Home > Uncategorized > Is an ECB backed investment bank a better idea than QE? Varoufakis thinks so.

Is an ECB backed investment bank a better idea than QE? Varoufakis thinks so.

In Europe, we are wasting time. Varoufakis tries to break the deadlock: the continent is awash with money but, despite record low-interest rates investment rates are low. In a very well written speech he proposes a solution, based on the ‘Modest proposal’ by Holland, Galbraith and Varoufakis. The sting in the tail: there will be another undemocratic ‘federal’ institution, an investmentbank, backed by the ECB. Maybe this institution might, to an extent, make up for the lack of fiscal policy on the Eurozone level, at least by restoring part of the monetary transmission channel, i.e. provide a level playing field when it comes to financing projects in the different countries in the Eurozone. While it might also make up for the present lack of government investment in at least some countries. And it might make the present, asset price increasing, kind of QE superfluous. My idea: the European Parliament will have to get large supervisory powers over this bank. An excerpt:

Here is what the ECB could do to achieve its objective while overcoming both its ‘operational problem’ and the ‘macroeconomic concern’:

  1. The European Investment Bank (EIB) should be given the green light to embark upon a Pan-Eurozone Investment-led Recovery Program to the tune of up to 8% of the Eurozone’s GDP, concentrating on large scale infrastructural projects while its offshoot the EIF concentrates on start-ups, SMEs, technologically innovative firms, green energy research etc.
  2. The EIB has been issuing bonds for decades to fund investments, covering 50% of the projects’ funding costs. It should now issue bonds to cover the funding of the Pan-Eurozone Investment-led Recovery Program to the full; that is, by waving the convention that 50% of the funds come from national sources.
  3. To ensure that the EIB bonds do not suffer rising yields, as a result of these large issues, the ECB ought to announce its readiness to step into the secondary market and purchase as many of these EIB bonds as are necessary to keep the EIB bond yields at their present, low levels.

The merit of this proposal is that, essentially, it recommends that the ECB enacts QE by purchasing a single asset; the solid, non-toxic, non eurobonds issued by the EIB on behalf of all European Union states. Thus, the ECB’s operational concern about which nation’s bonds to buy is alleviated. Moreover, the proposed form of QE backs productive investments directly, as opposed as to inflating risky financial instruments.

  1. March 15, 2015 at 11:40 pm

    Varoufakis talks sense. Also I agree that the way forward is to create new “federal” institutions with large fiscal budget and democratic oversight, not to put more constraints on national institutions. I just fear that asset holders, mainly of German and other north-European assets, may be too tempted to cash in on QE asset price inflation to allow any alternative.

  2. Rob Parenteau
    March 15, 2015 at 11:51 pm

    The problem with the Modest Proposal is it requires cooperation of the Troika, which is clearly in no mood to negotiate terms of existing Treaties and Agreements, never mind initiate new ones. You may know that Yanis moved on from the Modest Proposal to a Parallel Currency solution based on Bitcoin. This too has its challenges, as Bitcoin is an intangible asset that is very easy prey for speculators, and not really a currency at all. The TAN (tax anticipation note) proposal linked below may be a better way forward, as it provides an alternative government financing instrument ( one that may also be adopted as a Parallelwahrung, as the Germans put it) that may allow Greece and other eurozone nations to exit fiscal austerity without having to exit the euro. Please take a look – the TAN approach was first proposed the Levy Economics Institute conference in Athens in November 2013, and this proposal was passed on to Yanis at the time, and informed his move away from the Modest Proposal solution to his version of Bitcoin.



    Happy to reformat these for real world economics if you care to post these – just send me the correct contact info and format required for submission.

  3. Mike NZ
    March 16, 2015 at 3:27 am

    Oh – I read it as using the existing EIB, not creating another institution… Am I missing something?

    • merijnknibbe
      March 16, 2015 at 4:35 am

      The existing EIB will get a new role and new powers

  4. March 16, 2015 at 8:05 am

    Another proposal for a parallel currency that is better than bitcoins can be found at:

  5. Nell
    March 16, 2015 at 12:02 pm

    Some really positive proposals being put forward from various sources. This is great, but the elephant in the room is that those who have the power to make the kind of decisions necessary to put even one of the proposals into action are locked into austerity group think. The evidence on the deleterious effects of austerity policies in Europe are apparent for all to see, yet the eurogroup will not even budge an inch. Even QE, a policy measure applied in other OECD countries, which mainly protects the wealthy, had to be fought tooth and nail. I fear for Europeans. I really do.

  6. blocke
    March 16, 2015 at 1:02 pm

    That is why elections occur; organize and throw the bums out. We always knew that right wing economics had to be opposed. That is what the Greeks did and at bottom it is the politics that is driving Schrauble nuts and sartorial style.

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