Winner of the New Statesman SPERI Prize in Political Economy 2016

Saturday, 13 February 2016

How the Eurozone can be reformed

The 50th anniversary issue of Intereconomics is out, and I have a contribution which summarises how I think the Eurozone could succeed without deeply problematic attempts at fiscal and political union. I look at three areas where change is required, and then rerun history to show how the Eurozone crisis could have been transformed into no more than a Greek public debt crisis.


Of the three areas of reform, I have written about the necessity of national countercyclical policy many times. Perhaps the only novelty in the paper is that I make it clear that this could be conceived and run locally or directed centrally: I prefer the former, and I discuss some advantages of subsidiarity, but the issues are separable.  On reform of the ECB I think it's fair to say my discussion is weak: I just think this issue has to be discussed more.


The final area of reform involves OMT and a genuine no bailout rule, the combination of which in 2010 would have prevented the government funding crisis spreading beyond Greece. (This might have creating a banking crisis in some core countries, but problems with banks are best confronted directly.) It is revealing just how many people still think 2010 was all about trying to help those countries with profligate governments. If this is your view, I strongly suggest reading this paper by Orphanides, who slowly unpicks the ‘official’ version of the crisis with the IMF’s help.  

A good paper to write is why the Eurozone has been such a failure at trying to play the role of the IMF (and to some extent corrupted the IMF at the same time). Judging by the number of useful roads built in Spain, Ireland and elsewhere, the EU has had some success at playing the World Bank role, although I’m sure there are also mistakes. However I do not think a political scientist would find the failure to play the IMF’s role any great puzzle. It has taken the IMF many years and errors to learn to at least try to refrain from simply bailing out western creditors. Judging from the failure to even admit the mistakes of 2010, I doubt that the Eurozone would even try. It would be much better if the Eurozone j
ust abandoned trying to play this role, and left the IMF (with reduced European influence) alone to do its job of helping Eurozone governments that get into difficulties.

10 comments:

  1. I think we need to talk about unemployment. With New Keynesian theory it is the central bank that is in charge. But there are still millions unemployed and the bank has made no changes for years. It is also baked into the EU treaty.

    The whole theory operates around the NAIRU and blaming the unemployed for not becoming match able in the jobs market.

    You'll note that the Krugmans and Stiglitzes of the world (and tbh the Keens and Pettifors) studiously avoid talking about unemployment.

    If you want something in 'your language' criticising the current state of affairs and why the approach is wrong and creating unemployment then there is this piece by Roger Farmer

    I don't agree with is search theory solution, but the description of the problem is reasonably accurate.

    The MMT description and solution to the problem is described here

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    1. The problem with these academic economist solutions for the Euro, is they don't understand the mechanics of the accounting system. Particularly, how the "accounting unit" is created by the currency issuer and destroyed by taxation. A function carried out by a sovereign fiat currency issuing Treasury, not a Central Bank. Such a Treasury is the spender of first resort and the redeemer, and destroyer, of last resort of its own fiat currency by taxation.

      Nineteen Eurozone countries, don't spend the Euro fiat currency into existence, like the UK or USA, they spend Treasury Bonds into a parasitic secondary market, to obtain cash Euro. The Euro being supplied by the nineteen national central banks, as instructed by the twentieth central bank, the ECB; which is not accountable to a Treasury, because the Eurozone does not have a (federal) Treasury with taxation and transfer powers. (But it does have a payment clearing and settlement system TARGET2).

      The best thing you could do with the IMF is shut it down. Fiat currency economies don't need an external lender, they never run out of their own currency. The IMF is a relic of the Gold Standard. Countries that peg to a foreign currency; or, borrow in foreign currencies, have only got themselves to blame. This is effectively what the nineteen Eurozone countries are doing. Greece ended up being lent, cheap, a currency that it could not afford to buy, if it had been outside the Eurozone. http://www.3spoken.co.uk/2012/04/fixed-exchange-rate-system-at-heart-of.html

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  2. Are The EU PIIGS About To Start Squealing?

    As the migrant crisis in Europe worsens serious steps to address it are being considered.

    One proposal is for passports to be required in order to cross from one EU country to another.

    Would such a drastic move spell the beginning of the end for the Eurozone as a viable entity?

    And if so what will happen to the piles of sovereign debt that's been issued by the economically vulnerable EU PIIGS, and to the investors who have been pouring money into them at what appear to be ridiculously low yields?

    Read the story and check out the historical yield chart at the article 'EU PIIGS: Are These 10-Year Sovereign Bond Yields Either Warranted Or Sustainable?' here: https://www.linkedin.com/pulse/eu-piigs-10-year-sovereign-bond-yields-either-michael-haltman?trk=mp-reader-card

    Mike

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  3. "Judging from the failure to even admit the mistakes of 2010, I doubt that the Eurozone would even try. It would be much better if the Eurozone just abandoned trying to play this role, and left the IMF (with reduced European influence) alone to do its job of helping Eurozone governments that get into difficulties."

    Hopefully not along the lines of the IMF's response to the Asian Financial Crisis. The IMF is very close to the Washington establishment - hence the Washington Consensus. It is a very close operative of US Foreign Policy and is heavily influenced by US intellectual cliques and fads, particularly coming out of places such as MIT. Fine if this stuff gets enough intellectual scrutiny and there are intellectual counterweights, but it does not, and there are not. If you had an administration like Reagan (or even Bill Clinton) in power, we have seen how there can be a serious problem. Now, US influence may be waning, perhaps China will now have more influence in the US in the future. But is this a good thing? Having a European counterweight to offset these fads and influences may be a good thing.

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    1. This is just orrible identity politics, I'm afraid.
      Sell me on what this counterweight will do and why rather than tell me their raison d'etre is 'because they're not neocon Americans', please.
      Thanks.
      p.s. I know it's not normally worth the effort to respond to the anonymous ECB posters here but on this occasion I thought it might be useful.

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  4. Dear Professor, I have always read you with great interest. But I must admit this time I am quite disappointed. Proposing to enforce a no-bail out rule and leave to the IMF the job of deciding whether a Member State of the EZ should default is a very strange way to keep a monetary union alive. First, if the MS under pressure had its own currency it would not need to default at all. A flexible E/R would absorb the shock and the blanket guarantee of the Central Bank would restore confindence. It happened everywhere in the world, even in countries as small as the Czech Republic or Poland, except of course in the MS of the EZ. Second, even if the IMF imposed a default to a MS (and even assuming than foreign creditors, aka German Banks, would swallow it), how would the country in question be supposed to kick start its economy? Borrow again? from who? Internally devalue? (really?) Or "implement structural reforms", whatever they are?
    I am failing to see how these proposals would "save" the EZ. I think by now it would be more honest to say that the EZ is not worth saving. And start analysing what needs to be done to dismantel it in the least distruptive way possible.
    Best regards

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    1. I wanted to write pretty much the same before seeing this comment. Actually it was the fear there might *not* be bail-outs that caused the contagion of the crisis to Spain etc.
      Completely disagree with the last paragraph though: Having a single currency has huge advantages too in a globalized economy, so we have to talk about how to reform the EZ in order to stabilize it. No currency union can function without some form of mechanism to counter imbalances.

      Another point is that I have the impression that the author underestimates the political significance of the crisis (well, he's an economist). The reforms implemented over the last couple of years would not have been (politically) possible without the Damokles' Sword of a collapsing EZ over everyone's head. What good are economic ideas if there's no majority/ unanimity to implement them?

      Regards,
      smukster
      (Germany)

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  5. How can one possibly take Apostolides seriously? He produces 33 pages of special pleading based on the divine right of peoples to default on their debt. The Greeks had the fun of spending 330 billion Euros. Of those, they were pardoned 100 billion. If they are now required to repay the rest on very generous terms - low interest and incredibly extended maturities - he finds that that is shifting losses from other member states of the EU to another, viz. Greece that owed them in the first place.

    It is the right of science to be counterintuitive. But if you'll believe that, you'll believe anything.

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  6. Typo: Orphanides instead of Apostolides (who is just as bad).

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  7. How can one possibly take Orpahanides seriously? He produces 33 pages of special pleading based on the divine right of peoples to borrow money without repaying it.. The Greeks had the fun of spending 330 billion Euros. Of those, they were pardoned 100 billion. If they are now required to repay the rest on very generous terms - low interest and incredibly extended maturities - he finds that that is shifting losses from other member states of the EU to another, viz. Greece - that owed them in the first place.

    It is the right of science to be counterintuitive. But if you'll believe that, you'll believe anything.

    ReplyDelete

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