Archive for the ‘Eurozone Crisis’ Category

Deflation in the Air

Greg Hannsgen | December 22, 2014

A New York Times article over the weekend delves into the history and rationale of the 2 percent inflation target, beloved of central bankers everywhere and a fairly recent innovation. Of course, the US Federal Reserve has a dual mandate, which includes both inflation and employment goals. The Fed said last week that it was most likely to start raising interest rates around the summer of 2015, but many countries’ central banks are moving in the opposite direction, solely because inflation is falling short of their targets.

Private borrowers—who usually have higher propensities to spend than lenders—benefit from an easing of the burden of debt when wages and prices move broadly upward. Also, for governments with debts that they cannot service with their own currency, inflation eases the burden of making payments, as tax revenues tend to rise in step with nominal wages and prices. Of course, falling prices have the opposite effect. The resulting changes in spending reverberate through the rest of the economy. Recent data show that there exists a strong threat of deflation around the world in economies such as Japan and the Eurozone, where core inflation has recently turned negative.

The effect of deflation on spending by indebted households was noted by Keynes in Chapter 19 of the General Theory (pp. 268-269). Michal Kalecki also argued to this effect in a critique of the so-called Pigou effect (falling prices would supposedly restore full employment by raising the inflation-adjusted wealth of households). The New York Times emphasizes instead the point that lower inflation makes it easier for some inflation-adjusted wages to fall, given that wages do not move downward as easily as upward. It also mentions that modest inflation permits central banks to lower real short-term interest rates below zero. Thoughts that deflation might be coming in much of the world are very sobering.


“Interesting Times” Ahead for Euroland

C. J. Polychroniou | December 8, 2014

The Levy Economics Institute of Bard College co-organized an international conference on November 21-22 in Athens, Greece, on the continuing crisis in the eurozone.

Among the speakers were:

• Elga Bartsch, Morgan Stanley’s chief European economist;

• Peter Bofinger, a German academic economist and a member of the German Chancellor’s Council of Economic Advisers;

• Marek Belka, governor of Poland’s central bank;

• Giannis Dragasakis, a Greek politician and member of the Greek parliament for the Coalition of the Radical Left (SYRIZA);

• Heiner Flassbeck, a former director of the Division on Globalization and Development Strategies of the United Nations Conference on Trade and Development (UNCTAD) and former vice minister of the German Federal Ministry of Finance;

• Patrick Honohan, governor of Ireland’s central bank;

• Stuart Holland, a British academic economist teaching in Portugal and a former member of the British parliament;

• Stephen Kinsella, an Irish academic economist;

• numerous Greek economists, including Panagiotis Liargovas, the head of Parliamentary Budget Office at Greek Parliament; and, last but not least,

• scholars from the Levy Institute, including its president (Dimitri B. Papadimitriou), who heads the Institute’s macro-modeling team projects.

Adding to this rather illustrious list of speakers were panel moderators from The New York Times, Wall Street Journal, Bloomberg News, National Public Radio (USA), and various daily newspapers in Greece.

While there were some disagreements on policy matters among the panelists, it seems that most speakers reached the following conclusions: continue reading…


Berlin Wall

Jörg Bibow | November 12, 2014

Germany is celebrating: it is 25 years ago that the Berlin Wall came down, marking the end of Stasi tyranny, and much more than that. No doubt that is reason to celebrate, for Germany, Europe, and the world. As a German and European, I am celebrating too.

Alas, this is also an occasion for hearing that tiresome story again about how costly and burdensome it was for Germany to reunite. For instance, Terence Roth writes a piece in the WSJ titled “After Fall of Berlin Wall, German Unification Came With a Big Price Tag.” Now, this kind of statement really needs to be qualified, especially as the myth about the “burden of unification” paved the way for yet another German myth a few years later that has proven rather catastrophic for Europe: namely, the myth that Germany had to “restore its competitiveness,” which it apparently had lost in the context of reuniting. Undisturbed by any doubt or reason, the German authorities live in their mythical world of economic virtue and vice, famously referred to by finance minister Wolfgang Schäuble as his “parallel universe.” Let’s try to get the matter straight then.

To begin with, it is unquestionably true that German unification came along with a big price tag. But the price Germany ended up paying was only partly due to the wreckage that communism had produced in the east. The macroeconomic policy response, featuring ultra-tight money and mindless fiscal austerity, proved far more costly. In 1991, both Germany’s consumer price inflation and budget deficit as a share of GDP were about 3 percent. Imagine the Federal Reserve responding to the historical challenge and responsibility of national reunification by monetary overkill—which is exactly what the Bundesbank chose to do, hiking rates to 10 percent and pressuring fiscal policy into sharp tightening too. Ironically, this counterproductive macro policy mix pushed headline inflation up, apart from crushing growth. As a consequence, on top of the legacy of wreckage in East Germany, unemployment in former West Germany doubled as 1.5 million jobs (5 percent of the labor force) were destroyed. Unsurprisingly, Germany struggled until 1998 to get the budget deficit back to just below 3 percent. Only the smaller part of the rise in Germany’s debt ratio from 40 to 60 percent of GDP over the 1990s owed to East German legacies (see here and here).

This is not where the story ends though. continue reading…


Why the Eurozone Needs a Treasury

Jörg Bibow | November 11, 2014

Slowly but surely a new consensus is emerging emphasizing the need for Europe’s currency union to organize public investment as a means to overcome its crisis, by now in its seventh year; the outlook being truly grim. Back in July President-elect of the European Commission Jean-Claude Juncker called for a €300bn public-private investment program. ECB president Mario Draghi lent his support to the idea in his Jackson Hole speech, finally acknowledging that the eurozone is suffering from deficient aggregate demand.

Former EU Commission President Mario Monti has also recently thrown in his voice, observing that public investment has been crushed by the Stability and Growth Pact and relentless austerity drive undertaken across the continent in its name. In its latest World Economic Outlook, the IMF highlights that at the current juncture public investment is as close to a free lunch as it ever gets: countries renege on their grandchildren’s possibilities by not going for it. For far too long the debate in Europe was exclusively focused on the liability side of the public ledger: debt. But it is the asset side, the public investment undertaken, or not, which is far more relevant in shaping our future.

Today, embarking on a joint public investment initiative represents a special opportunity for the eurozone, a chance to fix the euro regime’s ultimate defect: the lack of fiscal union. The scheme proposed here is simple and straightforward. The idea is to create a Euro Treasury as a vehicle to pool future eurozone public investment spending and have it funded by proper eurozone treasury securities. The Euro Treasury would allocate investment grants to euro member states based on their GDP shares. And it would collect taxes to service the interest on the common debt, also exactly in line with member states’ GDP shares. The arrangement amounts to a rudimentary fiscal union, not a transfer union though, as benefits and contributions are shared proportionately. Nor would the joint public debt issued for investment purposes mutualize any existing national debts. Instead, the Euro Treasury securities would provide the means to fund the joint infrastructure spending that is the basis for the union’s joint future.

Currently, eurozone public investment spending is at a very depressed level of around 2 percent of GDP. continue reading…


Germany’s Über-Economists Are Rampant Again

Jörg Bibow | October 31, 2014

The rest of the world is holding its breath as the eurozone continues wobbling along the brink of deflation. In fact, numerous member states are already experiencing what it means to let “it” happen again. With the region stuck in depression since 2008, Euroland authorities are writing fresh world records in failing to improve the well-being of their citizens. The only thing that keeps rising in the eurozone is indebtedness—as the unsurprising consequence and symptom of its collective austerity insanity.

But that is not how the German authorities, or for that matter German economists, view the world. Blatantly ignoring the dismal facts that their favored medicine has produced, they never tire of calling for more of the same: austerity, austerity, and another extra dose of austerity please. By contrast, anything that might possibly help to turn fortunes around gets rejected out of hand as conflicting with the requirements of stability-oriented policymaking. In Germany, neither facts nor economic theory matter at all, it seems. Policy prescriptions simply have to match the ruling austerity-cum-competitiveness ideology, no matter what.

Hans-Werner Sinn, president of Munich’s IFO think tank, provided us with a fresh sample of German economic wisdom about a month ago, calling on Germany’s Chancellor Angela Merkel to stop ECB President Mario Draghi from even trying to regain control over its primary price stability mandate, defined as “below but close to two percent” inflation. Eurozone HICP inflation is currently running at only 0.3 percent. But even the thought of the ECB purchasing government bonds is giving rise to hyperinflation fears among German economists, it seems. It’s all a matter of principle and firm belief.

Professor Sinn is known to readers of Germany’s tabloid Bild-Zeitung as the country’s smartest economist. As if to confirm this popular verdict, Professor Sinn was at least making one valid point in his FT op-ed: namely, that the ECB has finally stopped ignoring super-low inflation while the eurozone’s political leadership remains stuck in denial. As the political authorities continue dreaming their austerity-boosts-growth delusion, the ECB (at last) has started devising actions intended to stop the nightmare reality from getting worse. To be sure, it is not an enviable position for any central bank to be in. The ECB is learning the hard way that not having a euro treasury partner means doing the tango on your own (which may look somewhat curious, if not ridiculous). But perhaps some central bankers have come to realize that not even trying to solo-dance might be judged as gross negligence should the eurozone end up sinking into full-blown deflation and chaos.

Professor Sinn reminds his fellow German citizens that they may petition the German Federal Constitutional Court in case they fear that their country’s Basic Law gets trampled upon. The law says that Germany can transfer monetary policy to a European institution that is independent and committed to the primary goal of price stability. This would seem to open up the interesting possibility that the court, if petitioned by its citizens, could also force German politicians to take action against the Bundesbank for failure, as part of the Eurosystem, to effectively stem deflation. Of course this is not exactly what Professor Sinn has in mind. It is utterly inconceivable that Germans, supposedly scared of nothing else in the world but hyperinflation, could ever worry too much about the opposite threat wreaking havoc across Europe—even as destructively-low inflation has been the reality for quite some time now.

And then there is Otmar Issing, formerly a professor of economics at Würzburg University and chief economist at the Bundesbank and then the European Central Bank. His recent FT op-ed is a response to worldwide calls on Germany to change its steadfastly-held austere fiscal stance and finally help the eurozone to recover. Here is Professor Issing’s diagnosis of the situation: continue reading…


Germany May Be the Biggest Loser If It Doesn’t Start Spending

Jörg Bibow | October 21, 2014

There’s growing pressure on Germany to spend more to support Europe – and for good reason. But it’s proving to be a hard sell to the country’s leaders.

Germany’s budget is balanced and the government insists that its current policy stance is the best it can do – for itself, the eurozone and the world at large. The government’s mantra is that a balanced budget inspires confidence, which in turn propels growth. That’s not actually happening of course, as is plainly visible for anyone to see, yet the ongoing stagnation and sense of crisis felt across the eurozone have only encouraged the German government to repeat its flawed logic.

The rest of the world is not amused, especially eurozone members that have been at the receiving end of Germany’s economic policy wisdom and have been more actively pushing against its gospel of austerity of late.

For much of the time since the euro was launched in 1999, Germany has depended on foreign purchases of its exports for its own meager growth, particularly when domestic demand stagnated for much of the 2000s, just as it does today. But Europe’s biggest country has not been willing to return the favor, as public and private investment remain severely depressed. Even as the government has just cut its own growth forecast for this year and next, it also signaled its continued stubborn refusal to change course.

A nation of surpluses

That protracted stagnation in domestic demand helped cause Germany to run up huge and persistent current account surpluses, averaging about 7% of GDP since 2006. Germany’s current account surplus, on pace to be the world’s largest for a second year in a row, is significantly bigger than China’s, which has declined sharply as a share of GDP from 10% to 2% since the financial crisis.

Bibow_German Current Account

Meanwhile Germany’s has gone the other way, and its leaders do not see anything wrong with that. Rather, the government views it as evidence of the country’s sound policies and restored competitiveness. Eurozone partners are invited to follow the German lead. They are told to balance their budget, liberalize their labor markets and improve their own competitiveness.

There is something fundamentally wrong about this prescription. continue reading…


No, Tourism Will Not Save Greece

Michael Stephens | September 25, 2014

From Dimitri Papadimitriou today in New Geography:

Will Lindsay Lohan Save Greece?

It’s September, but island beaches from the Aegeans to Zante are still buzzing in Greece. Mykonos has been the summer’s Go-To spot for superstars and supermodels; the mainland and cities are also seeing the British and Europeans coming back.

Greece’s reemergence on the tourist circuit and the celebrity-watch sites has brought travel revenue, which accounted for 12 billion euros through April, actually above the previous peak in 2008. And, based on arrivals, the national tourism agency predicts that visitors will account for 13 billion euros this year.

So did the appearance of Lindsay Lohan and friends in the Greek isles signify, as one newspaper put it, a template for Greece’s economic recovery?

It didn’t. It’s even still possible that Greece’s economic troubles have yet to hit bottom — no one really knows. There is one definite, though. Even with a dramatic increase in its significant tourism industry, the dance floor under Greece’s summer parties has been resting on a breathtakingly shaky foundation.

Read the rest here.

The supporting research mentioned in the piece is from the Levy Institute’s latest strategic analysis: “Will Tourism Save Greece?


Europe at the Crossroads: A Union of Austerity or Growth Convergence?

Michael Stephens | September 19, 2014

Co-organized by the Levy Economics Institute of Bard College and Economia Civile with support from the Ford Foundation

Megaron Athens International Conference Centre
Athens, Greece
November 21–22, 2014

On November 21 and 22, the Levy Economics Institute of Bard College will hold its second annual conference at the Megaron Athens International Conference Centre in Athens, Greece. Co-organized by the Levy Institute and Economia Civile, the conference will focus on the continuing debate surrounding the eurozone’s systemic instability; proposals for banking union; regulation and supervision of financial institutions; monetary, fiscal, and trade policy in Europe, and the spillover effects for the US and the global economy; the impact of austerity policies on US and European markets; and the sustainability of government deficits and debt.

To register, click here.


George Argitis, Professor of Economics, University of Athens; Scientific Director, Institute of Labour, GSEE

Emilios Avgouleas, Chair, International Banking Law and Finance, University of Edinburgh

Elga Bartsch, European Chief Economist, Morgan Stanley

Marek Belka, Governor, National Bank of Poland

Peter Bofinger, Member of the German Council of Economic Experts; Professor of Monetary Policy and International Economics, University of Würzburg; Research Fellow, Centre for Economic Policy Research

Carlos da Silva Costa, Governor, Bank of Portugal

Stanley Fischer, Vice Chair, US Federal Reserve System*

Richard W. Fisher, President and CEO, Federal Reserve Bank of Dallas*

Heiner Flassbeck, formerly Director, Division on Globalization and Development Strategies, UNCTAD, and Deputy Finance Minister, Germany

Eckhard Hein, Research Associate, Levy Institute; Professor of Economics, Berlin School of Economics and Law; Adjunct Professor of Economics, Carl von Ossietzky University Oldenburg

Stuart Holland, Professor, University of Coimbra

Patrick Honohan, Governor, Central Bank of Ireland

Lex Hoogduin, Professor of Economics and Business, University of Groningen

Joanna Kakissis, Correspondent, NPR and PRI, Athens

Stephen Kinsella, Lecturer in Economics, Kemmy Business School, University of Limerick

Jan Kregel, Senior Scholar, Levy Institute; Professor of Finance and Development, Tallinn University of Technology

Roberto Lavagna, formerly Minister of Economy and Production, Argentina*

Panagiotis Liargovas, Director of the Budget Office, Greek Parliament; Jean Monnet Chair in European Integration and Policies, University of Peloponnese

Lubomír Lízal, Member of the Board, Czech National Bank

Gyorgy Matolcsy, Governor, National Bank of Hungary*

Michalis Nikiforos, Research Scholar, Levy Institute

Dimitri B. Papadimitriou, President, Levy Institute

Sarah Bloom Raskin, Deputy Secretary, US Department of the Treasury*

Engelbert Stockhammer, Professor of Economics, Kingston University

Mihai Tănăsescu, Vice President, European Investment Bank

Andrea Terzi, Professor of Economics and Coordinator of the Mecpoc Project, Franklin University Switzerland

Mario Tonveronachi, Professor of Financial Systems, University of Siena

Raymond Torres, Director, Research Department, International Labour Organization



Is the Eurozone Turning into Germany?

Jörg Bibow | September 8, 2014

It has been pretty clear since at least the spring of this year that the ECB was keen to see the euro weakening. At the time the euro stood near to $1.40. Policymakers in a number of euro area member states issued calls for a more competitive exchange rate, directing barely hidden criticisms in this regard at the ECB.

The ECB itself ever more forcefully asserted that international factors, including euro strength, were largely responsible as the bank’s price stability misses got ever crasser. Either through direct references to the euro’s exchange rate expressing discomfort about its strengthening, or by highlighting that the prospective monetary policy stances on either side of the Atlantic were on diverging paths, inviting the markets to bet on the dollar and against the euro, Mr. Draghi applied his magic in talking the euro down.

The latest package of ECB easing measures introduced in early June steered the euro overnight rate closer to zero, raising the euro’s attractiveness as a funding currency for carry trades. All along Mr. Draghi has held out the prospect of some kind of quantitative easing even beyond the credit easing measures promised to be unleashed in the fall. As inflation has declined even more and the so-called recovery stalled once again, the beggaring for a weaker euro has brought some visible success: in late August the euro was approaching the $1.30 mark.

Should the Euro Weaken?

Should the euro have weakened, should it weaken even more? The euro area as a whole, which is the relevant entity here, does not lack international competitiveness. Most common measures suggest that the euro is valued about right in its recent range. Certainly the euro area’s soaring current account surplus together with inflation close to zero – and lower than in competing economies – suggest otherwise. Are the world economy and global trade booming and overheating so that more relief through even bigger euro area export surpluses might seem warranted and welcome?

Quite the opposite. continue reading…


Greece, Rock Bottom, and Co-operative Banking

Michael Stephens | August 29, 2014

In a recent interview, C. J. Polychroniou asked Dimitri Papadimitriou about the idea that Greece is on the verge of economic recovery:

Both the International Monetary Fund (IMF) and the European Commission (EC), in their assessments of the performance of the Greek economy, appear more optimistic on the future of Greece because of the deceleration of the negative growth and a very slight decline of the unemployment rate, even though this was due to using statistics based on the new census that has resulted in demographic adjustments, and not due to growth in employment.

An artificial positive sign on Greece that indicates nothing about Greece’s economic condition, yet it was celebrated as a sign of recovery, was the primary budget surplus and “going back to the financial markets” for a new issue of bonds. The budget surplus was achieved at the cost of creating many damaged lives. On the other hand, going back to the markets was purely a public relations exercise, since the interest cost of almost 5 percent of the new bonds was much higher than that paid on the bailout funds. Moreover, the bonds were implicitly guaranteed by the ECB because they could be used as collateral to the ECB for lower-cost bank borrowing. Finally, the demand for these bonds reflected the current state of excess global liquidity available and not because investors considered Greek bonds as a good risk. The latter is in concert with the well-known adage in Wall Street that at times of “excess liquidity, even turkeys can fly.” All in all, even if the economy were to have hit bottom, this does not necessarily mean it is out of the woods and to a better outlook for its future.

In another segment, Polychroniou and Papadimitriou discussed a recent Levy Institute report that features a proposal to reform and expand co-operative banking in Greece:

Greek banks remain fragile and undercapitalized, thus unable to help the economy recover. A recent Levy Economics Institute publication strongly endorses co-operative banking for Greece as a much-needed alternative financing model for start‐up and existing small enterprises and as an all-important poverty policy alternative. Does the American experience with co-operative banking support this recommendation for Greece?

In the United States, there are no co-operative banks per se. There are what we call Credit Unions and Community Development Banks. Credit Unions have been established throughout the United States and are very successful and mostly unaffected by the subprime financial crisis of 2007-09. They were originally established to serve customers who possessed some common characteristic, i.e. employees of a large organization such as the UN, or big business – IBM – or a locality, Hudson Valley in upstate New York and so on. By now depositors do not need to share a common characteristic. The present credit unions are not very big and serve their local customers since they are geographically focused. Community development banks are very similar and provide banking services to individuals and businesses with limited credit history, such as start-up businesses, firms in agricultural and remote regions, or to inner cities that big banks do not find it profitable to extend their services to. They are doing quite well serving the interests of the unbanked.

Co-operative banks are mostly a European phenomenon and some have become very important in their respective countries and quite large. Others continue their mission of providing services, especially depository and lending functions, to people and areas that large banks shy away from. The most successful are in Germany. There is serious interest from these German co-operative banks to establish their model and operation in Greece. We don’t really need them. We can establish the Greek co-operative bank system very much different than the one we now have, which did not perform well all the time. Our proposal for cooperative banking in Greece incorporates a strong regulatory and supervisory structure, fully transparent, guided by a strong and professional board that will serve the liquidity needs not in the form of “red loans” (κόκκιναδάνεια), but to promote regional entrepreneurship. These banks would contribute to restarting the engine of economic growth, especially within the European framework of the social economy. It has been shown that the large systemic banks in Greece are still in the process of strengthening their balance sheets and have created the credit crunch I mentioned earlier.

Read the rest of the interview here.

Related: “Co-operative Banking in Greece: A Proposal for Rural Reinvestment and Urban Entrepreneurship” (pdf)

See also this policy brief from 1993, co-authored by Hyman Minsky, Dimitri Papadimitriou, Ronnie Phillips, and L. Randall Wray: “Community Development Banking: A Proposal to Establish a Nationwide System of Community Development Banks” (pdf)