Introduction:

The Eurozone lacks a central bank to do what most central banks are supposed to do: finance government deficits. To make matters worse, the Lisbon Agreement limits these deficits to 3% – too small to pull economies out of depression by offsetting private-sector debt deflation.

Even if central banks could monetize higher levels of deficit spending, there are good reasons not to subsidize regressive tax systems and tax cuts on the real estate and financial "free lunch" windfalls that classical economists urged to be the tax base. Under classical tax policy, Europe would not have had a land-price bubble in the first place. "Free lunch" economic rent would have become the tax base, not capitalized into bank loans to be paid out as interest. Government budgets would have been financed in a way that kept down property prices. But bank lobbyists have blocked the Eurozone from creating a true central bank to finance public budget deficits. They also have reversed classical tax policy, un-taxing real estate and finance while putting the burden on labor, corporate profits and consumers by the turnover tax (VAT). These twin financial and fiscal policies have strengthened the wrong sectors and made the current sovereign debt crisis inevitable, turning it into a general economic and political crisis.

Debts that can’t be paid, won’t be. The question is whether their nonpayment will take the form of debt writedowns to the level that can be paid, or whether Europe will be subjected to a wave of foreclosures, privatizations and cutbacks in public spending on infrastructure and social programs. In discussing alternatives, it may help to remember that Germany’s Economic Miracle was grounded in the Allied Monetary Reform of 1947, which was a far-reaching debt cancellation. A similar debt write-off is needed to enable Europe to re-start with a Clean Slate and a sounder financial system. Such a financial reform needs to be accompanied by a tax reform to collect land rent, natural resource rent and monopoly privileges for the public sector rather than leaving it as a windfall gain or "free" to be capitalized into a new wave of bank loans.