The eurozone has been in crisis since 2008. By the end of 2015 domestic demand was still 3 percent below its pre-crisis peak. Throughout, the European Central Bank (ECB) has acted as the eurozone’s prime crisis manager.  As capital flows reversed and inter-bank lending seized up, the ECB provided emergency liquidity to keep banking systems afloat.

However, for legal and political reasons, the ECB was restrained in supporting sovereign debt. But, given that there are close linkages between banks and sovereigns, supporting only one party in the duo proved insufficient. From 2011–2012, interest rate differentials between eurozone members soared and credit dried up, as the risk of default on national debt and currency redenomination became investors’ foremost concern. In the end, Mario Draghi’s famous promise to “do what it takes” calmed the markets – at least for now.

The ECB’s monetary policy course was rather less helpful. The ECB is legendary for its reluctance to ease interest rates in the face of downside risks, and it even prematurely hiked rates in 2011. And so it took the ECB until the summer of 2014 to finally contemplate unconventional monetary policy measures to counter deflation risks, which were by then acute. Meanwhile, the ECB has indeed adopted a negative interest rate policy, pushing short-term money market rates below zero. It has also embarked on quantitative easing, including the large-scale purchase of national sovereign debts, as part of monetary policy rather than for government financing reasons.

Falling Interest Rates Reduce Incomes

The ECB’s more aggressive monetary policies are working, to some extent. Credit and the economy are growing again – albeit sluggishly – after years of shrinkage. Overall, however, the eurozone’s recovery remains fragile and uneven, while the ECB is falling short of its primary price stability mandate by a wide margin.

Arguably, the ECB’s negative interest rate policy even risks self-defeat: as a means to weaken the euro, the ECB’s global competition is getting fiercer; as a means to boost lending, it may not help to undermine bank profitability by effectively taxing them as the negative deposit rate amounts to taxing banks. Quantitative easing has at least successfully diminished interest differentials and reduced borrowers’ interest burden, opening up some fiscal space, among other things.

However, there is a downside, as falling interest rates actually reduce incomes. In the end all may come to nothing unless someone boosts spending. Neither exports nor private spending are a promising proposition here. Government spending is the last resort. Halting the brutal austerity policies that were imposed from 2010 until 2012 was an important first step towards ending the two-year decline in domestic demand. Today it is time to take the next step: governments must step in and boost infrastructure investment spending. continue reading…

Servaas Storm means well. He is alarmed that the eurozone’s official strategy of “internal devaluation” might do more harm than good by unnecessarily forcing countries that have lost their competitiveness into deflation (see here, here, and here). This is a very real concern indeed and Storm should be applauded for raging against the colossal folly that is wrecking Europe. Unfortunately, Storm goes astray in seemingly dismissing any role for unit labor cost competitiveness and German wage moderation in causing the still unresolved eurozone crisis in the first place.

Referring to bits and pieces of evidence derived from mostly partial-equilibrium empirics of one type or another, Storm fails to notice that no coherent macroeconomic analysis of the eurozone crisis emerges unless German wage moderation gets assigned a prominent role in the play. At the heart of the whole confusion is Storm’s attempt to attribute to those who emphasize German wage moderation as a key causal factor in the eurozone crisis the view that “expenditure switching” would explain 100 percent of the eurozone’s internal current account imbalances (and related balance sheet troubles). This would be a very peculiar view indeed – and I am not aware of anyone who actually holds it. Certainly the proponents of the “wage moderation hypothesis” that I know, including those who responded to Storm’s “critical analysis” (see here and here, and also this author), definitely do not hold this view. Effectively, Storm set up a straw man that he then defeats with flying colors; not realizing that his arguments are self-defeating and make a mess of the whole analysis of monetary union. continue reading…

The deadline to apply for this year’s Hyman P. Minsky Summer Seminar is approaching:

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

Levy Institute
Blithewood
Annandale-on-Hudson, New York

June 10–18, 2016

The seventh Minsky Summer Seminar will be held at the Levy Economics Institute in June 2016. The annual Summer Seminar provides a rigorous discussion of both the theoretical and applied aspects of Minsky’s economics, with an examination of meaningful prescriptive policies relevant to the current economic and financial crisis. Organized by Jan Kregel, Dimitri B. Papadimitriou, and L. Randall Wray, the Seminar program is geared toward graduate students and those at the beginning of their academic or professional careers. The teaching staff includes well-known economists concentrating on and expanding Minsky’s work.

Applications may be made to Kathleen Mullaly at the Levy Institute ([email protected]), and should include a current curriculum vitae. Admission to the Summer Seminar includes provision of room and board on the Bard College campus.

Due to limited space availability, the deadline for applications is March 1, 2016.

A user name and password are required for the Summer Seminar webpage; participating students may log in by clicking here.

Senior Scholar Nancy Folbre was interviewed by Woman’s Work on the wage gap and women’s underrepresentation in economics:

Folbre: [M]arket logic doesn’t apply to care of dependents, a more traditionally feminine obligation. Children, the sick, and the frail elderly don’t fit the preconditions for consumer sovereignty in market exchange. Most care of dependents takes place outside the market. Women generally take more responsibility for this care than men do. …

The whole concept of concern for other people or interdependent utilities or obligations for other people, these are largely absent from the market paradigm. The textbook assumption is that participants in the market don’t care about other people, they have independent preferences. They are basically making decisions based on prices and income. It’s a very narrow, stripped down characterization. In some instances, it may be accurate. But a lot of the work that women, in particular, do doesn’t involve impersonal transactions.

We live in a world shaped by a moral division of labor that is highly gendered.

Read the rest here.

The Levy Institute has completed its most recent medium-term projections for the Greek economy. The outlook, unsurprisingly, isn’t reassuring.

The baseline simulation, which assumes the continuation of current policy, shows the GDP growth rate turning positive in 2017 and reaching 2 percent in 2018. Yet, in a reflection of how much damage has been done by the crisis, even if Greece managed a growth rate around that pace (2.1 percent per year), it would take until 2030 for real GDP to return to its 2006 level. It’s fair to wonder whether such a delayed recovery — with little relief on the horizon for the elevated numbers of poor and unemployed in Greece — is politically and socially sustainable.

And there’s worse news in the report. The baseline generated by the authors’ model for Greece reflects a scenario in which future growth would be export-driven. But this increase in Greek exports would not be generated primarily by price competitiveness (“the price elasticity of Greek exports is low while the income elasticity is high”). That is, the decline of Greek wages — the centerpiece of the official “internal devaluation” strategy — isn’t projected to produce much of a payoff in terms of net exports.

Instead, the rise of exports in this scenario is almost entirely due to assumptions about the economic health of Greece’s trading partners; assumptions taken from the IMF. And as the authors caution, the IMF is likely overstating European growth prospects. So this lost decade-and-a-half for Greece (more, if you’re counting from the onset of the crisis) is actually the “optimistic” scenario.

What can be done? Some of the plans being considered are simply too tame. The authors run a second simulation based on the implementation of a “Juncker Plan”: an increase in public investment for Greece, funded by European institutions, of €1 billion in 2016, €2 billion in 2017, and €3 billion in 2018. The results suggest such a program could help raise GDP growth rates (to -0.4 percent in 2016, 2.9 percent in 2017, and 2.8 percent in 2018), but according to the authors the lag between output and jobs would still leave unemployment too high for too long. Something better targeted, and less reliant on the good will of European institutions, is required. More on that soon.

Read the full Strategic Analysis here and the One-Pager version here.