Posted by WARREN MOSLER on September 24th, 2011
While the way the euro zone is currently function would not be my first choice for public policy, it is operationally sustainable.
The ECB is writing the check, and can continue to do so indefinitely.
as long as the ECB buys sufficient quantities of Greek bonds in the secondary markets,
Greece will be able to fund itself.
The ECB debt purchases merely shift net financial assets held by the ‘economy’ from Greek govt. liabilities
to ECB liabilities in the form of clearing balances at the ECB, which does not alter any ‘flows’ in the real economy.
So as long as the ECB imposes austeric terms and conditions, their bond buying will not be inflationary.
Inflation from this channel comes from spending,
and in this case the ECB support comes only with reduced spending.
For the ECB this also means they accrue substantial net interest margins on their portfolio of Greek debt.
And as long as they keep funding Greece in any manner, Greece need not default.
This means the ECB books profits from their portfolio that adds to their stated capital.
While this is of no operational consequence,
it does help satisfy political concerns over ECB capital adequacy.
Nor is this ‘Ponzi’ in any sense,
as the ECB is not dependent on external funding
to make payments in euro.
Additionally, the ECB no officially has stated it will provide unlimited euro liquidity to its banks.
This too is not inflationary or expansionary, as bank assets remain constrained by regulation
including capital adequacy and asset eligibility which is required for them to receive ECB support.
So while politics is and will always be a factor in government in general, the current state of affairs can be operationally sustained.
The problem then shifts to political sustainability which is necessarily less certain.
The near universally accepted austerity theme is likely to result in continually elevated unemployment,
and a large output gap in general characterized by a lagging standard of living and high personal stress in general.
With ECB continuing to fund, this can, operationally be readily adjusted via a loosening of the Growth and Stability Pact budget constraints, but politically this possibility remains remote without a substantial increase in popular opposition.