Archive for the ‘Eurozone Crisis’ Category

A Fiscal Policy Rule Without Austerity

Greg Hannsgen | August 18, 2014

What will happen about fiscal policy after the tumultuous events beginning in 2010 or so in Europe and the end of Great-recession-era fiscal stimulus in the US? In the US, Paul Krugman and other economists debate the meaning of the CBO’s recent fiscal report, which, as Krugman points out, clearly show a drastic fall in the US deficit—to less than 3 percent of GDP at last check.

This brings us to the main subject of our post: an interesting article that seems to be out in the July issue of the Cambridge Journal of Economics (abstract—rather technical). I happened to run across this new study last week. It may be one of those cases in which an academic article has some implications for macro policy. The authors consider an inflation-targeting fiscal rule: they explore the outcome when government spending is always adjusted upward or downward, depending upon the actual inflation rate, according to an algorithm of sorts set in advance.

Before I go on, I should note the disclaimer that a paper of my own featuring fiscal targets also appeared last month in Metroeconomica, an international journal whose chief editors are based in Austria and Italy. I argue in the paper against deficit targets that restrict spending levels without regard to the strength of the economy. This notion that fiscal policy should aim for budget balance rather than good economic performance is the “Treasury view” lambasted, by the way, in another article in the same journal, penned by Suzanne Konzelman. I will try to outline the article on fiscal targets in terms of what I found in the process of working on my own paper. The post also includes an interactive model of how the rule in my own paper would work in a simplified version of the economy.

I am happy to see various parallels and hope the new piece is indicative of widespread interest in output-stabilizing policy rules, or at least non-austerity rules, and in stock-flow-consistent macro models, including the Levy Institute macro model. The differences between the policy rules and other assumptions in the two papers are numerous. Most importantly perhaps, Matthew Greenwood-Nimmo, the author of the new CJE article, considers a different type of rule. An inflation-targeting rule is the main fiscal policy rule considered in the paper. Inflation-targeting is certainly run-of-the-mill for monetary policy around the world, but as this IMF country-by-country list of fiscal rules now in force indicates, most actual rules simply specify low deficits or low ratios of the budget deficit to GDP.

The new CJE article notes, commenting on a fiscal policy rule from our former Distinguished Scholar Wynne Godley’s work with Canadian Marc Lavoie, that “it seems unlikely that the form of fiscal intervention advocated by Godley and Lavoie…could be fine-tuned to the degree required to achieve a point target in practice, as activating and deactivating public works projects, for example, is likely to generate a somewhat lumpy path of government spending [i.e., one that moved in big steps rather than smoothly]. For this reason, the use of a band target [a range, rather than a specific number] for fiscal policy seems more appropriate.”*

Specifically, Godley and Lavoie’s rule–published years ago in the Journal of Post Keynesian Economics and reprinted in 2012 and in a collection of papers by Godley —called for a level of government spending that would immediately fill the gap between actual and potential output—and hopefully keep unemployment low. In contrast, Greenwood-Nimmo adopts a rule with spending changes in specific amounts that go into force abruptly once inflation exceeds or drops below certain upper and lower bounds or thresholds.

continue reading…

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Can a Euro Treasury End the Crisis?

Michael Stephens | August 14, 2014

Dimitri Papadimitriou introduces Jörg Bibow’s plan for the creation of a Euro Treasury:

It was only a matter of time until the euro area was hit with the kind of crisis from which it is still struggling to recover—this was understood well in advance, by many at the Levy Institute and elsewhere. The problem has always stemmed from a structural weakness in the design of the currency union: member-states gave up control over their own currencies but retained responsibility for fiscal policy. This situation rendered them subject to sovereign debt runs—which occurred when the fallout from a banking crisis fell squarely on euro area national treasuries—of the sort that countries controlling their own currencies do not face.

As we have pointed out previously, member-states are in some ways in the same situation as US states, which are forced to cut back when the economy contracts—that is to say, at the very moment when expanded public spending is required to place a floor under the economic collapse. But US states have the benefit of a treasury at the federal level that can spend without the same sovereign debt concerns (which the US federal government did, briefly, before succumbing in 2010 to a misguided notion of “fiscal responsibility,” not to mention congressional obstruction). The eurozone member-states, however, do not have the benefit of this treasury–central bank combination at the level of the central government—a lacuna Jörg Bibow addresses with the proposal outlined in this policy brief.

One challenge for “United States of Europe” or “complete the union”-type plans is their political toxicity, but Bibow has tailored his Euro Treasury plan so as to minimize the political vulnerabilities (this is not a transfer union) while preserving the principal benefit: ending the divorce between monetary and fiscal powers in the euro area. continue reading…

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Greece: A Nation for Sale and the Death of Democracy

C. J. Polychroniou | August 2, 2014

When the European Union (EU) and the International Monetary Fund (IMF) came to Greece’s rescue in May 2010 with a 110 billion euro bailout loan in order to avoid the default of a eurozone member state (a second bailout loan worth 130 billion euros was activated in March 2012), the intentions of the rescue plan were multifold. First, the EU-IMF duo (with the IMF in the role of junior partner) wanted to protect the interests of the foreign banks and the financial institutions that had loaned Greece billions of euros. Greece’s gross foreign debt amounted to over 410 billion euros by the end of 2009, so a default would have led to substantial losses for foreign banks and bondholders, but also to the collapse of the Greek banking system itself, as the European Central Bank (ECB) would be obliged in such an event to refuse to fund Greek banks.

Second, by bailing out Greece, the EU wanted to avoid the risk of negative contagion effects spreading across the euro area. A Greek default would have led to a financial meltdown across the euro area and perhaps to the end of the euro altogether.

Third, with Germany as Europe’s hegemonic power, there was a clear intention to punish Greece for its allegedly “profligate” ways (although it was large inflows of capital from the core countries that financed consumption and rising government spending), and by extension, send out a message to the other “peripheral” nations of the eurozone of the fate awaiting them if they did not put their fiscal house in order.

Fourth, the EU wanted to take the opportunity presented by the debt crisis to turn Greece into a “guinea pig” for the policy prescriptions of a neoliberal Europe. Berlin and Brussels had long ago embraced the main pillars of the Washington Consensus—fiscal austerity, privatization, deregulation and de-statization—and the debt crisis offered a golden opportunity to cut down the Greek public sector to the bare bones and radicalize the domestic labor market with policies that slash wages and benefits and enhance flexibilization and insecurity. continue reading…

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Greece: The Impact of Austerity on Migration

Gennaro Zezza | July 11, 2014

Greece. Population
The chart above documents another striking feature of the impact of the recession on Greece.

The Hellenic Statistical Authority (ElStat) has recently released the new quarterly data on employment and the labor force, which includes a measure of the population aged 15 or more (Table 1). While the series published in the previous release exhibited a stable upward trend (reported in green in the chart), the new estimates show that population peaked at 9.437 million at the end of 2008, and then started declining, reaching 9.296 million in the first quarter of this year, i.e. it went back to its 2004 level. (The reasons for the change in the series are due to ElStat incorporating the latest census data: details are available in the ElStat web site).

As ElStat does not publish an up-to-date measure of net migration, we assume this could be measured by the distance between the pre-crisis population trend and the actual values. We therefore computed a simple linear trend on the 2001-2008 data, which shows that population would have now been at 9.686 million, had the previous trend continued. The difference between this value and the population reported for the first quarter of 2014 is thus approximately 390,000 people (4 percent).
Greece. Population by age group
ElStat makes available the detail by age groups (Table 2), reported in our second chart, which shows that younger Greeks are declining steadily in number – a trend which is common to many developed countries who chose to reduce the average number of kids per family – while the number of older people is steadily increasing – again a trend common to many countries, linked to longer life expectancy. Summing up the 15-29 groups to the 45+ groups, we find that the decline in the younger population accelerated after 2007, compensating the increase in the number of Greeks aged 45 and over, so that the inverted U-shape of the population in our first chart can largely be attributed to the decline in Greek residents aged 30-44, who are now 2.442 million against a peak of 2.544 million at the end of 2008.

We have no complete information to know if this decrease is due to Greeks in this age cohort migrating abroad, or to a smaller number of immigrants. However, the OECD migration database contains some (incomplete) statistics on immigrants by country (the figures largely under-estimate total migration, as some major European countries such as France and Italy do not report any figures to the OECD).

As the next chart shows, and how it should be expected looking at the respective unemployment rates, the main destination of Greek emigrants is Germany, and the number of migrants has almost doubled from 2010 to 2011 (the last available year).
Greece. Emigrants from Oecd database
The other portion of the fall in population is given by migrants to Greece, which have fallen from 65.3 thousands in 2005 to 33.3 thousands in 2010 and 23.2 thousands in 2011.

It is to be expected that migration of Greeks abroad, and the decline in immigrants to Greece, continued on the same paths after 2011, given the size of the unemployment rate in Greece (still at 26.8 percent in March 2014, seasonally adjusted). Using the economists’ jargon, this is another loss of human capital for the Greek economy which will make a recovery more difficult. And, in addition, balance of payments statistics published from the Bank of Greece do not show any improvements in payments made from abroad which could be related to migrants’ remittances: both the compensation of employees received by Greece from abroad, and current transfers to the private sector have actually declined since the beginning of the crisis.

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Predatory Capitalism and the System’s Denial in the Face of Truth

C. J. Polychroniou | July 7, 2014

Contemporary capitalism is characterized by a political economy which revolves around finance capital, is based on a savage form of free market fundamentalism, and thrives on a wave of globalizing processes and global financial networks that have produced global economic oligarchies with the capacity to influence the shaping of policymaking across nations.

As a result, contemporary advanced capitalist societies are plagued by dangerous levels of income and wealth inequality, mass unemployment, rising poverty rates, social polarization, and collapsing social provisions. Furthermore, democracy and the social contract are under constant attack by the current system and there is an ongoing pressure by the corporate and financial elite to convert all public goods and services into private goods and services.

The rising inequality in advanced capitalist countries is well documented. Most recently, Thomas Piketty’s publishing sensation Capital in the Twentieth-First Century, translated into English and published by Harvard University Press, provides massive data showing a widening gap between the rich and the poor, thus questioning not only the claim that the capitalist economy works for all but also underscoring the point of how dangerous the current system is to democracy itself. Indeed, a few years ago, Larry M. Bartels’s Unequal Democracy: The Political Economy of the New Gilded Age, published by Princeton University Press, pointed to the same gap between the rich and poor in the United States under Republican administrations.

The way wealth has changed in the United States over the last few decades, with those in Generation X and Generation Y accumulating “less wealth than their parents did at the same age 25 years ago”, is also demonstrated in a study produced by Eugene Steuerle, et. al. on behalf of the Urban Institute in Washington DC. And in a recent Strategic Analysis released just this past spring by the Levy Economics Institute with the title “Is Rising Inequality a Hindrance to the US Economic Recovery?”, the authors, Dimitri B. Papadimitriou, et al., demonstrate through macro modeling simulations that the current processes of inequality in the United States are unsustainable and that, if they continue, will result in weak growth and increased unemployment.    

As for the problem of mass unemployment, the facts speak for themselves. continue reading…

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Are German Savers Being Expropriated?

Jörg Bibow | June 14, 2014

Last week the ECB’s governing council agreed on interest rate cuts and some fresh liquidity measures. The policy move has sparked off quite some excitement in all kinds of corners. Certainly financial markets highly welcomed the ECB’s much-awaited new easing initiative, with stock indices surging and bond yields plunging to record levels. International commentators generally felt that the ECB was – finally, if belatedly – doing the right kind of thing. And, generally speaking, the European political body seems to be sufficiently famished, and perhaps also a little terrified by the recent EU parliament election results, to welcome any perceived easing of pain. Only one party felt seriously short-changed by the euro’s independent guardian of stability: German savers.

In Germany, the ECB’s latest policy decisions, featuring a negative interest rate to be paid by banks to the ECB for lending to the ECB by means of its deposit facility, triggered an across-the-board outcry orchestrated by the German media, ranging from heavyweight tabloid Bild to the mouthpiece of Germany’s conservative intelligentsia Frankfurter Allgemeine Zeitung. German savers appear to be up in arms against the ECB’s outrageous decision to shave 10 basis points off its key policy rate and introducing a negative rate on its deposit facility. The president of Germany’s savings bank association declared that the ECB’s move amounted to expropriating German savers. And former ECB executive board member Jürgen Stark, who had resigned back in 2012 for “personal reasons,” which seemed to be all too clearly related to the ECB’s government bond buying program, was glad to add fuel to the flames by declaring in an interview that the ECB was breaching its mandate.

The German media reaction to the ECB rate cut is more than a bleak statement about the quality of economic journalism in Germany. One probably has to concede that it also well reflects the general state of mind and German psyche about Europe’s common currency project and the havoc it has wreaked across the continent. There are some important lessons here for Germany’s euro partners – and beyond.

First of all, these events once again highlight that in the German euro debate superficial morals prevail over any economic expertise. In Germany, saving is by its nature always virtuous. Savers, as creditors, occupy the moral high ground. Creditors are simply morally superior to debtors. In fact, debtors are suspected to be afflicted by some moral defect. As savers apparently have a moral right to get paid interest, the ECB’s move is seen as expropriation; its decision to make the creditor pay what seems like a “Strafzins” (penalty interest rate) for lending to the debtor seems outright immoral.

Within these pseudo-moralistic dimensions inspiring the German euro debate economic reasoning is conspicuous for its absence. It is somehow lost that there can be no creditor without any debtor. It is also lost that Germany as a nation can only run a current account surplus if other nations run deficits and pile up debts. So it has never entered the German national debate that Germany only managed to balance its public budget thanks to other countries’ willingness to borrow and spend on German exports. Instead, morally, it seems a clear-cut case that Germany has done everything right. If there is trouble in the system, it must be because of others’ failures and moral deficiencies. continue reading…

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Why Draghi’s New Measures Won’t Solve the Low Inflation Problem

Michael Stephens | June 11, 2014

In yesterday’s Financial Times, Jörg Bibow addressed Mario Draghi’s recent announcement that the ECB will take new steps (including cutting its deposit rate to -0.1 percent) in an attempt to deal with (or, one might argue, in an attempt to appear to deal with) the fact that inflation in the eurozone is too low, according to the ECB’s own alleged target.

For Bibow, the proposed measures are unlikely to get the job done, and the same could be said, he argues, for any last-ditch attempt at quantitative easing (a prospect mentioned by Wolfgang Münchau in his last column). The problem is that it’s hard to characterize eurozone disinflation as some unforeseen bump in the road:

The driving force behind the eurozone’s disinflation process is wage repression – exercised to a brutal degree across the currency union. In fact, wage repression – joined by fiscal austerity – is the eurozone’s official policy meant to resolve the euro crisis … With wages in übercompetitive Germany creeping up at a mere 2 to 3 per cent annual rate, the rest are forced into near, if not outright, deflation to restore their lost competitiveness. …

The ECB was late to diagnose the issue and super-late to act. But the real issue is that neither its recent move nor any imagined future quantitative easing will do anything to reverse deflationary wage trends any time soon – trends established by deliberate policy.

Read Bibow’s letter here.

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The Far Right and the European Elections

Michael Stephens | June 10, 2014

C. J. Polychroniou, reflecting on the results of the European Parliament elections:

The stunning victory of Marine Le Pen’s National Front in France that came in first with 25 percent of the vote—when it had won less than 6.5 percent in the last European elections—is quite indicative of the general political and social trends in Europe today. The parties of the far right scored quite well in Europe’s parliamentary elections …

What all these parties have in common … is their opposition to the current EU regime, which they blame directly for the loss of national sovereignty, the high levels of unemployment, the corrosion of traditional beliefs and values and the massive flows of immigrants.

[…]

[I]t is also not clear whether the far right parties will form a political alliance amongst themselves in the new European parliament. It is not certain at all that UKIP, or even the Finns Party, will collaborate with Marine Le Pen’s National Front. In short, it is highly unlikely that the parties of the far right will pose a systemic threat to the status quo in the EU.

What seems to be happening in Europe today is that the far right is simply taking advantage of the growing bitterness and resentment all across the continent towards the “New Rome”[*] and citizens’ lost faith in the ability or willingness of mainstream political parties to secure a better tomorrow for themselves and their children, let alone protecting the common good.

Of course, the key question here is why is it mainly the far right, and not the left, attracting voters dismayed with the status quo. This is by no means an easy question to answer. However, until the latter happens, the odds are that “New Rome” will continue with business as usual.

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Is the Eurozone Crisis Really Over?

C. J. Polychroniou | May 23, 2014

Economic pundits who predicted the collapse of the euro at the start of the eurozone crisis have been proven wrong. But those who say the crisis is over are equally wrong.

Four years after the start of the euro crisis, the bailed-out countries of the eurozone (Greece, Ireland, Portugal, and Spain) are still facing serious problems, as the austerity policies imposed on them by the European Union (EU) authorities and the International Monetary Fund (IMF) not only failed to stabilize their economies, but actually made matters worse; in fact, much worse: the debt load increased substantially, national output was seriously undermined, unemployment reached potentially explosive levels, a credit crunch ensued, and emigration levels rose to historic heights. Because of these highly adverse effects, the citizens in the bailed-out countries have grown indignant and mistrustful toward parliamentary democracy itself, euroskepticism has taken firm roots, and a cleavage has reemerged between north and south.

Take unemployment, for example. The current unemployment rates in the four bailed-out eurozone countries are: 27 percent for Greece; 25 percent for Spain; 15 percent for Portugal; and 12 percent for Ireland, the nation with the highest emigration rate in all of Europe, and whose government was actually asking the unemployed recently to leave and take jobs in other European countries.

A similarly dramatic picture emerges when one looks at current government debt. In Greece, it ballooned from slightly less than 130 percent in 2009 to 175 percent at the end of 2013 and it still growing. Ireland’s public debt, which stood at 25 percent of GDP in 2008, grew to nearly 65 percent by 2010 and climbed to over 125 percent by the end of 2013. Portugal’s public debt, which was slightly less than 70 percent in 2008, jumped to over 100 percent by 2011 and then to over 130 percent by 2013. And Spain’s public debt has surged to nearly 95 percent of GDP, standing at close to 1 trillion euros—three times as much as it was at the start of the crisis in 2008—and is projected to go over 100 percent by the end of 2014.

In short, the rest of the bailed-out eurozone countries are looking more and more like Greece when it comes to public debt—the result of the “voodoo” economics that the witch doctors of the EU and the IMF cooked up in order to formulate the so-called “rescue” plans.

The prospects for real growth in the periphery of the eurozone are grim as the EU’s current economic mindset, a set of economic dogmas that include (1) relegating unemployment to the status of a natural and inevitable (and perhaps even desirable) outcome of fiscal adjustment, (2) relying on austerity as a confidence builder, (3) treating structural reform as a panacea and (4) valuing exports as the primary engine of growth trump serve to impede recovery.

Each one of these ideas, as I spell out in detail in a public policy brief that was just released by the Levy Economics Institute, are highly flawed and, when combined, they can be deadly dangerous. They constitute tenets of an ideological “worldview” rather than empirically proven statements. continue reading…

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Greece Has Returned to the Bond Markets—Mission Accomplished?

Michael Stephens | May 5, 2014

C. J. Polychroniou interviewed Levy Institute President Dimitri Papadimitriou for the Sunday edition of Greece’s Eleftherotypia. What follows is an excerpt from the English version of that interview (part one of the Greek version is here):

C. J. Polychroniou: After four years as the pariah of the financial markets, in the course of which 330 billion euros was granted/guaranteed in international bailouts in order to avoid an official bankruptcy, Greece has made a successful return to the international bond markets. Why did Greece return to the bond markets now when the country’s debt-to-GDP ratio is much bigger than it was back in 2010?

Dimitri B. Papadimitriou: The return to the bond markets was an act of pure symbolism. The government purposely made the success of the austerity program dependent on achieving a primary surplus as opposed to the return to growth in output and employment. Recall that the idea of expansionary austerity embraced by the country’s international lenders was spectacularly discredited. Thus, the Troika (IMF, EU and European Central Bank ) and Greece’s compliant government needed to invent a new metric of success, and it was associated with achieving a primary surplus as large as it could be so that financial markets can be impressed. However, no one else is impressed, especially the international lenders, for three main reasons: (1) The primary surplus was achieved by a one-off (non-recurring) excess revenue from the gains of Greek bonds in the portfolios of Eurozone’s central banks and the European Central Bank’s (ECB) holding that were returned to Greece; (2) collections of old tax revenue; and (3) non-recurring spending cuts and delayed payment of the government’s debt to the private sector, whether VAT refunds or non-payments to private sector vendors.

Finally, the return to the markets was costly to the country — the apparent low interest rate of 4.95% notwithstanding — since the interest rate of the funds borrowed from the European Stability Mechanism (ESM) is at a very much lower interest rate. To be sure, the hedge funds and the private sector [parties] buying the new bonds knew that there was an implicit guarantee from the ECB that would accept these bonds under its Outright Monetary Transactions (OMT) program. So the bonds were not backed by the progress of the Greek economy — it would be ludicrous to assume so, for an economy in continuing recession and increasing debt to GDP ratio, especially if its credit rating is still below investment grade. So, all in all, it was an act of desperation and a strategy to give the government extra help in the soon-to-be-held local and European Parliament elections.

[…]

CJP: Radical structural reforms, which include labor and product markets and blanket privatizations, constitute the second component of the conditions behind Greece’s bailout plans. First, is there in economic literature a direct connection between labor market flexibility, productivity growth and national economic performance?

DBP: The economic literature, as economists know, can produce conflicting results. It will not be surprising to find cases when statistics will prove that there is a positive outcome in terms of increasing productivity with flexible labor conditions, but this is always dependent on the level of technology diffusion. To be sure, German workers have the highest productivity in Europe along with those in the Netherlands, but it is not because they are paid less than other Eurozone workers but because of the high level of effective technology used. So they are about 70% more productive as compared to Greeks, Portuguese or Spaniards despite the fact that the latter work substantially many more hours during the week. Clearly, Germany’s and other North European economies enjoy better economic performance, but this is not due to so-called labor flexibility only. Germany is successful because it is lucky, having an extraordinary number of idle and low-wage workers from East Germany when the unification took place. Unification gave Germany the ability to hold West German wages down. But this should not be used as an example of a successful application of a labor flexibility policy. The literature also abounds in studies showing that labor productivity is not dependent on labor flexibility. Indeed, the theory and policy of “efficiency” wages, promoted by none other than Nobel Laureate George Akerlof and current Fed Chair Janet Yellen, is part of the economic research which shows there are productivity gains and other positive outcomes to firms which pay higher than market wages. All in all, then, the argument of flexible wages does not, I am afraid, hold water.

Read the rest of the interview at Truthout.

Related: “Prospects and Policies for the Greek Economy

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