16 March 2015
1. Sovereign debt remains high – greater than the size of the economy. However, official measurements underesti-
mate the burden of this debt. When measured against our actual fiscal capacity (a measurement used by the Irish
Fiscal Advisory Council to assess the actual size of the economy excluding the impact of multi-nationals accounting
practices) our debt rises and the burden is greater. When measured against our gross national income (essentially
our GNP plus small EU transfers), Irish debt rises higher again – nearly 40 percent above the already high levels
that exist in the Eurozone. Even using this measurement flatters the Irish economy as GNP levels are artificially
inflated by the profits of re-domiciled multi-nationals. There can be little question that sovereign debt represents
a significant burden on the Irish economy.
2. This burden is manifested in the high levels of interest payments on the government debt. These annual payments
are expected to reach €8bn by 2017 and remain at this level (even rising) in the years ahead. This is equivalent
to the government’s education budget. While the low-interest regime offers the prospect of refinancing debt at
lower costs, interest payments will still remain at elevated levels. This represents a significant drain on the pro-
ductive economy as tax revenue is diverted into interest payments rather than investment in our economic and
social infrastructure.
3. The current debate about government debt and interest payment is framed incorrectly. The issue is not whether
the debt is ‘sustainable’, a term that is rarely defined in concrete terms save for mathematical calculations. Any
number of metrics and formulae can be produced to show that almost any level of debt is sustainable. That the
Eurozone finance ministers believe the Greek debt is sustainable is testament to the malleable definition of the
word. The issue is not whether the debt is sustainable; rather, does the debt and the resulting interest payments
constitute a clear and significant impediment to maximising economic growth and social equity. There are few who
would argue that it doesn’t. This can be seen by a simple counter-factual question. If debt and interest payments
were reduced by half, this would provide an extra €20bn to the Government over the life-time of a parliamentary
term. Whether through public investment, expansion of public services or increased income supports this €20bn
would add considerably to real as opposed to statistical growth – in 2014 it is estimated that the phenomenon of
‘contract manufacturing’ made up nearly half of GDP growth, something that had almost no impact on the domes-
tic economy. It would have a significant impact on social equity, especially considering that over 1.4m people are
officially described by the Central Statistics Office (CSO )as living in deprivation conditions.
4. Therefore, reducing the burden of debt and interest payments should be central to economic and social policy. This
Memorandum proposes that the Government should endorse calls for a European Debt Conference – a meeting of
all Eurozone countries (though this could be extended to EU Governments) to discuss various options to reduce
the debt burden and agree a new approach which would involve debt restructuring. While burdensome debt levels
are usually associated with the peripheral countries, the fact is that debt is a Eurozone issue. The IMF estimates
that by the end of the decade nearly half of all Eurozone countries will have debt levels above or uncomfortably
close to 100 percent of GDP. A Eurozone issue requires a Eurozone solution.
5. While there are a number of options to consider this Memorandum proposes that the Government adopt the
framework outlined by three economic advisors to Syriza. In essence, they propose the
following:
a) The European Central Bank (ECB) acquires a significant part of the outstanding sovereign debt of the Euro-
zone countries – reducing national debt levels to 50 percent of GDP.
b) These bonds would be converted to zero coupon bonds with a 1 percent discount
c) The countries will buy back the debt when the ratio of those bonds falls to 20 percent of GDP.
d) The impact on Irish debt would be dramatic. Government debt would fall from 108 per-
cent of GDP (2015 projection) to 50 percent. In nominal terms, debt would fall from €210bn to
€97bn. This would have an immediate budgetary impact. It would have the potential of reduc-
ing interest payments by half, saving €3.7 to €4.2bn annually over the medium-term.
This framework, if adopted, would have a similar effect throughout the Eurozone. All countries would benefit (with
MEMORANDUM
To: New Left Government
From: Michael Taft
Date: March 2016
Re.: Debt must be postponed so the economy can thrive
March 2015 17
the exception of Estonia, Latvia and Luxembourg; their debt is already below 50 percent). Over €4tn of Eurozone
debt would be removed to the ECB. With the considerable interest payment reductions, the Eurozone would receive
a similar boost. This has the potential to free the Eurozone from the low-growth, deflationary predicament we find
ourselves.
6. The Government should take account of three factors if it decides to base its own proposals on this framework:
First, this is not a nominal debt write-down or ‘haircut’ – Eurozone governments would buy back the debt taken
by the ECB; but only when that amount reaches 20 percent of GDP. In Ireland, this means that (given a long-term
nominal annual growth rate of 4.5 percent) the Government wouldn’t be buying back the debt until 2053 or
nearly 40 years. However, inflation and GDP growth would bring about an effective write-down. Second, as it is
the ECB that is buying the debt, there are no fiscal or budgetary transfers between Eurozone countries. In other
words, no country would be liable for another country’s debt or repayments. Third, the ECB would borrow the
money from the private sector to acquire sovereign debt. This would remove excess liquidity in the economy and,
so, limit future inflationary pressures. The potential impact of this framework is best expressed by the authors:
“This model of an unconventional monetary intervention would give progressive governments in the
Eurozone the necessary basis for developing social and welfare policies to the benefit of the work-
ing classes. It would . . . replace the neo-liberal agenda with a program of social and economic
reconstruction, with the elites paying for the crisis. The perspective taken here favours social jus-
tice and coherence, having as its priority the social needs and the interests of the working majority”.
In all matters, regardless of the options adopted by a European Debt Conference, member-states would still be
subject to the preventive arm of the Stability and Growth Pact. This means they will still be bound by rules to sta-
bilise deficits at low levels.
7. This framework could attract the crit-
icism that this constitutes monetary
financing. It is difficult to disagree with
that. However, while EU Treaties rule
out direct monetary financing, the ECB
has devised strategies that effectively
finance governments without falling out-
side Treaty rules. The restructuring of
the IBRC promissory notes and the ECB’s
recent quantitative easing programme
can be categorised as arms-length mon-
etary financing. The above framework
can be similarly categorised.
8. While it is beyond the scope of this Mem-
orandum to prioritise the distribution of
resources - approximately €20bn over
a five-year parliamentary term – we
would point out that both the Hermin
and Hermes macro-economic models
employed by the Nevin Economic
Research Institute and the Economic
and Social Research Institute both indi-
cate that public expenditure increases, in particular public investment and employment, are more efficient in
boosting economic growth than taxation reductions. Given our widely acknowledged deficits in our economic and
social infrastructure, priority should be given here.
9. Finally, this Memorandum proposes that the Government engages in an open and honest dialogue with the people of
Ireland. Our indicators of national income are distorted and give a misleading picture of the health of the economy.
Our indigenous enterprise base is extremely weak by European standards while domestic investment is histori-
cally tied to property and finance rather than productive activity. Our long-term policy of incentivising foreign
investment through low tax rates and an accommodative tax regime will undergo profound changes as the inter-
national environment is becoming more hostile to tax haven-conduits. The need for a new debt dispensation along
the lines of the framework outlined above is a necessary step to provide us with the resources needed to undergo
the necessary and profound restructuring of the Irish economy – a restructuring that will promote and vindicate
the energy and creativity of the people of Ireland.
Michael Taft is research officer for Unite, the Union
Chart 1: Goverment debt as a % of Gross national Income, 2014
Source: OECD Employment Outlook 2014
Greece
Italy
Portugal
Ireland
Cyprus
Belgium
Spain
Eurozone
France
Austria
Slovenia
Germany
Malta
Netherlands
Finland
Slovakia
Lithuania
Latvia
Luxembourg
Estonia
10.2
36.1
40.6
42.1
54.6
58.7
69.3
71.2
72.4
83.0
86.8
93.7
93.9
99.7
106.5
110.9
130.6
131.9
132.0
175.8

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