Could it be that Mario Draghi is alone among the key euro authorities in recognizing that the euro crisis may not be quite over yet? Given that Mr. Draghi is also widely credited as the euro’s foremost savior, this seems more than just a little odd.

Recall that, almost magically, Mr. Draghi managed to pull the euro currency union back from that yawning abyss of acute breakup scares prevailing until the summer of 2012 – and with nothing but words: the simple promise “to do whatever it takes” to keep the euro whole.

As the markets have stayed calm ever since, the euro body politic has indulged in complacency. All the more so since the release of the first non-negative quarter-on-quarter GDP growth number for the spring of last year that saw the euro authorities engage in self-congratulatory shoulder-slapping, bravely declaring that the war on the euro crisis was won as their sound policies were finally starting to bear fruit.

European Commission president José Manuel Barroso just added another refrain to the chorus, predicting that 2014 would bring definite change for the better to the euro community. Interestingly, as delusion and denial seems to fully absorb other euro authorities, the ECB’s president alone is taking a more clear-headed view on the actual state of affairs and prospects for the euro currency union. I dare to venture that this may be because he is also all too aware of the fact that his monetary powers are actually quite limited.

It may be time for a sober stocktaking of where the eurozone stands regarding the successful resolution of its internal crisis. Is the economy truly on the mend? Has the euro policy regime been put on a sound and sustainable footing? continue reading…

The Hellenic Statistical Authority (ElStat) reports today that real GDP in the third quarter of 2013 has fallen by “only” 3 percent. More in detail, from their press release:

Total final consumption expenditure recorded a decrease of 6.6% in comparison with the 3rd quarter of 2012 (Table 4).
Gross fixed capital formation (GFCF) decreased by 12.6% in comparison with the 3rd quarter of 2012 (Table 4).
Exports increased by 5.7% in comparison with the 3rd quarter of 2012 (Table 4). Exports of goods increased by 2.4% and exports of services increased by 8.8%.
Imports increased by 2.3% in comparison with the 3rd quarter of 2012 (Table 4). Imports of goods increased by 2.6% and imports of services increased by 1.1%.

(Imports will be growing with exports also because, as we have argued, a large and growing portion of Greek exports are intra-industry trade connected to oil products.)

My personal guess is that these figures will be revised downwards.

In the chart above we show exports of services in euros, as published by ElStat, together with the Turnover Index in Accommodation and Food Service Activities, also published by ElStat. The definition of the index given by Eurostat is as follows: “The definition of turnover is rather straightforward. It comprises basically what is invoiced by the seller. Rebates and price deductions are taken into account as well as special charges that the customer might have to pay. Turnover does not include VAT or similar deductible taxes.”

The two figures in the chart seem to move with the same seasonal pattern (although they are not strongly correlated in growth terms). If we take the value of the index as a predictor of the value of exports for the third quarter of 2013, we should expect exports of services to grow at about 1.2 percent over the same quarter of the previous year — or less, since the chart suggests that exports are less volatile than the turnover index.

This is a much lower value than what ElStat expects for exports of services. Given that all other components of demand are in free fall, a decrease in real GDP of 3 percent YoY in the third quarter of 2013 seems to me to be on the optimistic side.

1) In an interview with Roger Strassburg, James Galbraith discusses the “Modest Proposal,” a plan for resolving the eurozone’s multiple crises without creating any new institutions or amending any treaties. Galbraith is a co-author of the latest version of the proposal, joining Yanis Varoufakis and Stuart Holland (an earlier version was published as a Levy Institute policy note). The interview then turned to a discussion of next year’s potential US debt standoff in the context of Modern Money Theory.

Read Galbraith’s full interview here at Yanis Varoufakis’s site.

2)  Starting off from Wynne Godley’s 1997 observation that the fundamental problem with the EMU setup was the institutionalized divorce between fiscal policy and currency sovereignty, Rob Parenteau develops an alternative public financing instrument that attempts to get around this flaw:

… governments will henceforth issue revenue anticipation notes to government employees, government suppliers, and beneficiaries of government transfers. These tax anticipation notes, which are a well known instrument of public finance by many state governments across the US, will have the following characteristics: zero coupon (no interest payment), perpetual (meaning no repayment of principal, no redemption, and hence no increase in public debt outstanding), transferable (can be sold onto third parties in open markets), and denominated in euros. In addition, and most importantly, these revenue anticipation notes would be accepted at par value by the federal government in settlement of private sector tax liabilities.

Read the rest here at Naked Capitalism. Parenteau recently discussed the idea at the Levy Institute’s Athens conference. You can listen to his presentation here (Saturday, November 9, Session 4; slides available here).

Also, see Philip Pilkington and Warren Mosler’s related proposal for “tax-backed bonds,” recently updated.

3) Usually, when we think about the rising threat of authoritarianism accompanying Greece’s policy-induced economic disaster, we think about Golden Dawn, but C. J. Polychroniou argues that there’s more to the deterioration of Greece’s political culture than the growing popularity of the far-right party:

In today’s economically beleaguered Greece, where the repayment of foreign debt, the sale of public assets to private interests and the blocking of alternative routes to recovery define the official public policy agenda, the government has resurrected the many authoritarian practices of the past in an apparent effort to keep the game going for as long as possible.

Read the rest at Truthout.

Last year, Philip Pilkington and Warren Mosler argued that they had come up with a financial innovation that had the potential to help control the crippling borrowing costs faced by many member-states on the eurozone periphery. Their “tax-backed bond” proposal worked like this: if a member-state issuing these bonds defaulted on a payment, the bonds could, under such circumstances (and only under such circumstances), be used to make tax payments in the country in question (and would continue to earn interest).

This financial innovation attempts to address, obliquely, one of the critical design flaws of the eurozone setup: that member-states remain responsible for their own fiscal policy after having given up control over their own currency. (Dimitri Papadimitriou and Randall Wray explain here why separating fiscal policy from a sovereign currency was such a fatal mistake.)

Part of the idea behind the tax-backed bond proposal is that it would allow a member-state to enjoy borrowing costs that would be more comparable to those of a currency issuer (countries that issue their own currency have lower debt-servicing costs, even when their government debt-to-GDP ratios soar above some of the ratios seen on the eurozone periphery, because they can always make payments when due). Tax-backing is meant to assure investors that these bonds are always “money good.”

Since they first published their proposal, ECB President Mario Draghi had his “whatever it takes” moment, which contributed to a fall in sovereign debt yields on the periphery. Does this make the tax-backed bond moot?

Pilkington has just published an update on the proposal, and he explains why the idea is still relevant in a post-OMT eurozone. In addition to being able to further reduce borrowing costs, Pilkington argues that implementing this plan would enable troubled member-states to minimize or avoid the fiscal austerity imposed as a condition of the troika’s bailouts and backstops; it would “give eurozone member countries back their fiscal independence,” as he puts it.

Pilkington also responds to some objections that have been raised since the proposal was first published, including most notably those of Ireland’s Minister for Finance, Michael Noonan (the proposal was raised, and ultimately rejected, in the Irish parliament). Finally, Pilkington explains how the tax-backed bond could be used in non-eurozone context, referencing recent debates over Scottish independence.

Download Pilkington’s latest policy note: “The Continued Relevance of Tax-backed Bonds in a Post-OMT Eurozone”

(The original tax-backed bond proposal, by Pilkington and Mosler, is here.)

I recently had the great fortune to listen to a speech delivered by Mr Yves Mersch, Member of the Executive Board of the European Central Bank. This was in Athens on November 8 at the first Minsky Conference in Greece organized by the Levy Economics Institute. The title of the conference was “The Eurozone crisis, Greece, and the Austerity Experience.” The conference was well attended by the interested public. As is typical of Minsky conferences, annually held in the United States, it brought together academic scholars, financial market practitioners, journalists, as well as policymakers, including Mr. Mersch, whose speech was titled “Intergenerational justice in times of sovereign debt crises” (see here). Mr Mersch played part in the negotiations of the Maastricht Treaty and has served as the Governor of the Central Bank of Luxembourg since its formation in 1998, before joining the ECB’s Executive Board last year.

Apart from lauding Greece’s pension reforms as measures that were necessary in view of demographic trends, Mr Mersch hailed Greece’s achievements in closing its fiscal deficit as “remarkable,” describing the Greek austerity experience as a “fiscal adjustment of historic proportions.” That it truly was, and Mr Mersch was keen to emphasize that the “extraordinary efforts” undertaken by the Greek people refuted the naysayers and proved wrong prophetic claims heard in May 2010 that Greece would leave the euro area within months. Mr Mersch acknowledged that record-high unemployment was a “tragedy,” only to go on to assert that “this is the painful cost of reversing the misguided economic policies and lack of reforms in the past.”

And, of course, more of the same would be needed, according to Mr Mersch: more fiscal consolidation, more structural reforms, and lower wages and prices in order to increase external competitiveness and facilitate an export-led recovery, as Greece’s “external sector must go into surplus.” This may be painful, “but we are in a monetary union and this is how adjustment works.” In addition to more wage-price deflation, Mr Mersch singled out the need to restore the health of Greek banks and the need for attracting more foreign investment as the other key ingredients that would deliver adjustment and recovery in Greece.

During the Q&A session following his speech I asked Mr Mersch whether there might not be a conflict between, on the one hand, emphasizing the need of healthy banks that would fund the recovery and, on the other hand, prescribing more wage-price deflation. Since a deflationary environment was not exactly known as a factor that would tend to improve the health of banks. And I also asked him why the ECB was tolerating such a significant undershooting of its 2 percent stability norm while calling for even more wage-price deflation in crisis countries – instead of going for higher inflation in current account surplus countries such as Germany. At least to me it seemed obvious that a properly stability-oriented central bank should much prefer inflation in surplus countries to be sufficiently high so as to enable the bank to actually meet its mandate, that is, 2 percent HICP inflation on average across the currency union, over an outcome where even Germany has an inflation rate that is well below 2 percent, with the ECB ending up sharply missing its self-defined target in the downward direction.

Mindless austerity or stability-oriented austerity?
Mr Mersch’s answers were very interesting. continue reading…

In a recent speech at the Levy Institute conference on “The Eurozone Crisis, Greece, and the Experience of Austerity” held in Athens, Mr. Yves Mersch, a member of the Executive Board and General Council at the ECB, made it clear that the success of the troika plan for the Greek economy requires the current account balance to improve as the public deficit is reduced. In his own words,

To facilitate an export-led recovery, this trend [decreasing competitiveness] has to be corrected and there is no way this can be achieved in the short run other than by adjusting prices and costs. I know the difficulties that such adjustment creates and the criticisms that are leveled against it. But we are in a monetary union and this is how adjustment works. Sharing a currency brings considerable microeconomic benefits but it requires that relative prices can adjust to offset shocks.

The troika requests for a reduction in costs have been met by Greeks, as our first chart shows.

Indeed, nominal wages(1) have fallen by 23 percent from their peak in the first quarter of 2010, and real wages(2) have fallen by 27.8 percent over the same period.

While it is true that prices started to fall later than wages, and therefore the improvement in competitiveness has been limited, its impact on exports is doubtful.

The chart above shows that nominal exports of goods have somewhat improved, but if we decompose exports of goods using the Eurostat database by SITC categories, we learn that most – if not all – of the increase in exports of goods is related to oil products(3). Indeed, recent news indicates a fall in non-oil exports.

Summing up, internal devaluation has so far had negligible effects on Greek exports, while the fall in the purchasing power of wages has added to the fall in domestic demand generated by fiscal austerity, and thereby contributed to the unprecedented crisis in Greece.

Our July projections have so far been on track, and we predict that even if prices keep falling, as advocated by the troika plan, the response of the current account will be too slow to compensate for fiscal austerity. Strategies to increase employment and income are urgently needed.

Notes:
(1) The wage index is taken from the Hellenic Statistical Authority (ElStat).
(2) Real wages are obtained by deflating the wage index by the Overall CPI published by ElStat, seasonally adjusted in Eviews and converted to quarterly frequency.
(3) We use the SITC category “Mineral fuels, lubricants and related materials” for our measure of oil-related exports.

In “America’s misplaced lecture to Germany,” Gideon Rachman ends up offering a singularly misplaced defense of Germany. Quite similar to the typical stories one hears on this matter in Germany itself, Rachman appears to be unaware of how self-contradictory his arguments really are. To begin with, after describing the Federal Reserve’s QE policies as both a vital support to the world economy and an addictive drug, he goes on to identify the markets’ reaction to tapering by the Fed as the “biggest threat to the global economy in the coming year.” Does he suggest here that, once adopted, QE policies can never be reversed without causing market turbulences and that QE policies, therefore, should never have been adopted in the first place? That would beg the question as to what else would have provided that vital support to the world economy which Rachman himself attributes to these very policies.

The real issue here is why such overburdening responsibility for supporting the global economy has come to rest on the Federal Reserve’s shoulders. Apparently without seeing the connection, Rachman supplies one reason himself: the “particularly mindless game” of toying with defaulting on the national debt on the part of the US Congress that has accompanied harsh fiscal contraction in the US this year.

Another reason is to be seen in the fact that Europe’s economy, especially the eurozone under German austerity leadership, has been shrinking for years. Europe is still the US’s most important trading partner. It may be a matter of annoyance rather than envy that US firms find themselves exporting into a shrinking market while German firms enjoy participating in the recovery of their important US market. Globally, then, QE may also be seen as a defense against bloated German export surpluses, benefiting from a euro exchange rate that is way undervalued as far as Germany is concerned.

But Rachman also refers to the situation inside the currency union, attesting that Germany has generously provided large-scale bail-outs for its eurozone partners in crisis. Again, he is missing an important connection here. continue reading…

In advance of this week’s Ford–Levy Institute conference in Athens, Greece (Nov. 8–9), Jörg Bibow gave an interview with George Papageorgiou, senior editor of newmoney.gr, on the role German policy has played (and still plays) in generating and exacerbating many of the problems plaguing the eurozone periphery — something Bibow was warning about back in 2005 (see here, for instance). He also addressed where the eurozone needs to go from here, touching on a plan for a Euro Treasury he’ll be discussing at the Athens conference.

The English text of the interview follows (Greek version here):

You have been critical of German policy. How does it really affect the rest of Europe? In what ways does it cause harm to the peripheral economies?

Yes, indeed, German policy bears foremost responsibility for the euro crises and German policy is key to Europe’s future. Germany is Europe’s largest economy. For that reason alone whatever happens in Germany inevitably significantly impacts the eurozone economy. For instance, when Germany prescribed itself an extra dose of wage repression and fiscal austerity in the early 2000s, this had rather fateful consequences for the currency union. For one thing, stagnant domestic demand in Germany constrained its euro partners’ exports to Germany. For another, stagnation in Germany provoked some degree of monetary easing from the ECB, monetary easing which was both too little for Germany but too much for the euro periphery where wages and domestic demand were thereby propelled further. In other words, Germany undermined the ECB’s “one-size-fits-all” monetary policy stance. This happened alongside cumulative divergences in intra-area competitiveness positions, current account imbalances and the corresponding buildup in foreign asset and debt positions. Together this meant that the currency union was going to face trouble as soon as those imbalances would start to unravel. I started warning of these developments in 2005, but the euro authorities were sleeping at the wheel for many years to come.

This is the background to the still unresolved euro crisis, which is primarily a balance-of-payments and banking crisis that only became a sovereign debt crisis as a consequence. Adding insult to injury, the crisis has left Germany in the driver’s seat in eurozone policymaking. Germany punches above its weight in current policy debates. Unfortunately, in misdiagnosing the true nature of the crisis, Germany’s policy prescriptions have focused on nothing but fiscal austerity and structural reform. The consequences are proving a disaster for Europe. In particular, since Germany refuses to adjust its massive external imbalance and continues to have very low inflation, the ongoing rebalancing process inside the currency union is proving deflationary for everyone else. Essentially, as average eurozone wage and price inflation has fallen to extremely low levels, euro crisis countries are forced into debt deflation. Predictably, the wreckage is truly enormous. Policies and consequences are akin to what U.S. President Hoover and German Chancellor Brüning attempted in the 1930s. As we know, this sad experiment in macro policy folly gave the U.S. FDR, the New Deal, and Social Security, while outcomes in Germany were far less benign. It is as yet unclear which path Europe will take this time; the constructive or the destructive one.

What drives then Germany’s current policy? Doesn’t its leadership recognize the danger it poses for the future of the eurozone?

Confusion, a load full of ideological baggage, and short-sighted vested interests, I suppose. Apparently the German authorities do not understand the futility of their favored policies. My reading is that they have never quite understood that Germany could only succeed with its peculiar economic model in the past because and as long as its key trading partners behaved differently. Today Germany is forcing Europe to become like Germany. The trouble is of course that not everyone can be super-competitive and run perpetual current account surpluses at the same time. Somehow the German authorities are stuck in a deep ideological hole on this issue – and they keep on digging.

If Germany continues practicing its current policies, what would be the most likely outcome? Will we head towards the dissolution of the eurozone or with the permanent two- or even three-tier Europe and with the periphery in a quasi colonial situation? continue reading…

The next Minsky conference in the Levy Institute’s international series is taking place in Athens next week, November 8-9. The central theme, as you can probably guess from the location, is the ongoing eurozone crisis.

This conference is organized as part of the Levy Institute’s international research agenda and in conjunction with the Ford Foundation Project on Financial Instability, which draws on Hyman Minsky’s extensive work on the structure of financial systems to ensure stability and the role of government in achieving a growing and equitable economy.

Among the key topics the conference will address are: the challenges to global growth and employment posed by the continuing eurozone debt crisis; the impact of austerity on output and employment; the ramifications of the credit crunch for economic and financial markets; the larger implications of government deficits and debt crises for US and European economic policies; and central bank independence and financial reform.

Keynote speakers will include Már Gudmundsson, governor of the Central Bank of Iceland (“Iceland’s Crisis and Recovery: Are There Lessons for the Eurozone and Its Member Countries?”), Yves Mersch, member of the ECB’s Executive Board and General Council (“Intergenerational Justice in Times of Sovereign Debt Crises”), and Lord Robert Skidelsky, Emeritus Professor of Political Economy at the University of Warwick (“The Experience of Austerity: The UK”).

You can find a full schedule of the speakers and panelists here (audio and select slide presentations will be uploaded during the conference). Some abstracts (pdf) for the presentations have been provided in advance.

The policies Greece has been implementing as part of the price for its two bailouts are not working the way we were told they would. That’s pretty clear if you look at the troika’s endlessly downgraded projections for key economic indicators. Here, for instance, is actual Greek unemployment, compared to a series of troika projections (source):

One common response to these apparent failures is to say that we just need to hold on, keep the faith, and perhaps double down on the strategy; eventually, internal devaluation and austerity will bear fruit. It is unfortunate, though not surprising, that this has become the “responsible” position; the stance of the supposed steadfast realist.

Presumably it appeals to some deep-seated moral intuitions about the need to pay for past “excesses” or to suffer short-term pain for long-term gain, or some such pablum. And in that context, pointing to increases in poverty, falling living standards, and eye-popping levels of unemployment may not have the rhetorical effect we might hope for, at least among those who see themselves as committed to the policy strategy — perhaps it only reinforces their self-image as defenders of “tough choices” standing steely-eyed in the face of populist clamor.

There are no signs that the internal devaluation strategy is having anything like the effect on growth we were told it would have. But even if we were to grant the assumption that net exports will pick up at some point in the future at a sufficient pace to generate a modest recovery, the problem with the idea that we just need to wait a while longer and cut a little deeper is that we risk serious damage to the tissue of the body politic while we indulge this (we should say radical) intellectual experiment.

The strains are already showing: “While the neo-Nazis won nearly 7 percent of the vote in the 2012 elections, which allowed them to enter parliament with 21 seats, recent public opinion polls suggest that they may now enjoy as much as 20 percent of the public’s support.” This is from C. J. Polychroniou, documenting the recent surge of the neo-Nazi movement in Greece. The policy-prolonged depression isn’t the only reason this is happening, says Polychroniou, noting the history of authoritarian and fascist strains in Greece, but it is playing the key enabling role, he argues: “The surge of neo-Nazism in Greece certainly would not have been possible without the ongoing economic catastrophe and the social decay caused by the policies of fiscal sadism conceived by the EU and the IMF.” (Read the rest here.)

And as for the time horizon of the austerity endgame, take a look at this table from Paul De Grauwe and Yuemei Ji. They’ve calculated how long it would take for countries on the eurozone periphery to halve their debt levels, assuming they run primary surpluses of various sizes (of 2, 3, or 4 percent) and assuming that the nominal interest rate on member-state debt equals nominal growth of GDP (which, as they point out, is not yet the case).

“The issue,” they write, “is whether their political systems will have enough resilience to maintain such ‘temporary’ austerity programmes in order to slowly and painfully draw down the levels of debt.” Even if you’re able to manfully wave away all the waste of human potential that will result from sticking to the policy status quo, betting that Greece’s social and political fabric can hold out for this long is a risky, irresponsible gamble.

There are alternatives.