Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 2 October 2014

Disagreements between nations

My recent posts on the Eurozone and German attitudes have attracted a lot of hostile comments, and generated a lively debate. Sometimes I feel the debate is skating on the thin ice of national stereotypes, and occasionally the ice breaks. Some people just plunge straight in! For more debate on the desirability or otherwise of fiscal union, which I hope does not fall into that trap, there is an interesting discussion of various proposals by Yanis Varoufakis and James Galbraith at OpenDemocracy, plus two responses from myself and Frances Coppola.

Another clash between nations is described in Ed Conway’s account of the Bretton Woods summit that created the IMF, World Bank and the post-war international macroeconomic framework that lasted until 1971. I must admit my preconceptions about the impossibility of making macroeconomics fun to read about have been thoroughly shattered over the last year. First there was Tim Harford’s guide to macroeconomics that I talked about here, and now a book about a three week conference discussing macroeconomic institutions and exchange rate regimes that manages to be a great read. Admittedly this particular conference had as it central characters two intriguing individuals: Keynes I knew about of course (although I felt I learnt a lot more here), but Harry Dexter White, the maybe spy, I did not. If you think I’m biased because I’m a macroeconomist, read Peter Preston’s review here.


There are numerous little surprises. I had not realised how, perhaps because of the war, economists were often central in international negotiations. James Meade writes at one point: “Ten years ago at Oxford I should never have dreamed that an economist could live in such a heaven of practical application of real economic analysis!”. Though the detail is fascinating, I was left wondering just how important the conference really was. Although it created both the IMF and World Bank, neither was actually that important in the decade that followed the war, and their eventual roles were rather different from that intended by the Bretton Woods agreement. I also wonder just how much the prosperity and stability of the Bretton Woods era was caused by that agreement.

What I think will surprise many is just how inconceivable an era of floating exchange rates was to those taking part in that conference, Keynes included. Of course the debate over fixed versus floating will never end: some might argue that the demise of Bretton Woods in the early 1970s sowed the seeds of subsequent financial instability, but the current troubles of the Eurozone also remind us of the dangers of fixing exchange rates. One clear impression I got from the book is that when exchange rates are fixed, the creditor nation (or nations) call the shots. This was evident in the asymmetric influence of White versus Keynes in their various negotiations, and it helped me understand more clearly just why the influence of Germany is so strong within the Eurozone right now.


27 comments:

  1. Sounds really interesting. I just finished my catch-up to understand the Great Depression to a greater extent.
    After finishing Eichengreen's classic, this book seems to be a good possibility to start focussing on the post-war era.

    Btw.: Have you read Prof. (Un-)Sinn/(Non-)sense in the FT:
    "Anyway, deflation is not a danger for southern Europe but an essential precondition for restoring competitiveness."
    As a German I am deeply ashamed that this guy represents the conservative mainstream in Germany.

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    1. moderate inflation (4%) seemed to be perfectly acceptable in germany 20 years ago and is now an anathema for some reason. given that, sinn is correct in arguing that deflation is the only way to restore competetiveness for the PIIGS.

      Why has the mindset of Germans changed; why is 4% inflation now impossible to contemplate?

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    2. rob sol2 October 2014 06:40

      "moderate inflation (4%) seemed to be perfectly acceptable in germany 20 years ago"

      Untrue!

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    3. blub2 October 2014 06:03

      It's always good if Germans are ashamed. Continue, blub!

      Delete
    4. @rob sol:
      It again comes down to trust. And the question if 4% inflation is just part of a slippery slope down to a Euro-Lira versus a hard Euro-DM.

      Delete
    5. Anonymous2 October 2014 07:49

      rob sol2 October 2014 06:40

      "moderate inflation (4%) seemed to be perfectly acceptable in germany 20 years ago"

      Untrue!

      To convince Rob, I refer to

      http://de.inflation.eu/inflationsraten/deutschland/historische-inflation/vpi-inflation-deutschland.aspx

      There you will find that inflation in 1993 had risen to 4.3 % (from 3.33) and was immediately reduced to 2.45 and 1.51 in 1994 and 1995.

      Delete
  2. Dear Prof. Wren-Lewis,

    Since the history of Bretton Woods leads you to comparisons with Germany's position today, might I request you to makea comprehensive post on the following subject:

    - Germany does not love inflation.

    - Germans approve of reducing public debt.

    Now, your recipe so far to resolve the Euro crisis is

    - inflation

    and

    - strong fiscal expansion in the whole of the Euro zone, i.e. including Germany.

    Clearly, all that is incompatible. Germans will accept rising prices in a boom, but an intentional more than tripling of their present inflation would produce an explosion of rage. And the fact that Germany is close to balancing its budget means that it is the wrong time to speak of fiscal expansion - which would be accepted if crisis was at hand, as a couple of years ago its cash for clunkers policy.

    That means that at the present time you have no way to persuade Germany. So it would be worthwhile to answer this question:

    What macroeconomic policy is possible with those constraints (no inflation, no deficits)?

    After all, the ECB is saying all the time that structural reforms are necessary in the deficit countries. Furthermore, expectations of deflation (i.e. postponing private expenditure until prices fall further) have not yet materialized.

    Thank you in advance!

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    1. I was commenting at the same time as you so only just saw your comment, I think my comment answers your question of how I- some random guy on the internet would do it.

      Probably not as helpful as someone who knows what they're talking about thought :P

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    2. I can think of a couple of things. The ECB could follow up on it's announcement of Outright Monetary Transactions by actually buying peripheral debt and publicly comitting to preventing Euro countries from default. Most likely they would not need to purchase too much before investors get the hint. This would cause interest rates to go down, making debt much easier to pay off and allowing the periphery to delay austerity until a more opportune time.

      The problem is that it would (probably) be a violation of the EU's primary law. Once again the issue is with the Germans who reject any suggestion of bending the rules or changing of the law.

      The ECB could also implement a more aggressive QE without causing excess inflation. Perhaps the biggest motivation for a looser monetary policy is to increase aggregate demand. Keeping in mind that the current environment of low demand seems to be pushing the eurozone in the direction of deflation, a monetary expansion would most likely just stabilize inflation rather than force Germany to go above 2%.

      I am much less articulate than Prof. Wren-Lewis and I have almost certainly left something(s) out but I hope this comment helps you at least a little bit.

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    3. "Once again the issue is with the Germans who reject any suggestion of bending the rules or changing of the law."

      And once again the issue of the slippery slope towards a Euro-Lira. It's not acceptable for the German public.

      Delete
    4. Hugo André2 October 2014 15:49

      "This would cause interest rates to go down, making debt much easier to pay off and allowing the periphery to delay austerity until a more opportune time"

      What interest rates would fall? Just now, they are unprecedently low. If you mean the rates on old loans, your proposal would not change anything..

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    5. The reality of it is that you need prices to move faster in Germany than in the periphery. This can be achieved in several ways, but there's no sensible story line where deflating major economies is easier and cheaper than inflating one.

      But will Germany ever accept this policy? As many stated, it is highly unlikely to happen. Nevertheless, I still believe we need to call a cat, a cat: their stance on this issue is not only ill informed, it actually sets the stage so that everyone except them pay the price of human stupidity. That, my friend, is what is not fair.

      On a second note, it is striking how things have evolved in Europe during the last decades. They enacted some of the most extensive commitments humankind has ever witnessed, compelling themselves to undergo important institutional changes in the name of an ideal. But this effort did take place in exceptionally stable circumstances. To use Foot's expression, their virtue was not severely tested -- it is easy to agree when everything works smoothly.

      Of course, their project of european unity did prove more resilient than some might have thought. Despite the issues it rose, nations stuck with the political and monetary union. However, behind those covers of civility lurks rampant divisions and hatred. How many times do you hear Europeans actually talk about "us, Europeans"? You just don't. Those lines you read and hear about involve what "we" can or should do about "them." They save their face world wide by saying they are united, but this is about as believable as a fake marriage homosexuals would use as a cover in the Texas of the 1940's.

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    6. 'Despite the issues it rose, nations stuck with the political and monetary union. However, behind those covers of civility lurks rampant divisions and hatred.'

      So people who don't want the United States of Europe are uncivil, narrow-minded, hateful? I think the United States of Europe is just a code word for power centralization, for a top-down Europe of elites.

      'How many times do you hear Europeans actually talk about "us, Europeans"? You just don't.'

      Because Europe as a substitute for the nation-state has been the project of elites and intellectuals. It has never been a bottom-up thing and this is why it is all wrong. A Europe implemented through the benign guidance of a caste of people that consider themselves more enlightened than the plebs is a dystopia, plain and simple.

      If the sentiment of "Hey, let's all be Europeans first and foremost" isn't growing ON ITS OWN among the masses, then a united europe isn't worth having.

      "They save their face world wide by saying they are united, but this is about as believable as a fake marriage homosexuals would use as a cover in the Texas of the 1940's."

      And the Euro is a forced marriage. And the "parents" who have forced it onto the people are our elites. Some benign and enlightened leadership indeed. If you want to know the roots of recent election results in europe, don't look further than this tutelage. People want to be in charge of their own destiny and a Europe of the elites doesn't cut to it.

      Also look at growing outrage in Germany over the "benign and enlightened guidance" of our mass media in all matters Ukraine. People are fed up with elite networks. And, yes, that includes parts of academia too.

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    7. Stephane4 October 2014 10:45

      "The reality of it is that you need prices to move faster in Germany than in the periphery."

      Please help my human stupidity:

      Why? How would that help the others? Surely you don't believe that Germany could ever import enough from them to revive their economies. And how would rising prices in Germany help them to export enough to have significant effects? Would you buy a Greek car?

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    8. "Would you buy a Greek car?"

      It's long been a cliche, in the UK at least, that buying a Seat or Skoda was cheaper than buying a VW, with not much loss in quality.

      And I'm not sure whether you're the anonymous that has been ranting about the Euro-Lira, but there are many who would buy an Italian car, or bicycle, or ... etc.

      What the "periphery" needs is investment, not internal devaluation.

      Delete
    9. gastro george5 October 2014 02:54

      You certainly hit the nail on your thumb.

      In Italy, Fiat's boss Marchionne is threatening to move the company to Canada or the US since Italian labour law prevents sensible investments.In other words: Italy needs structural reforms. Even so, lots of Germans like Fiats, esp. the 500, as well as Skodas or Seats - however the latter have a problem: In spite of German management, Seat in Spain has been continuously losing money. Does that invite investment? How do you cure that except by structural reform?

      The periphery needs sensible investment. But what sensible investor would go there?

      The "Greek car" was a joke: There is no car industry in Greece because there are not enough skilled workers.

      Suppose somebody answers my question: How would rising prices in Germany help them (the periphery) to export enough to have significant effects? And try to hit the nail on the head, please.

      Delete
  3. So I have a book recomendation and then a possibly stupid quesiton.

    Firstly Economix is what I recomend to my friends who want to understand stuff but don't actually enjoy economics. It's the history of macro in comic book form and it's easy and genuinely enjoyable to read. I will check out the summit though.

    Secondly the dumb question.

    Why can't the Eurozone allow Greece and other countries that are in trouble to print a companion currency to the Euro that only works in Greece?

    So buisnesses would have to accept the currency at par, backed by the goverment doing so for taxes. Goverment debt could then be paid in Euros or the new currency at par. You could put in protections where only so much could be printed, buisnesses have to pay employees in Euros, etc.

    With a releatively small amount printed the goverment could spend it in the economy, it would come back in taxes and then the goverment could use it to pay off some of the debt. Adding the extra money to the Greek economy would allow them to locally devalue, just like they need to, while the Euro outside of Greece would be largely unaffected.

    I realise some Euros would flow out of Greece into richer countries, causing a little inflation, but as long as a releatively small amount of new currency was printed this effect would surely be small, especially with so much slack in the Greek economy.

    What am I missing?
    Thanks

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    1. Stephen, the parallel currency / tax credit avenue is probably the best solution to solve the Eurozone mess. Here you have a detailed project

      http://bastaconleurocrisi.blogspot.it/2013/09/tax-credit-certificates-certificati-di.html

      which I developed and I'm actively promoting (together with a group of economists - including Biagio Bossone, Warren Mosler and Giovanni Zibordi) to Italian MPs and media.

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    2. That's really interesting, thanks! Good to know I'm not completely insane.

      What has been the reaction? I'm assuming there is some surprising, if so what are they skeptical about?

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    3. Some skeptisim* sorry the auto-correct on this phone is a little over zealous.

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    4. There is growing interest and attention, mainly (but non exclusively) from opposition parties. MPs belonging to the government coalition did not contest it would work. Still, their official position is that "flexibility as required" with respect to the Maastricht / SGP limits will be accepted by the EU. Which is not happening.

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    5. This idea seems to be a bit like Hjalmar Schacht's Mefo bills, if I am correct.
      So strictly speaking this is government financing and would create outrage in Germany if it were implemented.
      But given the current circumstances this could work or at least be a good option to increase the pressure on Schäuble et al. to change policy.

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    6. Blub, I agree on your last comment.

      And you are right, Schacht's Mefo bills were an inspiration to the Tax Credit Certificates proposal, together with Mosler / Pilkington's Tax-Backed Bonds:

      http://www.levyinstitute.org/pubs/pn_12_04.pdf

      Delete
  4. The Germans are essentially mercantilistic. They like to sell things to others. They also like to have high personal savings, low inflation and stick to fiscal targets on deficit spending and general agreements on things. The French are .. sorry I nearly fell through the ice there. But to me it shows how differing national characteristics make a currency and economic union unviable between these nations. Why don't they just abandon it. Bring back the mark, franc, etc, and let them get on with it alone and stop blaming each other. Britain has saved itself considerable problems by not joining the Euro. But can you imagine what the current debate would be like if it had. Add in, theoretically, the British input, to the current debates. Ho hum.

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  5. Simon: do read Skidelsky's 3-vol Life of Keynes - unputdownable, and very interesting on Harry Dexter White.

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  6. "My recent posts on the Eurozone and German attitudes have attracted a lot of hostile comments, and generated a lively debate. Sometimes I feel the debate is skating on the thin ice of national stereotypes, and occasionally the ice breaks. Some people just plunge straight in!"

    Okay, but you cannot deny that every person has the right to decide where they would like to see their (tax-payer) money is invested. And very few people will be able to judge the soundness of a potential investment in detail - which is where, sorry but you cannot get around it, credibility and reputation come in.

    You can call it national stereotypes and I suppose it is to a point but that won't make it go away. Nor invalidate it. I suppose what one COULD do is to demonstrate why a certain bad reputation was not justified but quite frankly those who were skeptical when the Euro was introduced have been kinda vindicated because what has been happening in recent years has been more or less what they have been predicting.

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  7. "For a long time to come, one of the priorities of macroeconomic policy will be to slowly but steadily return debt to less dangerous levels, to move away from the dark corners."
    (Oliver Blanchard, Oct. 3, on vox eu.)

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