade surplus, like Germany does.

    Realistically, neither of these will happen. Therefore realistically there is no way to exit austerity without exiting the euro. Hence, for all EZ nations that do not enjoy a trade surplus (i.e. a positive current account) their debt, depression, and austerity will continue to worsen as long as they keep the euro.

    [2] Austerity is not a “failed policy.” Nor does the euro have a design flaw. Both have spectacularly succeeded in their purpose, which is to widen the gap between the rich and the rest, and to enhance the supremacy of the financial economy over the real economy.

    The Monetary Union was a scam from Day One.

    [3] Austerity is not a “neo-liberal experiment.” It is a savage assault on the masses; a calculated genocide. Anyone who disagrees with this is a moron, or a liar, or has not yet been hurt.

    [4] Stephanie writes, “In the case of Greece, with fuel, food, and medicine making up a large share of the import bill, further economic disruption and destabilization would likely result from a choice to exit the euro-zone. Exiting the euro does not appear to be an option – at least not one without a large risk of introducing further turmoil.”

    I disagree. I say the Greek economy would take off if Greece were to reclaim its monetary sovereignty, such that the government could create as many drachmas as needed out of thin air (like the US government does with dollars). Poland’s economy is now strong, and in Feb 2014 all of its privately-run pensions will be transferred to the government. The Czech Republic’s economy is also strong. Reason: neither country uses the euro, and neither indulges in austerity mania. (They did for three years, but the elitist “debt hawks” no longer control all discussions.) Even Bloomberg now admits that Poland and the Czech Republic were wise to avoid the euro.

    • “There are only two ways for this to happen…”

      Why not three? This idea is at least enough like a sovereign currency to have the same stimulative effect.

      • Rob Parenteau

        golfer1john: An introduction of a new sovereign currency is much more likely to be legally challenged and ruled in violation of treaties that were explicitly designed to create a common currency, no? While I am aware that Belgium has a complementary currency in operation called Torekes, and this has not (yet) been legally challenged, what I am proposing is an alternative public financing instrument so as to minimize the grounds for legal obstacles to arise once this policy approach is initiated.

    • Rob Parenteau

      Mark Robertson – I obviously disagree with your assertion that there are only two ways for this to happen. I have proposed a third way that does not require running current account surpluses (though many of the peripheral nations already are because imports collapsed with the compression in final domestic demand under austerity), and does not require the cooperation or the permission of the ECB. I am open to the suggestion that the real hidden agenda of the EMU was much more vile than I suggest, but by failure, let me be clear that I mean the promise of expansionary fiscal consolidations, which was repeatedly and aggressively marketed by policymakers in the Troika who are beholden to the faith based economics of neoliberal theology, have demonstrably failed after 3-5 years of live experiments in a number of eurozone countries. Austerity is both an assault on citizens, and an assault informed by neoliberal faith in the capacity of markets to lead economies along maximum noninflationary growth paths. Assaults are rarely random events, especially on this scale. Regarding the Poland and Czech Republic experiences, I will look into these further, but as far as I know, neither nation has gone through a maxi-depreciation or devaluation, and all of its side effects, so I am not convinced these are truly valid comparisons.

  13. > issue revenue anticipation notes
    Ah yes, more IOUs, yes we need more of those.

    • Well, yeah. When there are not enough IOUs (money) to support the economy, you need more. Call them Euros, or Dollars, or TANs, it makes no difference.

      • Rob Parenteau

        golfer1john: Not so much a problem of not enough money to support the economy. Money is a stock. Money flows through the economy as it is used to settle transaction in product markets, labor markets, financial markets, etc. A given stock of money can support a nearly infinite range of volumes of purchases – in economese, the transaction velocity of money is not fixed, and can (an historically has been) influenced by social conventions, institutionals, technology of settlement (think electronically wired funds versus Pony Express transfer of money). The issue is much more one of effective demand, in the sense Keynes used it. Business owners and entrepreneurs do not expect sufficient money profits to encourage them to push production out onto a full employment growth path. That has much to do with the current money being spent on products and the extrapolation of recent trends of the same by managers and entrepreneurs, which is related to the money stock of course, but may not be as constrained by the money stock as you suggest, though I may be wrong. Hence the emphasis of the TAN proposal is on increasing the capacity of fiscal authorities to spend more money than they suck out of the economy by taxing businesses and households, hence increasing the net cash inflows to the private sector, which by increasing money profits of the business sector, should incentivize them to increase production – especially if they perceive the constraint on government financing has been permanently broken by the introduction of the TAN instrument of alternative financing.

    • Rob Parenteau

      R Foreman: Not really IOUs, I think. Private sector has future tax liabilities that are owed to the government. Government is simply issuing what amounts to a tax credit to government workers, suppliers, and transfer payment beneficiaries. The only IOUs, then, are the ones the private sector will owe to the government in the future, and the governments commitment to accept the TANs as an acceptable way of extinguishing private sector tax liabilities. So I am not sure I see the problem you are identifying, but perhaps you can give me some more clues. In addition, I would be interested in what you see might be a plausible alternative financing instrument that would free up fiscal policy without requiring an exit of the euro.

      • If a government can’t tax what it needs right now, then we really are leaving these burdens to future taxpayers. All the MMTers I’ve read say this is precisely what we aren’t doing. It seems like a lot of double-talk. Hell raise taxes and be done with it, or write off the debts that can’t be paid. Why is this so difficult for the Troika? They continue digging further and further into a hole with the outlier countries, giving them money that will never get paid back since they don’t have the productive means. I think Belgium deserves what it gets, and I think those outlying countries deserve what they get for staying in the Euro. Write down the debts damn it. Devalue the currency and get past it. If it wipes out a bunch of fat pig bankers then gee, that’s too bad.

        • Rob Parenteau

          R Foreman: The burden to future taxpayers is to pay revenues to the government, part of which will be paid to holders of government bonds…who are also often citizens. Income is being redistributed, not destroyed. Now I may have a problem with that given government bond ownership is concentrated in the upper income decile, which will likely diminish growth given higher propensities to save at high income levels, but what exactly is the burden you are referring to? Is not one of the main burdens being left to future taxpayers the irretrievably lost income (and employment, and also skill sets, as well as productive, natural, and social capital being depleted) of running an economy so far below full employment that suicide rates are climbing, malaria is returning to Greece, and drug abuse is surging? What is the real burden here R? Why is writing off debt so difficult for the Troika? Because the holders of peripheral debt are largely banks or public sector institutions – both have clout, do not want to take losses for the obvious reasons, and in the former case, may be insolvent if losses are recognized (hard to tell given balance sheets that are so opaque and the rolling over of existing loans with new bank loans in a Ponzi finance fashion). Wipe out the banks, and you take down the EMU’s financial system, and so their economies as well, unless you’ve got parallel credit and settlement systems ready to go day 1. Good luck getting past that!

    • Rob Parenteau

      Hilary: Where can I get more info about this program in the Philippines (how large is it, what are some of the challenges they have run into operating it, etc.)? Thanks for this clue!

  14. Unless it acquires the status of a defacto legal tender, the TAN will trade at a discount relative to the Euro if the total volume of TANs available exceeds the tax liabilities in the period. The rate of discount will be proportional to the excess of the TANs available to the current tax liabilities. The inflation of TANs will soon spiral out of control.

    To become defacto legal tender it will need to be available in both physical (for small volume transactions) and electronic (for large volume transactions and safekeeping) forms, ability to convert from one form to another easily, electronic transfer from one party to another and willingness on the part of the public and businesses to trade them at par even when they have more TANs than enough to meet their immediate tax liabilities.

  15. Rob Parenteau

    GRP: See above – have treated this question of an illiquidity discount for TANs in several responses already, especially the latest few to Spassapparrat. Remember TANs can be used to extinguish future tax liabilities – at any point in the future, not just the current year. So unless the issuance of TANs exceeds the expected sum of current and all future tax liabilities…which I think you would agree is highly unlikely…I suspect we have no demand side problem, beyond the limits to tax rates and tax breadth and tax enforcement…which are real, but not yet binding. Greece could do a lot to improve tax enforcement, and as I mentioned in the original piece, would be wise to do so before implementing a TAN alternative financing approach. Second, any illiquidity discount that does arise would make it preferable to pay taxes in TANs, in which case the demand for TANs goes up, and the discount shrinks or even disappears entirely, right? So how does the issuance of TANs spiral out of control exactly? In addition, remember the main purpose of TANs is to provide an alternative financing mechanism that will free up fiscal policy…and the purpose of freeing up fiscal policy is to get the economy growing again…which means higher income…and higher tax receipts…and lower government spending on unemployment related transfers and such…which should lead to lower fiscal deficits over time…and so could very well reduce the issuance of TANs (yet another reason why any illiquidity discount on TANs should self-correct). Regarding your second paragraph of concerns, I see no reason that any of these criteria could not be accomplished, but remember, the intent of the TAN policy is first and foremost to provide an alternative government financing mechanism to free up fiscal policy, no to create a complementary currency – though of course, consenting adults operating in free markets may in fact freely choose to use TANs as a means of settling private sector transactions as well. That is their free choice, but not the primary policy objective of TANs. There are many complementary currencies operating in Germany according to a 2006 Bundesbank publication, and Belgium, for example has a complementary currency still in operation called Torekes. My TAN proposal is not the same, and in fact goes beyond the properties and advantages of a complementary currency. In addition, I strongly suspect, in yet another move revealing the hypocrisy and arbitrary administration of power by the Troika, the explicit adoption of a complementary currency by a peripheral nation would be legally challenged by the Troika (though I have yet to find anyone who can identify the precise clauses in the 2000 page Maastricht Treaty that might be used to mount such a legal challenge).

  16. Rob Parenteau

    To all readers – I have really enjoyed receiving your comments, suggestions, clues, and critiques of the TAN proposal. This has been extremely helpful in clarifying my thinking on the proposal, and I am very grateful for the time you have all taken to really dig into what could be a very important policy method for ending the terrorist economics of austerity in the eurozone, or at least tipping the bargaining power away from the Troika’s insane and largely counterproductive diktats. The lessons of Bruning’s austerity in Germany in the early ’30s have been completely forgotten or ignored: the monomaniacal fear of another Weimar Republic hyperinflation episode is absolutely absurd in the face of more and more eurozone nations dropping into outright price deflation – that is, falling price levels in Greece and elsewhere. I now need to move onto to other demands pressing on my time, and will only be able to respond to new issues raised that I perceive are potentially serious flaws in the design of the TAN approach. In the meantime, to those of you who may have found yourself persuaded by my above responses, please help build some momentum behind this idea by spreading links to this NEP article liberally amongst friends, colleagues, neighbors, associates, and journalists. Best to all of you, and thanks again for taking the time to consider the proposal I have cobbled together – one I could not have possibly hoped to even begin to put together without the tireless efforts of Stephanie, Randy, Jan Kregel, Warren Mosler, and countless other heterodox heretics who dare to take the career risk of thinking outside the box because they know in their hearts and minds that another world is possible, and we have no choice in but to give it a beautiful birth in what is left of our lifetimes.

    • Thanks Rob for your efforts and this proposal – definitely the most promising idea I’ve seen yet, for giving periphery countries in the Euro a lifeline, and for cutting through the ‘There Is No Alternative’ narrative 🙂

      This one (like the Trillion Dollar Coin) ‘has legs’, and I think it has the potential to make a big difference – I’ll be sure to promote it where I can.

  17. I’ve been debating this in some places (not at a high level though – criticisms haven’t been as informative as comments here, but do help me refine my narrative/understanding), and this really is a excellent way of debating ‘MMT-by-stealth’, because it seems to be immune to the normal low-level money-printing/hyperinflation etc. based arguments you tend to get when debating vanilla MMT.

    I think with the right arguments, you can use this to even get austerians/fiscal-conservatives on board – and at worst, get people thinking at a deeper level, about what money really is and how it relates to debt (since TAN’s can, in a way, be simultaneously considered bonds/public-debt, by analogy, and also as money).

    I think this can be expanded well past a Euro-alternative, into a soft-introduction to MMT (it’s a steeper learning curve, but it’s less susceptible to being panned with the usual right-wing narrative).

    • JohnB: Yes, you see very clearly my intended line of march. If done right, this becomes a major “teachable” moment for functional finance and neochartalist approaches, as in exposing the basis of money and directly demonstrating how it can be used to fulfill social purposes, rather than the other way around, with society serving money. But step 1 is getting this proposal outside the heterodox ghetto and into the mainstream, or at least getting it adopted by existing administrations in the eurozone periphery, or in the worst case, a serious electoral platform plank for a plausible opposition party in any one of the countries heading into (or, as is the case with Greece, experiencing) outright consumer price deflation (on top of income deflation in some cases). Any and all help in these directions is gratefully accepted. Trying to get through to Martin Wolf at FT, for example in the past week, and no response, despite swapping e-mails and lunch in the recent past.

  18. I like the idea of a Tax (and/or Revenue) Anticipation Note very much. TANs still look to be a popular government funding mechanism as many city governments in California offer them. Cities like San Diego, Oakland, and San Jose and even Detroit, MI has offered TANs. However, those TANS seem to all involve investment banks as seller agents extracting fees for themselves and interest on principal for each note sold. If that is the case, how will Greece be able to keep the investment banking industry out of the note issuance and selling process?

    • These would be different. In the US, TANs are basically regular bonds with a particular revenue source earmarked for servicing and retiring them. These would be more like Euro notes (paper money), not like interest-bearing bonds. They would be printed by the government and spent, not sold on a stock exchange.

      • Thanks for the insight. US cities need those Euro type notes rather than the interest bearing, high fee ones sold by investment bankers. If Detroit could create no fee no interest notes, it could spend them into blighted neighborhoods. Instead they have to sell them to interest seeking bond holders who don’t spend in those same neighborhoods. Too bad that technology, e.g. like that used to create and spend get rich quick bitcoin seekers, couldn’t be applied to create and track no fee, non interest bearing TANs that could be spent by local governments to promote a better life in America’s poor neighborhoods.

        • Yes, that would help. The idea is mathematically limited, though. After a few years, the number of them in circulation would exceed the annual tax levy, and they would start to depreciate. Ultimately, a non-monetary sovereign must compete with others of the same type for residents, employers, taxpayers, and exports, unless the monetary sovereign provides it with regular infusions of money. Detroit in its heyday built a high-cost city government financial structure that its reduced economy and shrunken population can no longer support. TANs might stop the worst of the bleeding for a few years, but the only long-term option for Detroit is a restructure of costs by bankruptcy or bailout. Other cities and states in better shape could make good use of them for a longer time, but the better answer is for the money to be supplied by the monetary sovereign.

          • These might depreciate for people that must exchange TAN’s for dollars in the present (due to discount increasing the more TAN circulation exceeds revenue collection), but for everyone else it would be either like a type of (no-interest) forced-savings, or (importantly) if TAN’s become used as a medium of exchange (money) themselves – which I don’t see a show-stopping reason why not – then I don’t see the discount being relevant at all, or any depreciation happening.

            I agree though, that a better option is the government providing funding directly.

            A way I discussed this elsewhere (assume dollar/Euro here are interchangeable), was by separating a government/states dollar-only concerns (spending that must be done in dollars), from concerns that can be paid with TAN’s instead – and this could be used to mandate a certain minimum level of tax be paid in dollar’s (to meet dollar-only demands), while accepting TAN’s for the rest.

            Then, you can look at this as if you have two separate tax/government-spending systems (it’s really just the one system, but split to help understand better):
            The dollar-only system: Taxes and spending must be balanced.
            The TAN system: Taxes and spending do not need to be balanced, can be in deficit until inflation targets are reached.

            Now (to get to my relevant point), I don’t see why you can’t apply this to the private sector as well:
            The private sector will have a certain amount of dollar-only concerns, and will also have other concerns that can be met with TAN’s as well – the latter is not limited to state taxes, because anyone who accepts TAN’s as payment (such as any businesses which may utilize TAN’s for taxes) can have part of their trade treated as TAN-based concerns, instead of dollar-only.

            So, I would speculate, that you actually have way more room for TAN circulation within the private sector, before discounts/devaluation become a significant issue; the limit before issues begin to develop would not be ‘Tax intake’, it would be ‘Tax intake + Private sector TAN-based concerns’.

            • TANs surely would circulate as money, but for a city, like Detroit, they would be in demand only by those who must pay city taxes. If you shop in Dearborn, the supermarket there won’t accept TANs, and its employees won’t want them in their pay envelopes, if they don’t live in Detroit. Taken too far, Detroit city employees will have TANs coming out their ears, and no place to spend them (after they have bought everything they need from vendors within the city, and need “imports”). Even a store in Detroit, once it has enough TANs in its safe to pay its taxes, will have a preference for dollars and will increase the discount on TANs until its customers prefer to pay in dollars. A US State, or a Euro country, would be able to do more with TANs than a city, but eventually would run into the same thing.

              The issuer of the currency, in order to have the maximum policy space, must be willing to allow the value of the currency to float. If the city, or whoever issues TANs, accepts them at a fixed exchange rate with dollars or Euros, then they must limit the supply in order to maintain the peg on the down side. Once there are more than enough TANs in circulation to pay all the city taxes, the city could accept only TANs for tax payments, and let their value float. At that point it would have to be treated by banks and consumers as a separate sovereign currency, with electronic instances as well as paper notes.

              I don’t see it as a long-term solution, except perhaps as a transition tool to monetary sovereignty, but it could definitely be a short-term boost to get a struggling economy back on track. California seems to have used it successfully that way.

              • All good points, and I think the distinction between interest-bearing (which is what I assume California used) and non-interest bearing is important here, but yes good point all the same and I think an increasing discount would come into play at some stage (though I am optimistic that private sector TAN-serviceable liabilities would be high enough to expand TAN-issuance well beyond state tax intake).

                I would say, that for further information on a lot of this, there would need to be actual empirical studies done upon a real-world implementation, as I can’t make anything other than speculative claims about the range at which TAN-circulation can be extended, before it become subject to an increasing discount.

                • Maybe California wasn’t quite as successful with this as I thought. And didn’t do it in the same way as described in this article.

                  “The IOUs can be redeemed at face value, plus 3.75% interest, by Oct. 2 or earlier if a budget deal is signed and the state has enough cash to cover them. Some banks and at least 25 credit unions have agreed to accept the IOUs. Bank of America, Chase, Citi and Wells Fargo have said they would accept the paper through July 10.”

                  They seem to have bypassed the brokers, and maybe paid a lower interest rate than they would have had to pay in an agreed exchange, but it was hardly an exercise of sovereign power.

  19. One possibly positive side-effect of Greece’s belated (and exaggerated and misguided, in practice) commitment to not only imposing (which it was always quite good at) but also COLLECTING taxes, would be the enhanced practicality and viability of G-bills/notes (to use the term introduced in the piece for the TAN issued by Greece) as a tool of fiscal policy sans monetary sovereignty.

  20. I have to say, I’m having trouble presenting TAN’s to others without them getting very confused – particularly, the nature of paying people in TAN’s while also comparing them to bonds, seems to get people thinking too much in the mindset of bonds (bonds that are invested in, rather than bonds people are paid in).

    It also is a little bit confusing, in how the article compares TAN’s to the version of Tax Anticipation notes that US states use – this also has the problem, of not being an accurate comparison, due to US state version of TAN’s being (pretty much) bonds (invested-in bonds).

    I know that it’s a ‘next-best’ comparison, seeing as there is pretty much nothing like TAN’s that has been put into practice, but all these little things add up, to make it hard to present to others.

    Has anyone had any particular success with refining their narrative on TAN’s, to avoid common pitfalls/confusions? (or how to succinctly correct the confusions, without them coming back and being repeated)

    It seems to impact on the ability to convince people of the viability of TAN’s – them mistaking how TAN’s would work, and thinking “that’s not right – can’t work like that, that’s got to be wrong”.

    It would also be very interesting to get an update on TAN’s – i.e. what Rob is doing currently, and other economists/people who may be doing work on TAN’s or researching them?

    I’d very much like to keep an eye on that kind of stuff, as is very interesting, and is potentially important too – it’s probably the most promising thing, if it can be communicated to the public effectively, that could become a rallying point for political movements in periphery countries.

  21. JohnB: I am sympathetic to the difficulties of explaining TANs to the general public. Two thoughts. First, have the person you are discussing this with pull a $1 bill from their pocket. Tell them to place it on the table dead president face up. Ask them to read the top line. Mine says “Federal Reserve Note”. Then read the fine print below the bold United States of America line just below. It beings “THIS NOTE IS…”. Then explain as follows: a dollar bill is a note, a liability of the Federal Reserve/US government. The US government is liable to accept this dollar note as a means of settling payments required of (and liabilities imposed upon) its citizens, including taxes. It pays no interest. It is perpetual, as in it has no stated date of maturity. TANs, then, bear a similarity to the Federal Reserve Notes we carry around in the US. This gets them out of the mindset of bonds. The TAN structure It is clearest to those (mostly people who have been exposed to the work of Mosler and Wray, and other MMT advocates, which admittedly are too few and far between) that understand a dollar bill is not just paper issued out of thin air, but a liability (currency) on the Fed’s balance sheet, and one similar to a Treasury bond liability appearing on the Federal Government balance sheet, except it is perpetual (never matures) and pays zero interest. Second, the Levy Institute’s latest research on Greece sites a number of proposals, studies, and sources on so called parallel currencies. Here is the link: Now to be clear, I have presented an alternative financing vehicle for Greece (and the rest of the eurozone periphery), not a parallel currency per se, because I want to design a solution that has a low probability of facing a credible and possible debilitating legal challenge (which you know the Troika will mount). I may be unnecessarily conservative in this regard, as there are apparently over 100 parallel currencies operating within Germany alone (though it is unclear to me yet if any of them are accepted as a means of settling tax obligations at any level of the German government), and there is also a Bundesbank paper on them from 5 years or so ago that did not seem to depict them as illegal or against any of the EU treaties. Bernard Lietaer’s website also catalogs dozens of these parallel or complimentary currencies, some of which have been in use for decades, and are astonishingly creative. I have not pushed any further since putting the post up on NEP and sketching the TAN solution at the Levy Institute conference in Athens back in the fall, partly because I have been trying to find any flaws in the proposal, but also the time has not quite been ripe enough amongst eurozone policy makers. Perhaps that begins to change now that the Italian PM has stepped down. Please e-mail with further descriptions of the type of push back or confusion you are getting on the TAN proposal, especially after you try my suggested approach above, and also please read the Levy paper. GrkStav, you are correct, and I explicitly told the Greek audience in Athens that my TAN proposal will not work very well until the Greek government addresses its tax enforcement issues, as well as a more equitable distribution of taxes…which probably means the Greeks must first reclaim their democracy if they are going to be able to get anywhere with sensible economic reform. And this of course is true for most of the developed markets (US, as well), not just Greece. Best, Rob

  22. Hi Rob,
    Thanks for your reply – by the way, Yanis Varoufakis has just put out an article, making a proposal very similar to TAN’s:

    It seems to rely more upon a discount, but is very interesting nonetheless – and is promising to see him take interest in TAN-like options – I remember asking Yanis for his opinion on your proposal, when you first posted it.

    On discussing TAN’s with others:
    I’m from Ireland, which complicates explaining TAN’s using traditional MMT central-bank/government-based narrative, since the ECB is removed from individual EU governments.

    This is a big roadblock for a lot of MMT-narrative I find, when discussing Europe – it’s very easy to understand the narrative with respect to the US or UK, but it is more difficult to explain for Euro countries, since the ECB is essentially in limbo.

    Yes Bernard Lietaer is an excellent writer on alternative currencies, I will try to make time to look up that and look at the Levy document.

    Thanks again for the reply – I’ll see how I fare debating this further.