France and Germany held largely contradicting hopes and aspirations for Europe’s common currency. To France the key issue in establishing a European monetary union was to end monetary dependence, both from the vagaries of the U.S. dollar and from regional deutschmark hegemony, and to establish a global reserve currency that could actually stand up to the dollar as part of a new international monetary order. By contrast, the main German concern was to forestall the threat of deutschmark strength as undermining German competitiveness within Europe. Reserve currency status and currency overvaluation stand in conflict with Germany’s export-led growth model.

In light of the euro crisis both nations are bound to reassess the euro’s viability. No doubt France has seen all its hopes for the euro disappointed. France is facing the prospect of a lost generation today, a prospect shared with other debtor nations in the union, and a prospect that undermines the Franco-German axis and may soon turn it into the ultimate euro battleground.

…  Continue reading in English / Spanish

(see this working paper for more background)

From Mariana Mazzucato’s “Rethinking the State” series.

Earlier this month the Athens Development and Governance Institute and the Levy Economics Institute held a forum on the eurozone crisis:  “Exiting the Crisis: The Challenge of an Alternative Policy Roadmap.”  Below are the remarks delivered by senior scholars Jan Kregel and James Galbraith.

Yesterday, Dimitri Papadimitriou joined Ian Masters to discuss the response to the banking crisis in Cyprus.  The plan on the table, in which Cypriot banks would impose a deposit tax (9.9 percent on deposits above €100,000, and 6.75 on deposits below that) in order to gain access to a €10 billion bailout from the troika, unconscionably makes small depositors pay for someone else’s regulatory blunders — and is likely to be ineffective anyway, said Papadimitriou.

The entire episode once again points to the fundamentally unworkable setup of the eurozone, in which each member-nation is (ostensibly) responsible for its own banking system.  For more on these deeper structural problems, see this policy note:  “Euroland’s Original Sin.”

Listen to the interview here.

The evident failure of the ongoing austerity and “structural adjustment” experiments in Greece and the rest of the eurozone might have prompted some reconsideration of the intellectual foundations of those policies.  Instead, as C. J. Polychroniou observes in his latest policy note, one notable reaction seems to have been to blame the test subjects:

In drafting the document for the so-called “Second Economic Adjustment Programme for Greece,” the EU’s neoliberal lackeys contended that “Greece made mixed progress towards the ambitious objectives of the first adjustment program.” On the positive side, it is noted, the general government deficit was reduced “from 15.75 percent of GDP in 2009 to 9.25 percent in 2011.” On the negative side, the recession “was much deeper than previously projected” because, it is claimed, factors such as “social unrest” and “administrative incapacity” (including a lack of effectiveness in combating tax evasion) “hampered implementation.”

The antigrowth “fiscal and structural adjustment” program was perfectly designed and would have produced all the anticipated results if the government were better fit to carry out the policies … and if the citizenry did not on occasion make some fuss about them by staging demonstrations here and there or by occupying the square outside the Greek parliament building. In essence, this is what the above statement says.

The puny excuses of the EU bureaucrats for the fiscal consolidation program’s causing a much sharper economic decline than “previously projected” fly in the face of the recent partial concessions made by the IMF: that the policies carried out in Greece ended up having much more adverse effects on the economy because the Fund miscalculated the impact of the fiscal multiplier. Indeed, the executive summary of the “Second Economic Adjustment Programme for Greece” goes on to state unequivocally that, insofar as the prospects of the success of the second adjustment program are concerned, “the implementation risks . . . remain very high” but the success of the program “depends chiefly on Greece.”

The neoliberal economics applied to Greece by Germany, the EU, and the IMF did not simply cause a greater decline in Greek GDP than “originally projected” or make the debt grow substantially bigger in the course of the last two years (from 126.8 percent in 2010 to 180 percent in 2012). It also produced an economic and social catastrophe of proportions unparalleled in peacetime Europe.

Read Polychroniou’s policy note here.

A forum organized by the Athens Development and Governance Institute and the Levy Economics Institute — “Exiting the Crisis: The Challenge of an Alternative Policy Roadmap” — will take place in Athens, Greece on March 8–9.  The Levy Institute’s Dimitri Papadimitriou, James Galbraith, Jan Kregel, and Rania Antonopoulos are among the academics, journalists, politicians, and organizers participating in the two-day forum at the Athinais Cultural Centre (Kastorias 34–36, Votanikos).  Simultaneous translation (Greek / English) will be provided.

Topics include:

• Major Challenges and Policy Choices

• European Union: Toward Which Way and for Whom?

• National Strategic and Security Challenges in S.E. Europe and the Eastern Mediterranean

• Empowering Democracy: Legitimization, Accountability, Effectiveness, and Social Oversight

• Productive Restructuring and Sustainable Development

• Social Cohesion

• Fairness and Democracy

• Toward a Social Front for Change: Prerequisites and Priorities

For more information and a full list of participants, see here.

Why has the world’s premiere deficit-reduction laboratory produced such a dismal failure? European leadership still expects the painful über austerity measures imposed on Greece to result in a dramatic improvement of its debt to GDP ratio. But the experiment in endurance is not succeeding for an important reason: Austerity programs have been rooted in myths about what caused the crisis in the first place.

The popular notion that government overspending is the basis of Greece’s deficit woes is simply wrong. Evidence doesn’t support what seems to be a never-ending scolding about profligate spending.

Greek national expenditures were at about 45 percent of GDP in 1990, long before the crisis. That share remained stable through 2006. Proportionally, its size was well below that of France, Italy, or even Germany. While Greece has a reputation for a nasty, historically oversized public sector, in the lead up to the crisis it behaved no differently than its neighbors, and its rate of spending didn’t prevent it from catching and surpassing affluent eurozone nations in growth. Rapid spending increases weren’t notable until the 2008 recession. The timeline reinforces the conviction that long-term government extravagance hasn’t been key to the Greek meltdown.

Its debt picture was also steady. For years, Greece ran a deficit of 3 to 5 percent of GDP, and roughly a 120 percent debt to GDP ratio without any market upheaval. In 2000, just before it joined the euro, its deficit was 3.8 percent, where it more or less remained through the early euro years. Government borrowing didn’t explode until the sovereign debt crisis surfaced in 2009, which indicates that its record of national debt wasn’t the primary cause of Greece’s deficit crunch, either.

Other trends were more worrisome than government spending and borrowing. Revenues, for one, had been a creeping problem. Even before Greece joined the euro, it lagged considerably behind other European economies in tax collection. A Levy Institute analysis shows that by 2005, revenues from income and wealth taxes in particular, were still well below other European countries. The notable increase in government revenue, from 9.8 percent of GDP in 1988 to 2005’s high of 13.5 percent (before stabilizing at a slightly lower level), was mainly from an increase in social contributions. Tax evasion was rampant in the robust shadow economy.

In the late 1990s another danger emerged. continue reading…

Jörg Bibow was recently interviewed by CJ Polychroniou in Kyriakatiki Eleftherotypia (Κυριακάτικη Ελευθεροτυπία).*  An English transcript of the interview follows:

Since Mario Draghi’s announcement last fall that the ECB will intervene with the purchase of government bonds, the euro crisis is in a state of relative calm. Is it over? And if not, what developments could make the crisis resurface?

Yes, Mr. Draghi’s promise of ECB support for government bond markets seems to have calmed fears of an imminent euro breakup, at least for the time being. That does not mean the euro crisis is over though. Not at all, as the underlying problems remain largely unresolved. Liquidity can buy time but it cannot solve the imbalances inside the euro area and related debt overhangs that are the deeper cause behind the euro crisis. It is important in this context that the ECB promise is for conditional support. As liquidity support comes along with mindless austerity and asymmetric adjustment pressures imposed on debtor countries, debt problems are bound to get worse rather than better. Markets are currently in complacency mode about these prospects. The crisis may resurface at any time.

In several of your studies, you point to Germany as the main culprit behind the euro crisis.  Why is that?

Yes, Germany is the culprit. Being the largest economy in Europe, Germany’s performance and policies inevitably impact Europe. In the currency sphere Germany is also Europe’s traditional anchor of stability. As a result, the policy regime of Economic and Monetary Union agreed at Maastricht is largely of German design, based on the Bundesbank success story and deutschmark stability. It was not understood that the pre-EMU success of the German model of export-led growth required that other countries behaved different from Germany. Germany’s traditional two-percent price stability norm stimulated export-led growth as long as Germany’s trade partners had higher inflation, as such a differential would give rise to cumulative German competitiveness gains over time. Exporting the German model to Europe and requiring everyone to abide by the two-percent stability norm was therefore begging for trouble. Exports would no longer fulfill their traditional role as growth engine. Confronting high unemployment, Germany therefore departed from its own stability norm by prescribing itself flat wages. German wage repression—joined by mindless fiscal austerity—turned Germany into the “sick man of the euro,” suffering from protracted domestic demand stagnation. However, German competitiveness once again improved over time, this time inside the currency union. At the same time, given Germany’s size, the ECB’s monetary policies became too easy for countries with stronger domestic demand dynamics. Herein rests the source of the currency union’s internal imbalances and consequent crisis. German banks sponsored the boom in the so-called periphery serving as the vent for German trade surpluses.

You have argued that a euro country that runs up surpluses must lend or transfer its surpluses to the deficit-running euro countries. Germany and the other “northern” euro countries will never accept such a condition, so what are the implications of this for the future of the eurozone—a permanent fixture between a metropolis and satellite?

In pre-crisis times liberalized private capital flows permitted soaring intra-area trade imbalances. While Germany’s foreign asset position improved markedly, in the deficit countries, this meant a corresponding rise in external indebtedness. Internally, these debts were actually largely private debts, with Greek public debt developments as the outlier. At some point the markets woke up, and private capital flows dried up or even reversed. The irony is that since Germany cannot have perpetual export surpluses without bankrupting its partners, it is bound to end up paying for its über-competitiveness by means of fiscal transfers. The German authorities refuse to understand this accounting logic. They also decline to recognize that wrecking their debtors’ economies and driving them ever deeper into debt does not really improve the creditor’s position either. If Germany does not want Europe to be a transfer union it should end policies that make such a transfer union inevitable.

The IMF has admitted twice that it miscalculated the negative impact of the austerity measures on Greek growth because it misjudged the impact of the fiscal multiplier.  But isn’t it the case that the IMF never paid much attention to the multiplier, anyway, considering it to be a Keynesian obsession? continue reading…

Europe’s currency union is built on two key principles. The first is that the central bank must be independent of political control and its policies squarely focused on maintaining price stability. The second is that fiscal policy must be disciplined and never threaten price stability. Price stability, in turn, is the foundation for economic stability and prosperity. These principles and ideas are of German origin. And they distill the gist of Germany’s post WW2 economic history, an economic success story featuring both stability and growth.

The German success story was meant to be replicated at the European level. The European Central Bank copycatted the Bundesbank. As Germany’s constitution featured a “golden rule” limiting public budget deficits to public investment, a fiscal pact was to safeguard the ECB by decreeing budget deficits in excess of three percent of GDP as excessive and prescribing their speedy reduction. That pact was named the “Stability and Growth Pact” reflecting the German belief – based on historical experience – that fiscal and monetary discipline go along with both stability and growth.

Things have not played out according to script for Europe. …

Continue reading at http://www.social-europe.eu/2013/02/europes-perilous-quest-for-stability/
In Spanish: http://elpais.com/elpais/2013/02/07/opinion/1360258562_755195.html

Part 2 of a special event on Greece and the eurozone crisis, featuring top leadership of the official opposition party in Greece, SYRIZA:

For more background on some of the issues covered by Rania Antonopoulos’ discussion of direct social service job creation programs, see “Direct Job Creation for Turbulent Times in Greece” (Antonopoulos, Papadimitriou, and Toay).

The Levy Institute also released an interim report on the Greek economy that uses the Institute’s macroeconomic model (inspired by Wynne Godley) to identify the causes and consequences of the current Greek recession and to assess the likely results of the policy status quo: “Current Prospects for the Greek Economy” (Papadimitriou, Zezza, and Duwicquet). A final report will be issued shortly.