Archive for the ‘Eurozone Crisis’ Category

On the Alleged Pains of the Strong Euro

Jörg Bibow | April 9, 2014

Since its most recent low of $1.20, reached in the heat of the summer of 2012, the euro has appreciated by 15 percent against the US dollar and by more than 10 percent in inflation-adjusted terms against a broad basket of currencies representative of the euro area’s main trading partners. Amounting to a significant loss in international competitiveness, representatives from a number of euro area member states aired fears that euro strength might undermine the area’s recovery from gloom. Members of the ECB’s governing council too expressed concerns about the euro’s exchange rate. ECB president Mario Draghi recently argued that the strengthening of the euro was partly responsible for the bank’s conspicuous miss of its 2-percent price stability norm by an embarrassingly large margin, adding that the euro’s strength was “becoming increasingly relevant” in the ECB’s assessment of price stability.

In truth euro appreciation should attract neither fears nor blame. The euro area’s dangerously low rate of inflation owes primarily to domestic sources. Instead of debating the euro’s external value, it is high time for euro policymakers to concentrate on getting their own house in order.  A sober assessment reveals that the supposedly too strong euro is at risk of turning into yet another scapegoat. Covering up euro policymakers’ unenviable record of staggering policy blunders is unwarranted.

Ultimately the single most relevant factor for price stability in an economy as large as the euro area is wage inflation corrected for productivity growth. The outstanding fact is that euro area wage inflation is approaching zero. Unit labor costs and business costs more generally are flat or falling. It is therefore no surprise at all that the ECB is failing on its price stability mandate. Rather, what is surprising is that euro policymakers keep on clobbering wages without remorse, apparently wishing to drive them ever lower. Seemingly justified by some holy calling to please the gods of austerity and competitiveness, euro policymakers keep on digging the hole they are trapped in ever deeper. continue reading…


Can a Parallel Financial System Solve the Greek Crisis?

Michael Stephens | March 26, 2014

In a new article, Dimitri Papadimitriou looks at the possibility of creating a parallel financial system — dubbed the “geuro” (following Thomas Mayer) — to help rescue the Greek economy:

Geuros would essentially be small denomination zero-coupon bonds: transferable instruments with no interest payment, no repayment of principal, and no redemption, that would be acceptable at par for tax payments. This kind of arrangement is well-known in public finance.

The government would use the alternative currency to pay domestic debts, unemployment benefits, and a portion of wages for public employees. And it would demand that a share of taxes and social benefits be paid in geuros.

Foreign trade would still require euros, which would remain in circulation, and Greece’s private sector would still do business in euros. The currency would be convertible only in one direction, from euro to geuro.

There’s a certain view that, if Greece weren’t in the eurozone, the ideal solution would be to devalue its currency and grow its way out of depression through exports. But since Greece doesn’t have its own currency, we’re left with “internal devaluation” — trying to boost exports through reducing unit labor costs. As Papadimitriou and some other members of the Levy Institute’s macromodeling team (Michalis Nikiforos and Gennaro Zezza) have pointed out, that internal devaluation strategy isn’t working — even though Greece “succeeded” in reducing its relative labor costs.

But what if it were possible for Greece, while remaining firmly in the eurozone, to create a financial instrument (the geuro) that would effectively operate as a parallel currency? Would export-led growth through devaluation of the new currency then become a viable possibility? The answer, according to Papadimitriou, is no, not really:

Why not stress exports? Price elasticity in Greece’s trade sector is low, our analysis shows, which explains why there hasn’t been much evidence of success in export growth. Of course exports are important, but even China, with its gigantic export-guided economy, has recognized the need to increase and stabilize domestic demand.

The value of creating an alternative currency like the geuro is not that it would enable devaluation, but that it would allow Greece to regain a measure of control over its fiscal policy: it could be used to fund the sort of stimulative policies that aren’t forthcoming under the reigning austerity regime. Papadimitriou explains in the article that a geuro-funded direct job creation program targeting 550,000 jobs (not counting the indirect employment creation) could boost GDP in Greece by 7 percent at a net cost of around 3.5 billion geuros per year. And as he points out, “there would still be a sizable euro surplus.” Read the whole thing here.

The article is based on the recent strategic analysis for Greece by Papadimitriou, Nikiforos, and Zezza, which uses the Levy Institute’s stock-flow consistent modeling approach.


MMT, the Consolidation Hypothesis, and Why Louisiana Won’t Leave Its Currency Union

Michael Stephens | March 18, 2014

In this interview with Euro Truffa, L. Randall Wray responds to some recent critiques of Modern Money Theory (MMT).

In the first segment, Wray defends the idea that we can, for the purposes of simplifying the analysis of affordability constraints faced by modern governments, safely disregard many of the self-imposed constraints on Treasury-Central Bank cooperation (this is sometimes referred to as the “consolidation hypothesis.” For more on this topic, see “Modern Money Theory 101: A Reply to Critics,” by Randall Wray and Éric Tymoigne, as well as Tymoigne’s recent working paper on Fed-Treasury operations in the United States).

In this next segment (sorry, video quality is bad, but audio is fine), Wray challenges the idea that the eurozone crisis is chiefly a balance of payments crisis.


Inflation, Deflation, and ECB Asymmetry

Jörg Bibow | March 13, 2014

It is quite interesting to see how popular myths can live on in the public’s mind and continue to cause harm and irritation even when the facts speak to totally different language. How can education fail so badly?

The particular example I have in mind here is Germans’ supposed exceptionalism in matters of inflation hyper-sensitivity. Whether or not Germans really are special in this regard, even internationally many observers seem to feel that Germans would be truly justified to be that way. Hence Germans are readily excused for doing stupid things because they seem to be justified that way. There is a highly relevant context to this today: the ECB’s asymmetry in mindset and approach.

I recently argued in a Letter to the Editors, “Beware what you wish for when it comes to ECB measures,” published by The Financial Times on February 26 2014, that there was actually nothing really new about the ECB’s revealed asymmetry regarding inflation versus deflation risks. At issue is a genetic defect inherited from the Bundesbank. In fact, there can be absolutely no doubt anymore about the ECB being asymmetric in mindset and approach, and more and more observers have come to realize that in more recent times. But there is also a long track record of asymmetric “stability-oriented” monetary policy that includes and precedes the ECB’s own life.

My letter prompted a response from a Mr Han de Jong, the Chief Economist of ABN AMRO Bank in Amsterdam, arguing that there would be a solid basis in history for Americans to fear deflation over inflation while the opposite is true for Germans, pointing to the Great Depression as the biggest trauma in US economic history of the last 100 years and contrasting it with Germany’s hyperinflation of 1922-23 (“Economic trauma scarred both the US and Europe,” Letters, March 3 2014).

This is surely right about America. While some US economists speak of the “Great Inflation” of the 1970s, which was followed by the Volcker shock and a double-dip recession in the early 1980s, this episode truly pales in comparison to the calamitous Great Depression experience of the 1930s. The memory of the Great Depression lives on in modern America. US policymakers are haunted by the ghosts of that historical episode. And that is a good thing!

When it comes to Germany, however, the story is less straightforward than is popularly held. continue reading…


Export-led Growth for Greece?

Gennaro Zezza | March 8, 2014

In a recent post, Daniel Gros asks why Greece has failed to get out of recession through an increase in exports, as he claims happened in Portugal, Spain and Ireland.
He is suggesting that the problem lies in the economy resisting structural reforms:

“In Greece, by contrast, there is no evidence that the many structural reforms imposed by the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) have led to any real improvement on the ground. On the contrary, many indicators of efficiency of the way the government and the labor market work have actually deteriorated”

“So the only explanation for Greece’s poor export performance must be that the Greek economy has remained so distorted that it has not responded to changing price signals.”

Gros is therefore endorsing the Troika vision: European peripheral countries with a large current account deficit, and large government deficits, should use austerity to improve the public sector balance, and wage and price deflation to improve export competitiveness.
These policies have been devastating for Greece. Our first chart reports the level of real output: real GDP in Greece has fallen by almost 25 percent, relative to 2007, the last year before the recession started. Indeed, as we have argued, the recession in Greece has been worse than the 1929 Depression in the United States. In the other GIIPS countries the recession has been severe, but the fall in output has been much smaller. When capacity is reduced by a shock comparable to that of a war, it is hardly suprising that the exporting capacity is compromised as well.
Real GDP in GIIPS countries
Yanis Varoufakis, on Twitter, rightly commented on Gros’ post that Greek firms have been experiencing a severe contraction in credit, which is an additional reason to prevent any expansion in production and sales on foreign markets.
In addition, Greek exports were a smaller fraction of GDP, compared to the other GIIPS countries. The pattern of the response of the exports to GDP ratio during the crisis has been similar in Greece, Portugal or Spain, but as the next chart shows, exports in Greece were only 23 percent in 2007, compared to about 32 percent in Portugal or 27 percent in Spain, not to mention Ireland.
GIIPS share of exports on GDP
Last, but not least, our estimates of price elasticities for Greek exports suggest that they are low, so that increasing exports only through wage and price deflation will take a long time, and may even generate a fall in export revenues as long as the volume of exports does not grow sufficiently to outweight the fall in export prices.
Since Greece cannot expect to recover from exports (besides, export-led growth requires that your trading partners are willing to increase demand fo your products!), recovery can only come from government intervention, in one of the forms we have discussed in our last report.


Bibow on Deflation and ECB Measures: “Beware What You Wish For”

Michael Stephens | March 6, 2014

From Jörg Bibow’s recent letter in the Financial Times, reacting to an article by Wolfgang Münchau on deflation and ECB policy:

What is really new today is that wages are becoming unanchored and hence cease to provide the safety net that asymmetric central bankers habitually rely on. This is the consequence of the collective effort to restore competitiveness practised across the eurozone. Deflationary structural reforms of labour markets can only amplify this futile and hazardous process. But with the ECB applauding these efforts as the supposed panacea to the eurozone’s ills, what kind of miracle weapon can we expect the bank to deploy to halt the resulting plight?

Read the rest here.


On German Public Opinion and Illusory ECB Power

Jörg Bibow | February 26, 2014

After taking a short breather in late January-early February, the markets now seem to be back in “happy mode.” Whether the news on the economic recovery is good or bad doesn’t really matter. The current convention is that growth acceleration is under way.

That emerging markets had become key drivers of global growth was yesterday’s story, today they don’t seem to matter anymore. Developed economies are back, so we are told. The U.S. is roaring ahead, the euro crisis is over. And, by the way, central banks have no intention to really stop the party any time soon – as inflation is so conveniently low. In fact, inflation is nonexistent since labor markets are not exactly red hot and wages essentially flat. So lucky for us, or at least some of us, that at least the markets want to go up no matter what.

Curiously, not even the long-awaited ruling by Germany’s constitutional court on the ECB’s “outright monetary transactions” (OMTs) or, rather, on Germany and the euro, could rock the boat. The court expressed doubts about the legality of the ECB’s supposedly all-powerful weapon meant to bolster the earlier “whatever it takes” promise, the mere airing of which had ended the euro crisis and kick-started the brisk recovery now firmly under way. “So what?”, Mr. Market shrugged his shoulders.

The Financial Times’ Ralph Atkins reports of a banker who was even making fun of those “crimson-roped weirdos in Karlsruhe.” For apparently Karlsruhe does not matter anymore to the fate of the euro, only Frankfurt does, especially now that they have sent the case off to the European Court of Justice. The ECB is seemingly safe now to deploy its miraculous weaponry, or do anything it likes, it might even seem. Wondering whether the markets may be either deluded or wise and prescient in ignoring the ruling, Mr. Atkins seems to come down with the verdict that “Karlsruhe fallout highlights power of ECB.”

But just how powerful is the ECB, really? continue reading…


Seeing “It” Coming: An Interview on the Global Financial Crisis and Euroland’s Fatal Flaw

L. Randall Wray | February 20, 2014

I recently did an interview for the magazine “Synchrona Themata” (“Contemporary Issues”). The interview, which will appear in Greek, was conducted by Christos Pierros, doctoral student at the University of Athens Doctoral Program in Economics (UADPhilEcon). What follows is the English transcript:

What do you think went wrong in 2008? Why was standard macro theory unable to predict such an event?

This was a collapse of what Hyman Minsky called “Money Manager Capitalism.” In many ways it was similar to the 1929 collapse of “Finance Capitalism” that led to the Great Depression. MMC and FC share several common characteristics. First, the dominant approach of economists and policy makers in the 1920s and in the 2000s was one of “laissez faire”—that is, a worship of free markets. Importantly, that meant that finance was “freed” from regulation and supervision. Second, in both cases we lived in an era of globalization—with both goods and finance crossing borders fairly freely. That ensured that when crisis hit, it would spread around the world. Third, finance dominated over industry. Our economy in both cases was “financialized”—with finance sucking 40 percent of all corporate profits out of the economy. To say that “finance ran amuck” is an understatement. To say that our economies were completely taken over by “blood sucking vampire squids of Wall Street” is only a slight exaggeration.

Standard macro theory either thinks all these are “good” trends, or ignores them. That is why—as the Queen of England remarked—none of these economists saw the crisis coming.

Do you believe that by using other tools of analysis (another methodology) one could have seen it coming? If yes, which type of analysis would that be?

Certainly. Many of us saw the crisis coming. The three approaches that made it possible to understand what was going on were: a) Minsky’s financial instability approach; b) Wynne Godley’s sectoral balance approach; and c) Modern Money Theory—which actually builds upon the approaches of Minsky and Godley. All of those working in these approaches “saw it coming.”

Just very briefly, those following Minsky could see that financial institutions were engaged in highly risky practices that would eventually cause liquidity and solvency problems. Those following Godley knew that government budgets were too tight—including the governments of the USA, Spain, and Ireland. By the same token, private sector households and firms had taken on far too much debt. That was particularly true of homebuyers in the USA, in the UK, and in Spain. And those following MMT knew that Euroland was designed to fail; by disconnecting fiscal policy from currency sovereignty, the EMU ensured that the first serious downturn or financial crisis would threaten the very existence of the European Union.

Do you see any shift in the paradigm of economics taking place? If yes, towards which direction? continue reading…


The Problem of Unemployment in Greece

Rania Antonopoulos | February 12, 2014

(The following is an extended version of a piece that originally appeared in Greek in Kathimerini.)

The responses to unemployment by the last three governments in Greece have been characterized by sloppy proposals and an insignificant amount of funds in relation to the size of the problem. Regardless of whether there were political considerations behind it (or not), the recent announcement of the Prime Minister highlights, unfortunately, a relentless continuation of a lack of understanding of reality.

The Prime Minister recently (on January 29) told us that unemployment is a “sneaky enemy” and proceeded to announce measures to tackle the problem. He also indicated that “we do not promise things we cannot do, and we say no to populism and fine words.” The goal of the proposed measures, we heard, is to create 440,000 “work opportunities,” of which 240,000 will target the unemployed 15-24 years of age with no prior work experience. The announced measures totaling 1.4 billion euros will be financed by funds from the National Strategic Reference Framework (NSRF), social funds from the EU, and are classified into three pillars.

Specifically, the first pillar sets a target to recruit 114,000 unemployed for the private sector; an initiative that essentially subsidizes wages and social security contributions for businesses that hire unemployed who are up to 29 years old and some who are unemployed between the ages of 30 and 60. The second pillar concerns 240,000 young persons. This program will provide work experience and training for all unemployed up to 24 years old who have no prior work experience. These unemployed will also go to private companies for some time, or participate in vocational training centers (VTC) to improve their skills in order to find their first job, or both. The third pillar concentrates on hiring 90,000 unemployed from households that have no employed person, who will work in community service projects in the public sector and local government.

Assuming that strict rules are in place, with dedicated control mechanisms that will guarantee non-replacement of existing positions in the private and public sector (really, is there a sufficient number of public sector inspectors for this task?), prima facie, it all sounds positive and leads to the conclusion that at last the Prime Minister himself has publicly accepted his responsibility toward the citizens that have been left without a job. But appearances can be deceiving.

Let’s start with the obvious. continue reading…


SAPRIN and the Greek Experiment

Michael Stephens | February 11, 2014

From C. J. Polychroniou’s latest policy note:

[I]n 2001, a three-year, multi-country study by the Structural Adjustment Participatory Review International Network (SAPRIN), prepared in cooperation with the World Bank, national governments, and civil society organizations, offered a damning indictment of the policies of structural adjustment reform pursued by the IMF and the World Bank in third world countries. Here is a partial summary of the organization’s findings [...]:

“The intransigence of international policymakers as they continue their prescription of structural adjustment policies is expanding poverty, inequality and insecurity around the world. These polarizing measures are in turn increasing tensions among different social strata, fueling extremist movements and delegitimizing democratic political systems. Their effects, particularly on the poor, are so profound and pervasive that no amount of targeted social investments can begin to address the social crises that they have engendered.” (SAPRIN 2001, 24) [...]

The structural adjustment programs in Greece, combined with the policies of austerity, are producing results that fit the patterns outlined in the SAPRIN study like a glove. No doubt, this is part of the reason why the IMF was invited to participate in Europe’s rescue schemes: the Fund’s technical expertise in advancing the neoliberal agenda, which has been fully embraced by the EU at least since the Maastricht Treaty, carries more than three decades of experience.