The Plunging Euro and Its Muddled Cheerleaders

Jörg Bibow | March 16, 2015

Greg Ip had a couple of pieces on currency wars and gyrations in the Wall Street Journal last week (here and here), essentially arguing that talk about currency warfare is much beside the point and that exchange rate gyrations are merely benevolent side-effects of monetary policies that will inevitably make the whole world better off. The Financial Times had an editorial on the ECB’s QE and the euro plunge that ran along the same lines, bluntly declaring that “any criticism from outside the eurozone that the fall in the single currency will kick off a global currency war [was] misplaced.” And Bloomberg summed it all up by proclaiming that the whole currency war talk is a “load of baloney,” fearing that the currency war nonsense talk might lead to trade restrictions, which would do real harm.

While the Financial Times sees no cause for alarm at all it seems, Greg Ip’s alarm bells would only go off if China were to retaliate by weakening the renminbi.

So there appears to be a consensus that all is currently for the best in all possible currency worlds. As ever so often, the consensus may be seriously off track here.

Consider Greg Ip’s main point, which is that monetary easing cannot do any harm by weakening a currency because it simply forces other central banks to follow suit, which eases the global monetary stance, which is all for the good. Well, the argument fails to distinguish situations in which all countries share common monetary policy requirements from situations in which that is not the case. The former kind of situation prevailed right after the Lehman bankruptcy, when the Federal Reserve’s easing provided the scope for a global monetary easing. This benevolent alignment didn’t last very long, however, as the U.S. monetary stance proved to be excessively easy for numerous countries in the emerging world — countries that may today be held back by the financial fragilities that were created at that time. Fast forward, recovery in the U.S. appears to be leading the world economy today, creating the opposite kind of challenges. So is the Federal Reserve prodding everyone else to tighten too, to the benefit of the world? Or are the ECB’s QE adventures prodding the Federal Reserve to change course, to the benefit of the world and the U.S.? If neither is the case, will the resulting exchange rate gyrations really benefit the wider world — unless China devalues its currency, that is?

The new consensus overlooks that it matters to the global economy whether important countries are mainly driven by domestic demand growth or mainly freeload on net exports.

The evolution of current account imbalances and contributions of net exports to GDP growth in the key countries featured in talks about currency wars is revealing.

The U.S. had persistent negative net exports GDP growth contributions and a rising current account deficit prior to the crisis of 2008-09. The crisis then halved the U.S. current account deficit. And post-crisis QE and dollar depreciation saw U.S. domestic demand growth stimulate (disappointingly meager) U.S. GDP growth while net exports made a broadly neutral contribution as the U.S. current account deficit was contained overall. Suffice to mention that U.S. energy production was an important swing factor in this outcome. The U.S. non-energy external balance has deteriorated with the U.S. recovery.

Japan ran huge current account surpluses prior to the crisis. As the favored carry-trade currency, the yen was cheap at the time. When crisis struck, the yen appreciated sharply at first, and Japan’s current account imbalance has since disappeared as net exports made negative GDP growth contributions in the last four years. More recently, the yen’s appreciation was partly reversed by means of QE starting in 2013 when the Japanese authorities also initiated a program to stimulate domestic demand.

The eurozone had a broadly balanced external position prior to the global crisis. Internally, however, diverging competitiveness positions led to huge imbalances, which then imploded. As the eurozone authorities’ policy response suffocated domestic demand, positive GDP growth contributions from net exports were the currency union’s only lifeline. The eurozone has a surging current account surplus, the biggest in the world today, with Germany and the Netherlands as the lead stars.

It is true that China had by far the biggest current account surplus prior to the global crisis. But China has also gone through by far the biggest rebalancing since. China’s current account surplus halved in absolute terms; in relative terms it plunged from 10 percent of GDP to roughly 2 percent within a short period of time. In fact, the country has experienced quite persistent negative GDP growth contributions from net exports since the crisis.

In essence, in the years since the global crisis, China was the number one global growth engine, while the eurozone was the world’s outstanding drag on growth, undermining a proper recovery. Germany’s bilateral trade and current account balances vis-à-vis China are in surplus today.

The latest monetary policy initiatives and currency gyrations should be read against this background. The consensus suggests that euro devaluation through the ECB’s belated QE is just fine, a measure for the general good of the world. Apparently the plunging euro is not designed to augment and sustain the eurozone’s freeloading on external growth; it is not the mechanism by which the eurozone exports its homemade mess to innocent bystanders. By contrast, as Greg Ip states explicitly, if the Chinese authorities were to devalue the renminbi, that could be seen as beggar-they-neighbor policy, an attempt to steal demand from their trading partners. Apparently, China is obliged to provide positive growth stimuli to the global economy and must not try to contain the damage that eurozone freeloading has on its development.

Surely Dr. Schäuble and Germany’s export industry can only applaud the new consensus. Never mind the shallow double standards on which it rests. Or do we all begin to adopt the kind of logic that prevails in Dr. Schäubles “parallel universe”* — making it yet another German export success?

 

* Back in September 2013, Dr. Schäuble famously suggested (see my comment) that critics of the brilliant eurozone crisis management undertaken under his stewardship were living in a “parallel universe where well-established economic principles no longer apply.” Eurozone crisis management has been so brilliant that the world now enjoys its fruits at a super-competitive euro exchange rate. Bravo! More cheerleading please.

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Beyond the Debt Negotiations: Greece’s New Deal?

Michael Stephens | March 10, 2015

The negotiations over Greece’s public debt and the terms of its bailout agreement have understandably taken center stage. Behind all the twists and turns, the key consideration is that even if the public debt could be repaid through continuing with austerity policies — and there is little reason to believe it can — it would still be a mistake, for both moral and pragmatic reasons. But dealing with Greek debt and the impossible terms of the agreement signed by the previous government is just the first step in dealing with Greece’s needless humanitarian crisis.

As noted, our own Rania Antonopoulos, senior scholar and director of the Levy Institute’s Gender Equality and the Economy program, has joined the new Syriza government as Deputy Minister of Labor. Particularly germane to her new role in helping to combat unemployment, Antonopoulos has done extensive research on direct job creation policies for Greece, featuring estimates of the macroeconomic and employment payoffs and the fiscal impact, as well as work on setting up systems of monitoring and evaluation.

At the last Minsky conference in Athens, she spoke about the necessity for a targeted job guarantee or employer-of-last-resort proposal in the context of the perilous state of the Greek labor market, including discussion of the scale of the program, estimated macroeconomic outcomes, and potential financing:

Antonopoulos was also recently interviewed by Deutsche Welle on the subject of this targeted direct job creation policy (the whole interview can be found here):

Have Greece’s existing job support programs been successful?

The problem with the existing programs is that they focus on reskilling. They offer a maximum of two months or 80 hours of pay support, with the intention of helping people get some initial work experience.

But the main problem in Greece is lack of aggregate demand and consequent lack of jobs, not lack of skills. In fact, large numbers of highly qualified professionals have been leaving the country. And 80 hours isn’t enough to learn a new professional skill anyway. Also, the agencies managing the retraining programs ate up 75 percent of the available budget. Only 25 percent went to the unemployed as wages.

What kind of jobs do you envision creating?

We’ll work with local communities and initiatives to identify socially useful jobs. A key aim is to match people’s existing skills with socially needed tasks. We also want to stimulate economic activities that move in the direction of the new government’s development priorities.

Those priorities include renewable energy and sustainable fisheries, cooperative structures for locally produced food, organic farming… Plenty of initiatives have sprung up, but they need some support. The unemployed people trying to make them happen would be very happy to have wage support until they become sustainable independent businesses.

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Wray: What’s Wrong with the Euro Setup?

Michael Stephens |

In this March 7th presentation, L. Randall Wray argues that the central problem in the EMU is not profligate peripheral nations, trade imbalances, or insufficient “structural reform.” The fundamental issue, which can best be framed through an understanding of money, is a flawed setup — the EMU is designed to fail.

La Asociación de Economía Crítica, ATTAC, Econonuestra y FUHEM Ecosocial le invitan a la sesión “Teoría monetaria moderna: ¿Austeridad presupuestaria frente a déficits públicos?”:

See also “Euroland’s Original Sin

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Spain’s Proposal for a Job Guarantee

L. Randall Wray | March 5, 2015

Yesterday I participated in a press conference and gave the first of a series of lectures in Madrid on MMT and the Job Guarantee. At the press conference, Alberto Garzón announced his party’s plan to create a million jobs in a targeted JG: “IU plantea un plan de 9.600 millones para crear un millón de empleos en un año

Alberto and his brother, Eduardo, are well-versed in MMT. He emphasized that the barrier to full employment is not technical but political. If the political will exists, full employment can be achieved and sustained. MMT shows the way to understanding the policy options that are available to sovereign government.

The newspaper article summarized some of the points I made, arguing that we should no longer see the finances of a government as similar to those of a household:

Por su parte, Randall Wray, que ha estado presente en la presentación de la propuesta, ha rechazado las teorías que equiparan el funcionamiento del Estado con el de una familia, ya que el primero puede emitir su propia moneda y no puede quedarse sin dinero, por lo que sus opciones de gasto e inversión son diferentes y la austeridad no es la única salida posible.

Esto hace plausible el trabajo garantizado, que ya se aplicó de alguna manera en los años 30 del siglo XX en Estados Unidos con el ‘New Deal’ de Franklin D. Roosevelt, pero también en Argentina y, más recientemente, en la India, que incluso ha “incluido en su Constitución el derecho al trabajo”, que la Declaración Universal de los Derechos Humanos de la ONU también recoge.

La diferencia con este tipo de propuestas aplicadas hasta la fecha en otros países –”Casi todos los que tienen un paro inferior al 2%”, según el profesor estadounidense– es que la ambición de IU es que sea “universal y permanente”, y que no se desactive una vez superada la crisis.

Many other links to yesterday’s events are here.

A universal and permanent Job Gurantee will make full employment a reality.

garzon_wray_JG

I’ll report more on MMT in Spain tomorrow.

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The 24th Annual Minsky Conference

Michael Stephens |

Is Financial Reregulation Holding Back Finance for the Global Recovery?

Organized by the Levy Economics Institute of Bard College with support from the Ford Foundation

The National Press Club
Washington, D.C.
April 15–16, 2015

The 2015 Minsky Conference will address, among other issues, the design, flaws, and current status of the Dodd-Frank Wall Street Reform Act, including implementation of the operating procedures necessary to curtail systemic risk and prevent future crises; the insistence on fiscal austerity exemplified by the recent pronouncements of the new Congress; the sustainability of the US economic recovery; monetary policy revisions and central bank independence; the deflationary pressures associated with the ongoing eurozone debt crisis and their implications for the global economy; strategies for promoting an inclusive economy and a more equitable income distribution; and regulatory challenges for emerging market economies.

To register, please click here.

Participants

Lakshman Achuthan
Co-Founder and Chief Operations Officer, Economic Cycle Research Institute

Daniel Alpert
Managing Partner, Westwood Capital, LLC

Robert J. Barbera
Co-director, Center for Financial Economics, The Johns Hopkins University

Lael Brainard*
Member, Board of Governors of the Federal Reserve System

James Bullard
President, Federal Reserve Bank of St. Louis

Vítor Constâncio
Vice President, European Central Bank

Scott Fullwiler
Professor of Economics and James A. Leach Chair in Banking and Monetary Economics, Wartburg College

Michael Greenberger
Professor, School of Law, and Director, Center for Health and Homeland Security, The University of Maryland

Bruce Greenwald
Robert Heilbrunn Professor of Finance and Asset Management, Columbia University

Thomas Hoenig
Vice Chairman, Federal Deposit Insurance Corporation

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

Paul McCulley

Perry Mehrling
Professor of Economics, Barnard College

Patricia Mosser
Deputy Director, Research and Analysis Center, Office of Financial Research, US Department of the Treasury

Dimitri B. Papadimitriou
President, Levy Institute

D. Nathan Sheets*
Under Secretary for International Affairs, US Department of the Treasury

Gillian Tett*
US Managing Editor, Financial Times

Paul Tucker
Senior Fellow, Harvard Business School

Éric Tymoigne
Research Associate, Levy Institute, and Professor of Economics, Lewis & Clark College

Elizabeth Warren
US Senator (D-MA)

Maxine Waters*
US Representative (D-CA, 43)

L. Randall Wray
Senior Scholar, Levy Institute, and Professor, University of Missouri–Kansas City

* Invited

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Bitcoin and the Rules of Finance

Michael Stephens | March 3, 2015

Levy Research Associate Éric Tymoigne contributed to a debate in the Wall Street Journal over the viability of bitcoin and other cryptocurrencies. Here’s Éric:

Bitcoins are an odd sort of commodity. They are not financial instruments. The value fluctuates widely, in line with changing views regarding the overall usefulness of the bitcoin payment system and the speculative manias surrounding such views. There is no financial logic behind bitcoins’ face value. In other words, if you like to gamble, this is a perfect asset. If you are looking for an alternative monetary instrument, look elsewhere.

The bitcoin system has two components: the means of payment themselves, and an online ledger, called the block chain, which is a record of all bitcoins that have been created and who holds them. The ledger is the main innovation. It provides an open, decentralized, fast, cheap and supposedly secure means of completing transactions.

But as an alleged alternative currency, bitcoin is unacceptable. Its volatility and lack of liquidity pose risks far beyond most traditional currencies.

Read the WSJ debate and the rest of Tymoigne’s contribution here: “Do Cryptocurrencies Such as Bitcoin Have a Future?

See also Tymoigne’s earlier posts at New Economic Perspectives:

The Fair Price of a Bitcoin is Zero

Bitcoin System: Some Additional Problems

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MMT in Madrid: An Update

L. Randall Wray | March 2, 2015

Another event has been added. Hope to meet Spanish followers of MMT in Madrid this week.

TG_4_03

Here are some details:

 

Press release below the fold:

continue reading…

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Galbraith and Krugman on the Greek Deal

Michael Stephens | February 28, 2015

If you haven’t read it already, Senior Scholar James Galbraith shared his take on the four-month Greek deal in Social Europe:

there was never any chance for a loan agreement that would have wholly freed Greece’s hands. Loan agreements come with conditions. The only choices were an agreement with conditions, or no agreement and no conditions. The choice had to be made by February 28, beyond which date ECB support for the Greek banks would end. No agreement would have meant capital controls, or else bank failures, debt default, and early exit from the Euro. SYRIZA was not elected to take Greece out of Europe. Hence, in order to meet electoral commitments, the relationship between Athens and Europe had to be “extended” in some way acceptable to both.

But extend what, exactly? There were two phrases at play, and neither was the vague “extend the bailout.” The phrase “extend the current programme” appeared in troika documents, implying acceptance of the existing terms and conditions. To the Greeks this was unacceptable, but the technically-more-correct “extend the loan agreement” was less problematic. The final document extends the “Master Financial Assistance Facility Agreement” which was better still. The MFFA is “underpinned by a set of commitments” but these are – technically – distinct. In short, the MFFA is extended but the commitments are to be reviewed.

[…]

If you think you can find an unwavering commitment to the exact terms and conditions of the “current programme” in that language, good luck to you. It isn’t there. So, no, the troika can’t come to Athens and complain about the rehiring of cleaning ladies.

[…]

Greece won a battle – perhaps a skirmish – and the war continues. But the political sea-change that SYRIZA’s victory has sparked goes on.

Galbraith was recently interviewed by RNN’s Sharmini Peries on the same topic:

 

 

continue reading…

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The Greek Debt Problem and Selective Historical Memory

Michael Stephens | February 27, 2015

Michalis Nikiforos, Dimitri Papadimitriou, and Gennaro Zezza, who put together the Levy Institute’s stock-flow consistent macroeconomic model and simulations for Greece, have just released a new policy note, the upshot of which is that restructuring Greece’s unsustainable public debt is a necessary but not sufficient condition for a sustained economic recovery in that country. They also point to an interesting historical precedent that ought to inform the ongoing discussion of Greece’s debt and the conditions imposed by its official creditors.

The troika’s official story—about how Greece’s debt-to-GDP ratio will be brought down from its current 175 percent to 120 percent by 2022—is, as the authors put it, “wildly implausible.” The official forecasts depend upon large primary surpluses (in excess of 4 percent of GDP beginning in 2016) being accompanied by robust economic growth rates (based on, according to the official story, expanding net export surpluses and dazzling growth in private investment)—which is, the authors point out, virtually unprecedented.

But even if it were possible for Greece to pay down its public debt through continuing austerity, Nikiforos, Papadimitriou, and Zezza argue that this should be opposed on both moral (with respect to consequentialist considerations and principles of fairness) and prudential grounds. In this context, they quote Keynes’s dissent regarding the terms imposed on Germany by the Treaty of Versailles; a quotation which could just as effectively be deployed today in defense of Greece:

The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable,—abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilized life of Europe. Some preach it in the name of Justice. In the great events of man’s history, in the unwinding of the complex fates of nations Justice is not so simple. And if it were, nations are not authorized, by religion or by natural morals, to visit on the children of their enemies the misdoings of parents or of rulers. (Economic Consequences of the Peace [1919])

In yet another twist, precedent for how the Greek debt situation ought to be handled can also be found in German history—in the aftermath of its next war. According to Nikiforos, Papadimitriou, and Zezza, Germany’s post-WW2 experience provides us with a template for a bold Greek debt restructuring and recovery plan. The authors calculate that Germany was the beneficiary of debt cancellation amounting to more than four times the country’s 1938 GDP (or West German GDP in 1950). And these calculations don’t include foregone war reparations or foregone interest payments:

around DM3 billion in annual income transfers to foreign countries was avoided. This is a very significant amount given that West German exports totaled no more than DM8 billion in 1950. For Germany to find DM3 billion without a contraction of its GDP and imports would have required a 40 percent increase in exports.

We are often told how the trauma of Weimar hyperinflation shapes the German approach to policy to this very day (here’s a NYTimes headline from 2011: “Haunted by ’20s Hyperinflation, Germans Balk at Euro Aid”). In the context of the renegotiation of the terms of Greece’s bailout, Germany’s post-WW2 experience, in which it was the beneficiary of “the largest debt restructuring deal in history,” seems not to have left so indelible a mark on its national memory (at least as measured by the stance of current leadership toward the Greek plight).

As pointed out by Nikiforos, Papadimitriou, and Zezza, the debt cancellation and subsequent extensive reconstruction efforts orchestrated for Germany and other European economies played a significant role in shaping German economic history: “the postwar German economic miracle and the robust development of the rest of the European economies was not the result of abstract market forces. Instead, they were based on very specific and detailed planning.”

Selective amnesia aside, the key lesson to be drawn from the historical experience is that restructuring Greece’s public debt is only the very first step in what would be required to put the country back on its feet. The restructuring needs to be accompanied by a comprehensive policy program designed around fixing the eurozone’s structural defects and rebuilding a Greek economy that has suffered damage comparable to that inflicted by a protracted war.

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Papadimitriou on Greece’s Four-Month Extension

Michael Stephens | February 25, 2015

Levy Institute President Dimitri Papadimitriou discusses the four-month extension of Greece’s bailout agreement with its eurozone partners and the mood in Athens in this interview with Kathleen Hays and Vonnie Quinn.

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