The Greek debt trap: an escape plan. Bruegel Policy Contribution 2012/19, 7 November 2012

Without corrective measures, Greek public debt will exceed 190 percent of GDP, instead of peaking at the anyway too-high target ratio of 167 percent of GDP of the March 2012 financial assistance programme. The rise is largely due to a negative feedback loop between high public debt and the collapse in GDP, and endangers Greek membership of the euro area. But a Greek exit would have devastating impacts both inside and outside Greece. A small reduction in the interest rate on bilateral loans, the exchange of European Central Bank holdings, buy-back of privately-held debt, and frontloading of some privatisation receipts are unlikely to be sufficient. A credible resolution should involve the reduction of the official lending rate to zero until 2020, an extension of the maturity of all official lending, and indexing the notional amount of all official loans to Greek GDP. Thereby, the debt ratio would fall below 100 percent of GDP by 2020, and if the economy deteriorates further, there will not be a need for new arrangements. But if growth is better than expected, official creditors will also benefit. In exchange for such help, the fiscal sovereignty of Greece should be curtailed further. An extended privatisation plan and future budget surpluses may be used to pay back the debt relief. The Greek fiscal tragedy highlights the need for a formal debt restructuring mechanism

Financing the EU Budget: Moving forward or backwards? CEPS Paperback

Often described as complex, opaque and unfair, the EU budget financing system is an ‘unfinished journey’. One of the most critical issues is that EU revenue, drawn from the cashbox of national taxation, remains intangible to the general public. The nature of the EU as a union of states and their nationals makes the visibility of EU revenue unavoidable. The political sustainability of a move that would put the legitimacy of EU revenue at the forefront of public discussion will depend on the EU institutions and member states’ ability to demonstrate that EU funds can achieve results that are truly beyond member states’ reach. In this, his third, CEPS book on the EU budget, Gabriele Cipriani assesses the current system of financing the EU budget against the criteria of simplicity, transparency, equity and democratic accountability and offers two possible options for reforming the EU revenue system. He finds that the value-added tax (VAT) is a natural choice for funding the EU budget, through a dedicated EU VAT rate as part of the national VAT and designed as such in fiscal receipts, whose use as a means for raising EU citizens’ awareness could be encouraged already in the current arrangements.