Below is the video from the first part of last week’s event at Columbia University that featured key leadership figures from the official Greek opposition party (SYRIZA).

(3:29) Alexis Tsipras, Leader of the Opposition in Greek Parliament, Leader of SYRIZA, and President of Synaspismós.

(46:40) Panel discussion, featuring Rena Dourou, Member of Greek Parliament (SYRIZA); Critic of the Opposition for the Foreign Relations and European Issues, Yiannis Milios, Economic Advisor, SYRIZA, Member of the Political Secretariat of Synaspismos and Professor of Political Economy, National Technical University of Athens, Mathew Forstater, Professor of Economics and Director, Center for Full Employment and Price Security, University of Missouri – Kansas City, and Research Associate, Levy Economics Institute, Katharina Pistor, Professor of Law and Director, Center for Global Legal Transformation, Columbia Law School, and Thomas Ferguson Director of Research Programs, the Institute for New Economic Thinking (INET).

There is much hype about “currency wars” in the international media this week, reaching the heights of the Davos gathering. The excitement seems to have been started by Bundesbank president Jens Weidmann, who earlier this week aired his concerns about an apparent politicization of exchange rates owing to an erosion of central bank independence and rising political pressures for more aggressive monetary policies. Japan is the current focus of attention, as the deflation-worn nation is said to have kicked off a new round in the covert global battle for competitive advantage through currency manipulation by announcing a somewhat higher inflation target as well as new quantitative easing measures. In fact, the yen has depreciated markedly since last Fall against the U.S. dollar and even more so against the euro in anticipation of fresh policy moves by the Japanese authorities.

There is of course nothing new about sharp movements in the yen’s exchange rate. With zero interest rate policies in place for more than a decade, the yen for long won the popularity contest as carry-trade funding currency; with corresponding gyrations seen in winding versus unwinding phases in the global carry trade game. So the yen has appreciated strongly since the global crisis as the spectrum of funding currencies increased. Nor would it be the first time that the Japanese authorities have sought out deliberate measures designed to weaken the currency despite officially hosting a “floating” exchange rate determined “by market forces.” Long before the global crisis hit, Japan championed a version of quantitative easing that focused on FX reserve accumulation. The key difference is that other nations used to view such moves more benignly when times were still better at home. Today, with all key advanced economies still struggling to recover, and each of them hoping for relief through exports, zero tolerance and envy meet the nation that is seen as getting ahead in the common campaign for a competitive currency.

The euro appears to be the “victim” in all this. Paradoxically, as it may seem at first, while other currencies tend to weaken as their monetary authorities take on a more aggressive easing stance the euro has actually appreciated since Mario Draghi’s famous pledge to do “whatever it takes” to preserve the euro, promising—conditional—support for public debt of euro crisis countries. The ECB’s peculiar ways, its reluctance to be more forthcoming with monetary support, except when the euro seems to be on the verge of breakup, is being identified as the factor that might explain why the euro is the odd man out at the current juncture.

Yet, viewing the euro as the victim seems to be saying that the euro is more deserving of continued weakness than others, supposedly so as to foster and support the currency bloc’s recovery from crisis. Arguably, this would be somewhat akin to the more tolerant attitude towards Japan in this matter in pre-global crisis times. Yet, has this approach really helped Japan to recovery lastingly on the back of export-driven growth? Also, has it helped the world economy to contain global current account imbalances that were later identified as contributing causes behind the global crisis? continue reading…

Germany’s Federal Statistical Office released its first estimate of German GDP in 2012 at a press conference held in Wiesbaden yesterday: “German economy withstands the European economic crisis in 2012.” Reporting that growth slowed markedly in Germany last year, down to only 0.7 percent from 3 percent in 2011 and 4.2 percent in 2010, the international media seemed to pin the slump (the Office’s estimate assumes a contraction in GDP of 0.5 percent in the final quarter) on the euro crisis (FT.com:  “Germany hit by debt crisis turbulence”; WSJ.com: “Euro crisis damps German growth”).

It is rather unsurprising that German exports have not been doing so well in the crisis-stricken countries of the euro area of late. Germany’s trade and current account surpluses with its euro partners have declined significantly. But so far the crisis has actually been a mixed blessing overall. For one thing, benefiting from its haven status, Germany’s interest rates and financing costs are extremely favorable. While lending support to property markets, finance minister Wolfgang Schäuble enjoyed a nice windfall too, as Germany’s general government budget ended the year with a small surplus, in part owing to savings on debt interest payments (much in contrast to his partners elsewhere in the area).

But that is far from all. continue reading…

Next week, January 24th, the Modern Money and Public Purpose seminar at Columbia University will feature a special session with top leadership from the Greek opposition party, SYRIZA, including leader of the opposition Alexis Tsipras and economy critic George Stathakis (who gave an entertaining talk at the November Minsky conference in Berlin—see Session 3 for audio).  This special event will also feature the Levy Institute’s Mathew Forstater and our director of the Gender Equality and the Economy program, Rania Antonopoulos.  See here for a full schedule and list of participants.

Olivier Blanchard (the IMF’s chief economist) and Daniel Leigh tell us in their new working paper that IMF forecasters “significantly underestimated” how much damage austerity would inflict on employment and growth in Europe.  The authors are careful to insist that their results do not imply that austerity should be abandoned:  “The short-term effects of fiscal policy on economic activity are only one of the many factors that need to be considered in determining the appropriate pace of fiscal consolidation for any single economy.”

Greece’s particular pace of fiscal consolidation, required by the EU-ECB-IMF “troika” as part of the Greek bailout deals, has helped deliver a rise in unemployment that looks like this:

That’s from a new policy note by Giorgos Argitis.  Argitis focuses on the “Greek deal” reached this past November and concludes that it, along with the troika’s entire strategy to date, cannot succeed—even by its own cramped set of objectives.  “[T]he debt structure of the Greek public sector was not sustainable before, did not become sustainable after the ‘haircut’ in March 2012, and will not become sustainable as a result of the Eurogroup’s decision in November,” he writes.

The problem is not just that austerity is creating devastating levels of unemployment (which, if you’ve been following the debate, is all-too-easily dismissed as a necessary cost—a sign of virtuous suffering), but that the economic damage is so severe that the austerity strategy is likely to be self-defeating on its own terms, which is to say, with regard to the objective of significantly reducing debt-to-GDP ratios.

The enforcement of austerity keeps Greece locked in what Argitis calls a “default trap.”  Fiddling with the pace of fiscal consolidation is not going to fix this strategy.  We need to move in a new direction, according to Argitis, involving a more fundamental restructuring of Greek public debt and policies to generate growth in the short and long term.  Argitis borrows from Minsky’s idea of an employer of last resort and calls for the creation of employment guarantee programs (like this ones described here) that can create immediate economic expansion and ultimately generate the primary surpluses Greece needs to meet its debt obligations.

by Joerg Bibow

Mario Draghi’s pledge to do “whatever it takes” to save the euro has been widely hailed as a watershed event. Both the markets and euro politics have since been operating on the premise that the euro’s survival is ensured. Unfortunately, that is not a safe assumption at all. Not only because even agreement on the Single Supervisory Mechanism, the easiest element in any banking union-to-be, proved to be anything but easy. But even more so since concentrating energies on preventing future crises is somewhat premature anyway, as long as the current one remains largely unresolved. The point is that the policy strategy that has been adopted for overcoming the crisis, with or without any ECB liquidity promise in support of government bonds (i.e. Outright Monetary Transactions), is doomed to fail. The underlying causes of the crisis have been thoroughly misdiagnosed, and the medication ill-conceived as a result, while reforms of the flawed euro policy regime are so ill-designed as to ensure the euro’s final demise.

The ultimate fear of the Maastricht regime’s designers was that fiscal profligacy of nations lacking Germany’s legendary “stability culture” could usher Euroland into hyperinflation. The Bundesbank’s worst nightmares seemed to come true when Greek budget deficit (ratio) numbers were revised strongly upwards in 2009. So the ill-named pact that has so far failed to deliver on either stability or growth was further strengthened, with fiscal discipline henceforth to be anchored in national law. Irrespective of the collateral damages already endured, the big austerity stick will keep on bashing the Euroland economy for years to come.

This ignores the key flaws in the Maastricht regime of the EMU and the true causes of the crisis. One original sin was to put no one in charge of minding the store of the giant integrated euro economy. No demand management was foreseen in good times, no lender of last resort in bad. Predictably, the Euroland economy has proved prone to protracted domestic demand stagnation and conspicuous reliance on exports for its meager growth, while crisis management has been by trial and error; and errors with no end it would seem. The second original sin was to forget what fifty years of European monetary cooperation were all about, namely to forestall the risk of beggar-thy-neighbor currency devaluation. The euro provided the coronation of that very endeavor in the sense that exchange rates disappeared with national currencies. But this only meant that under the EMU trends in national unit labor costs have taken on the role of determining intra-union competitiveness positions alone. The golden rule of monetary union therefore requires that national unit labor cost trends stay aligned with the common inflation rate that union members have committed to – when they didn’t. continue reading…

Today Eurostat announced that the eurozone has plunged back into recession.  If you’re looking for a good explanation of the eurozone’s problems, you will only get so far by looking at the policy failures of particular countries.  The most fundamental problems—those that won’t go away with a mere shift in policy at the national level—are rooted in the very setup of the euro system.

In October, the Columbia Law School-sponsored series “Modern Money and Public Purpose” held a seminar that featured Yanis Varoufakis and Marshall Auerback on the design defects of the eurozone.  Varoufakis began his presentation with these lines:  “Greece is not important enough to be occupying the headlines around the world for three years.  Imagine a situation where a crisis in the state of Delaware was threatening to bring the United States of America down.  If that happened, then the problem would not be with Delaware, it would have been with the United States of America.” (video below)

Many of the themes in fiscal policy, economic growth, and distribution that we have been working on here have been in the news lately. Scholars from many fields are weighing in. One common theme is dynamics and their importance:

1)      Evidence of a self-reinforcing fiscal trap in operation in Britain, forwarded by the NIESR, a British think tank:  Dawn Holland and Jonathan Portes argue today in Vox that in the UK austerity has led to higher debt-to-GDP ratios, defying the predictions of orthodox macro models. For something from our Institute on the topic of fiscal traps, including the UK example, you might take a look at this public policy brief from Dimitri Papadimtriou and me, posted just last week.

It is important to keep in mind, as the authors of the British study point out, that fiscal austerity is hardly the only cause of the economic crises now underway in much of the world. For example, they get at the problem of coordinating macro policies in a group of open economies. Above this paragraph is a diagram from our brief, illustrating, among other things, the role of Minskyan financial fragility in generating crises in many places in the world. This role is shown by the light green arrows in the diagram, which show how rising numbers of “Ponzi units,” (firms and households that need to borrow in order to make their interest payments) can play a role in a fiscal trap. Spending cuts or tax increases are sometimes “self-defeating” in this view because they undermine the tax base—the amount of activity subject to taxation. The mechanism involved is a Keynesian multiplier effect. Internationally, there are many examples of this problem these days.

2)      More on models of economic growth and income distribution and their relationship to models from applied mathematics in letters to the editor of the Financial Times (here and here) and in a blog post from a mathematician: The FT letters discuss, among other things, the perhaps debatable role of unemployment in keeping real wages from rising. On the other hand, the blog post discusses various kinds of discontinuous dynamic behavior that fall under the rubric of catastrophe theory, mentioning a classic business-cycle model by Nicholas Kaldor and various sorts of straws that break camels’ backs. Author Steven Strogatz notes that “in some…cases (boiling water, optical patterns), the picture from catastrophe theory agrees rigorously with observation. But when applied to economics, sleep, ecology, or sociology, its more like the camel story—a stylized scenario that shouldn’t be taken for more than it is: a speculation, a hint of something deeper, a glimpse into the darkness.”

All of these ideas play a role in numerous macroeconomic models, including the one that I discussed in this post, which features CDF interactive graphics. New macro team hire Michalis Nikiforos has been working on many of these issues, too.

Breezily blaming the eurozone crisis on government profligacy is a widely-used journalistic shortcut, but by now it should be clear that it’s a shortcut that doesn’t help us understand what went wrong with the euro project.  It has been repeated often, though evidently not often enough, that Spain, one of the hardest hit countries, had a public debt-to-GDP ratio that was a mere 27 percent before the crisis hit.  And there is reason to believe that even in the case of Greece, the bogeyman of government profligacy, the popular narrative should be treated with a little more skepticism.

In a new report, Dimitri Papadimitriou, Gennaro Zezza, and Vincent Duwicquet use the “financial balances” approach pioneered by Wynne Godley to look at the recent history and future prospects of growth for the Greek economy.  Their analysis of the government accounts includes this graph: continue reading…

We’re seeing a lot of “is the euro crisis over?” stories pop up in the press lately (or rather, again).  The sensible responses are “no” and “which euro crisis?”

Presumably, this burst of enthusiasm derives in part from Mario Draghi’s announcement to (sort of) commit to (sort of) unlimited bond purchases.  But even if you think, optimistic reader that you are, that this will (sort of) rein in the periphery’s galloping borrowing costs and forestall an immediate breakup of the eurozone (at least until next month), that would just leave us with a slightly smaller pile of crises—including a crippling growth crisis.

For Greece in particular, to declare its crisis “over” requires a serious dose of lowered expectations:

The unemployment rate currently stands at 23.5 percent, wages and salaries have shrunk by as much as 30 percent, a series of pension cuts has been implemented (the latest proposal is to cut up to 600 euros per month from individual pension checks!), hospital operating expenses have been reduced by half, and the education budget has been hit so hard that many schools throughout the country operated without heating oil last winter.

If you want to know what it looks like when a national crisis isn’t over, read more here.