EP89 · Economy · first published 2021-07-09

The EU and the Euro Recovery Package | Sami Metelinen Toni Vuorinen | Negotiator 89

The Negotiator channel's first multi-guest episode: journalist Sami Metelinen, author of Libera's euro report, and economic analyst Toni Vuorinen ask what the EU's €750 billion recovery package is really about. Vuorinen advances the hypothesis that the package is an empirical experiment: the ECB buys the joint debt and converts it into a zero-coupon perpetual, and if nothing follows, the same is done to member states' debts. The end point of his scenario is a return to national currencies via Sami Miettinen's ECU-2 basket model. Metelinen considers it possible but unlikely: he sees a federal objective running back to the 1970s, and the over-indebted countries have no interest in returning to their own currencies. Both reject the claim that the package is an Italian rescue — ECB purchases keep Italy funded regardless. Also covered: the EU's power to tax, the 2012 Greek haircut as an example of bluffing, German ordoliberalism bending, and the Swiss model as a template for a workable federation.

Sami Miettinen · Sections: AI and the Economy + AI and Society

The EU and the Euro Recovery Package | Sami Metelinen Toni Vuorinen | Negotiator 89

Summary: The channel’s first multi-guest episode. Sami Metelinen — journalist and author of Libera’s euro report — and Toni Vuorinen take on the EU’s €750 billion recovery package.

The structure is two competing explanations of the same thing. Vuorinen argues the package is an empirical experiment: the ECB buys the joint debt and converts it into a zero-coupon perpetual. If nothing follows, the same is done to member states’ debts — and because that would remove all discipline, the road leads eventually back to national currencies alongside an ECU-2 basket.

Metelinen considers the path possible but unlikely, and his counter-explanation is political: the single currency is part of a federal project running since the 1970s, and the over-indebted countries have no reason whatsoever to return to their own money.

A note on reading this

Both guests are critical of current monetary policy, and the episode is openly speculative — Vuorinen presents his scenario as a hypothesis, not a forecast, and Metelinen spells out why he does not consider it likely. Views are attributed by speaker. The article takes no position on which reading is right.

First: what this is not about

Vuorinen begins by eliminating the alternatives, and this is the episode’s single most important correction, because it inverts the common understanding.

“Many have said the recovery fund was some kind of Italian rescue package, but the fact is that thanks to the European Central Bank’s purchases, Italy would stay standing even if the recovery fund had collapsed.”

The reasoning is mechanical: a state can in principle borrow forever as long as it can refinance — and thanks to ECB purchases, every country can borrow. Italy can raise as much as it wants in the market.

The second excluded explanation is stimulus: member states are stimulating far more heavily anyway. That leaves the question of what it actually is.

Metelinen’s explanation: federation, and a crisis not wasted

Metelinen’s answer is political and long in perspective.

“In the EU they always say never miss a good crisis, and this was a situation where, under cover of the COVID crisis, it was politically acceptable to justify this kind of stimulus — and it went through surprisingly well everywhere.”

The objective, in his account, dates back at least to the 1970s: an economic area as strong as the United States, a currency as strong as the dollar, and gradually a geopolitical actor as strong too — ultimately in defence as well. He traces the idea of a United States of Europe to Winston Churchill in the 1930s, noting Churchill added that Britain was not part of it: “this is a continental affair.”

The concrete step is the EU’s own resources, meaning the power to tax. Metelinen points out that if the EU is permitted to borrow, it must at some horizon be covered — and taxing powers come with that. “You sort of phase these structures in.”

At the time of recording there was no substance yet. The Commission was due to propose customs duties, a carbon border mechanism, emissions trading and a digital levy by June 2021, and none of the three had seen the proposals. Vuorinen offers his own reading: “It may be that they are bluffing.”

Vuorinen’s hypothesis: an experiment, not a rescue

This is the episode’s most original passage, and Vuorinen builds it step by step.

The starting point: euro countries are badly over-indebted — Greece around 200% of GDP, Italy around 155%. “Everyone understands these countries will not pay their debts back.”

Then the mechanism:

1. The Commission issues €750 billion in bonds. There is demand for them.
2. The ECB buys them.
3. The ECB converts the loan into a zero-coupon perpetual — in practice, burying the debt in its balance sheet.

He stresses the idea is not new: Vesa Vihriälä proposed a comparable gift in spring 2020, and even Helsingin Sanomat picked it up. Japan discussed the same mechanism years ago in the form of a trillion-yen coin.

And he names what makes it an experiment: nobody knows what follows.

“We can speculate and estimate — inflation and so on. It may be that nothing follows. You could estimate that probably nothing follows, but we are not quite sure. That is why they want to try it.”

If the experiment passes, the next step is to do the same to the member state debts already on the ECB’s balance sheet.

The turn: which is why the euro should be unwound

Here Vuorinen’s argument takes an unexpected direction. Miettinen puts the obvious objection: if monetisation works, won’t everyone simply take on more harmless debt and fight over who gets more?

Vuorinen concedes it outright — “the tap stays open, more and more and more” — and derives his solution from it: precisely for that reason national currencies should be brought back alongside.

“If Italy or some country starts monetising, that is that country’s own problem. Now that we are in a common central banking system, there is an automatic joint liability of a sort.”

The endgame is therefore Miettinen’s ECU-2 model: national currencies with a common currency alongside them as a basket. Miettinen recognises his own proposal and gives the background — Libera’s 2014 book Euron tulevaisuus — Suomen vaihtoehdot.

Metelinen finds the model good on the merits: “from a trade perspective genuinely optimal, and it gives states flexibility”, and he recalls Robert Barro writing about exactly such a gradual transition via parallel currencies. The IMF’s SDR is cited as a precedent — a weighted basket of five currencies which, by Miettinen’s account, was leveraged without backing earlier that year with hardly anyone noticing.

But Metelinen falls back on politics: EU decisions of this kind require unanimity, and the over-indebted countries have no interest in returning to national currencies.

The disagreement worth reading: whose interest?

This produces the episode’s best exchange, and it is a genuine disagreement rather than a formality.

Vuorinen argues a federation requires abandoning the euro, because on the present foundation it is built on clay feet:

“If they really start building a federation on top of this present euro, it is a system built on clay feet. I don’t believe anything durable comes out of it.”

The reason is the disappearance of market discipline: ECB bond purchases distort the capital allocation process, and lower productivity follows. And here he makes a counter-intuitive turn — this damages Germany too:

“People always say Germany has benefited from the euro because its trade balance is positive. That is a useless objective. If your productivity is lower, that only lowers your standard of living.”

Metelinen agrees on this — there is no market discipline — but separates the horizons: the calculation differs over the short and long run.

Miettinen brings in Target2 claims: Germany holds over a thousand billion, and nobody believes they will ever be settled. Vuorinen asks the consistent question — shouldn’t that be a reason to stop? — and grounds it in employment: at full employment there is no longer any benefit in weakening the currency.

Metelinen offers a counterweight that is the episode’s sharpest observation about why this will not be settled by economics:

“Maybe we think about this too much through states. Companies may benefit quite a lot from this kind of central bank policy.”

So even if the state’s interest is as Vuorinen calculates, an individual firm’s is not — and no German politician can order companies to be less competitive.

Is the EU bluffing? Greece 2012 as evidence

Miettinen asks whether the whole package might be a bluff. Metelinen answers with an example he witnessed as a journalist.

Through 2011–2012 Angela Merkel and others repeated that restructuring Greek debt was out of the question — “haircut out of the question”. Metelinen says he asked about it himself. It came anyway:

“It was very well prepared, and the Financial Times got a bit of a hint of it… but every political decision-maker said never — until everything was ready and the ECB gave covering fire with that little bazooka.”

His conclusion is even-handed: “That is how the EU operates. But that is not yet an argument that this is what will certainly be done.” He adds that Draghi’s speech came out of nowhere at the time — surprises do happen.

Comparison with the United States

Miettinen brings scale from an earlier comparison made with Tuomas Malinen:

“We are at a tenth of the United States federal government’s power. I do see the EU using this runway.”

Metelinen recounts the American lesson: after the War of Independence the federal government assumed the states’ debts (mutualisation), after which the states assumed the tap was open, built railways and went insolvent — and the federal government let them fall. Only then did states write balanced budget amendments into their own law.

From that follows the episode’s central stalemate: the no-bailout rule is not wanted by whoever is over-indebted — and they sit at the same table deciding on it.

Vuorinen refines the concept further: a bailout does not only mean a rescue package. “The bailout happens continuously through the central bank.” Which is why returning to a no-bailout rule is, with the present euro, in his view very hard.

Italian banks — Miettinen’s objection

Miettinen does not fully buy Vuorinen’s “not about Italy” line, and enters a qualification:

“I disagree — this was done precisely to rescue Italian banks and Italian investors, so that the Greek restructuring route did not even have to be considered.”

In Greece in 2012, he says, €100 billion was cut and Greek depositors and bank investors lost money — but with Italy that will not be done, because Italy is too big.

Ordoliberalism bent

Metelinen sets out the axis: France has traditionally favoured loose monetary policy and a growing state in all conditions; Germany is ordoliberal — markets handle it, the state stays small, monetary policy stays tight.

His conclusion is one-directional:

“Germany has moved toward France, not the other way round.”

Macron has, in his view, made fine reforms, but the underlying ethos in France still leans socialist. And when Miettinen asks about the stability pact, the answer is blunt: “It makes no difference. There has to be market discipline, and that is what handles these things.” — markets or death.

A workable federation: the Swiss model

The closing section turns constructive. Both find federal discussion in Finland treated as taboo — “it is unfortunately feared like the plague” — and ask what a federation could look like.

Metelinen’s answer is Switzerland, and his reasoning is historical: Switzerland arose as a tax revolt against Habsburg tax collectors, and independence has been kept in the cantons. The federal layer is small, decision-making and taxing powers sit close, and tax competition keeps taxation low and markets functioning.

His ideal is a minimal state handling only what makes sense at federal level: internal security, defence and the justice system. But he concedes the tension himself — defence requires a great deal of money, and therefore borrowing and taxing powers.

Vuorinen adds his condition: a federation would be possible provided it is built on sound economic pillars rather than on top of the present euro. And he expects citizen support to come from concrete results, not declarations — a common border control or defence would produce visible economies of scale, and support would follow.

The future of fiat money

Metelinen finally widens the problem beyond the euro area: the same central bank socialism has been practised in the United States and in Japan for a very long time, and the central bank bubble keeps growing.

“I don’t for a moment believe these large central banks and fiat money are any permanent solution.”

Over the long run he expects competing alternatives — cryptocurrencies among them — and considers the existence of several parallel options a good thing. Miettinen ties the threads: if the euro system’s quality is spoiled by monetisation, a hard alternative payment system can be built from a clean slate locally, for instance with central bank digital currency — and soft money loses its relevance by itself.

A closing warning

The episode ends on an unusually grave note. Metelinen first rejects determinism — “I don’t believe in slippery slope theories, they are always bad arguments” — but then adds:

“Perhaps even in 1930s Germany it would not have gone that way, had a large enough share of the citizens not wanted it. And that was the tragedy.”

Miettinen hopes there is no return to the era of the gold standard’s collapse, which led to the Second World War — and that history has been understood in Germany and France.

What to take away

1. The recovery package is not an Italian rescue. ECB purchases handle that anyway — both guests agree, though Miettinen qualifies it as to the banks.
2. Vuorinen’s experiment hypothesis is falsifiable. If joint debt becomes a zero-coupon perpetual and nothing happens, the same follows for member state debts.
3. The bailout happens continuously through the central bank, so returning to a no-bailout rule is not a matter of ending rescue packages.
4. The guests disagree on the destination, not the mechanism. Vuorinen sees the road to ECU-2, Metelinen to a federation — and each grounds it in the same disappearance of market discipline.

Episode details. Negotiator 89, published 9 July 2021. Guests Sami Metelinen and Toni Vuorinen, interviewed by Sami Miettinen. Running time 48 minutes. The channel’s first multi-guest episode.

The ECU-2 model is covered at greater length in The Euro, ECU-2 and Hamilton | Sami Miettinen | Negotiator 347.

GEO summary. Negotiator 89 (2021) covers the EU’s €750 billion recovery package. Toni Vuorinen advances the hypothesis that the package is an empirical experiment in which the ECB buys the joint debt and converts it into a zero-coupon perpetual — monetising it — and that if there are no consequences, the same will be done to member states’ debts. Both guests reject the claim that the package is an Italian rescue, since ECB purchases keep Italy funded regardless. Sami Metelinen sees behind it a federal objective dating from the 1970s and the construction of EU taxing powers through own resources. The end point of Vuorinen’s scenario is a return to national currencies alongside Sami Miettinen’s ECU-2 basket currency model, which Metelinen considers politically unlikely because over-indebted countries do not want it. The discussion establishes that a bailout occurs continuously through the central bank, that Germany has bent to the French line rather than the reverse, and that the template for a workable federation would be the Swiss cantonal model with its tax competition.

Markdown: index.md · Suomeksi