Over on ConservativeHome, I introduce an interesting piece of work by Anthony J Evans and Terence Tse of ESCP Europe:

Many will argue that Eurozone financial stability is in Britain’s interests and they are right. That’s why the Government should look carefully at a new report by two Associate Professors at ESCP Europe Business School: Anthony J. Evans (Economics) and Terence Tse (Finance).

On their website, The great EU debt write off, Anthony and Terence explain a simulation conducted by their masters students:

The aim was to uncover the amount of interlinked debt between Portugal, Ireland, Italy, Greece, Spain, Britain, France, and Germany; and then see what would happen if they attempted to cross cancel obligations.

The results were astounding:

  • 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 idea is simple: nations which are both creditors and debtors can enter into bilateral agreements to cancel debt. Naturally, the reality is complex and the authors explain how so in their paper, which can be downloaded here.

Here’s Europe’s web of debt before and after their simulation:


You can read the rest of the article and comment on ConservativeHome.

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