Consider this diagram showing the billions of euros that each of 8 EU countries owes the other.
Whilst the numbers are far from perfect, they give a clear understanding of the extent to which EU debt obligations are interlinked. But why try to raise money to pay someone off if they owe you even more? Why not cross cancel the debts and be left with the difference?
To see how this might work I recently ran a classroom simulation where students did precisely that. After three trading rounds they had managed to generate the following results:
- The countries can reduce their total debt by 64% through cross cancellation of interlinked debt, taking total debt from 40.47% of GDP to 14.58%
- Six countries – Ireland, Italy, Spain, Britain, France and Germany – can write off more than 50% of their outstanding debt
- Three countries – Ireland, Italy, and Germany – can reduce their obligations such that they owe more than €1bn to only 2 other countries
- Ireland can reduce its debt from almost 130% of GDP to under 20% of GDP
- France can virtually eliminate its debt – reducing it to just 0.06% of GDP
The final picture demonstrates the scope for cross cancellation. It is hard to see how such a policy would be possible, let alone desirable, but as a pedagogical exercise I think it is worth consideration. For those interested in more details I have set up a website: http://www.eudebtwriteoff.com. You can also download the full report: The Great EU Debt Write Off (.pdf)
- Steve Baker MP: Bailouts are a dead end but bilateral debt cancellation could transform the European crisis – Conservative Home