A guest commentary by Henry Kaspar [with update]
Paul Krugman and other commentators are singing the euro’s swan song, treating the disorderly break-up he euro area as a quasi fait accompli. Moreover, Krugman writes a first draft for the history books:
Let’s just say that the euro was an inherently flawed idea that can work only given a strong European economy and a significant degree of inflation, plus open-ended credit to sovereigns facing speculative attack. Yet European elites embraced the notion of economics as morality play, imposing across-the-board austerity, tightening money despite low underlying inflation, and have been too concerned with punishing sinners to notice that everything was going to blow apart without an effective lender of last resort.
… leading inevitably to:
The only route I see to avoid something like this involves the ECB totally changing its spots, fast.
I am less convinced that this is the euro’s final hour (I don’t see, for example, why recent events should break the currency union between France and Germany – or the Netherlands and Germany, for that matter). But this apart, there is much in Krugman’s post I agree with. Yes, to be able to function, a heterogeneous currency union needs more inflation than a homogeneous industrial country. This is why the ECB cannot copy the Bundesbank. And some European policymakers tend indeed to over-emphasize quasi-moral principles over pragmatic solutions. This was reflected in the refusal to grant the EFSF a banking license – and therefore quasi-unlimited firepower – due to alleged “monetization of fiscal deficits” (but then, listen to a Republican U.S. Presidential debate…).
And yet, the Krugman-type characterization is too incomplete to do the euro crisis justice. As Kantoos and I have argued repeatedly, a currency union needs not only inflation and open-ended credit – policies that, one may argue, are within the realm of the ECB. It also, and critically, needs the member states’ ability and willingness to adjust, to ensure they remain solvent and their economies competitive. And this is the responsibility of individual governments.
Our critics have dismissed such arguments with sweeping claims like ”Italy isn’t insolvent, but the victim of a self-fulfilling speculative attack”. The trouble is that the data simply don’t support this view. The “Italy isn’t insolvent” part ignores that Italy’s price competitiveness – and therefore its ability to grow and repay debts – eroded faster since euro introduction than that of any other major euro area economy, with a surge in export prices of 25 percent and in manufacturing unit labor cost of 8 percent relative to the rest of the union. And as for the “self-fulfilling speculative attack” part, I wonder how our critics make sense of this (I know, this is not new):
If the surge is self-fulfilling – i.e., excessive risk spreads undermine public debt sustainability, and therefore feed into even higher spreads – why did it not affect for Spain, that entered recent turbulence with spreads 100 bps above Italy? The shock to Italy’s risk spreads did not occur in the context of a general market panic, but as a idiosyncratic event that coincided with a political summer theatre during which Italy’s political class made every effort to convince investors of its incapacity for reform. While the ECB provided massive and almost unconditional liquidity support all along. Yes, it made a feeble attempt to coax Italy’s government into reforms by briefly pausing bond purchases; but when these reforms were not forthcoming the ECB purchased Italian bonds anyway, and it still does. And markets always knew this would happen.
It takes two to tango, and it was Berlusconi’s government that refused to dance.
This leads to a wider point: it is too easy to blame the ECB for everything that is wrong in Europe. Yes, if the ECB could and would act unconstrained, it could, in some instances, be more effective. But the underlying problem is that the euro’s founding fathers – i.e., the Helmut Kohls and Francois Mitterands – gave the ECB an impossible mandate: managing a currency union in a quasi-Bundesbank fashion that features a wildly heterogeneous membership, limited labor mobility and labor market flexibility, no crisis resolution mechanisms, and no mechanisms to reign in unsustainable fiscal or private sector behavior at the national level.
The ECB resembles a fire brigade being asked to put out a fire in a house where gas streams out of all faucets – and with no authorization to turn the faucets off. The ECB fights a brave fight in the circumstances, and it should not be given the entire blame if the house takes damage.
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Update. Several posters have pointed to Brad Delongs article on Project Syndicate that follows the “it’s all the ECB’s fault” theme. DeLong writes:
When the European Central Bank announced its program of government-bond purchases, it let financial markets know that it thoroughly disliked the idea, was not fully committed to it, and would reverse the policy as soon as it could. Indeed, the ECB proclaimed its belief that the stabilization of government-bond prices brought about by such purchases would be only temporary.
It is difficult to think of a more self-defeating way to implement a bond-purchase program. By making it clear from the outset that it did not trust its own policy, the ECB practically guaranteed its failure. If it so evidently lacked confidence in the very bonds that it was buying, why should investors feel any differently?
The trouble with this argument is that it was not the ECB that made financial markets wary of Italian bonds, but the very public, intense and enduring feud between Italy’s Prime Minister Silvio Berlusconi and his Finance Minister Giulio Tremonti. No happy smile and convinced posture by Trichet when announcing the bond purchase program could have undone the devastating impression left by Italy´s political leadership.
I am not surprised that Paul de Grauwe – who probably still has to find an ECB decision he likes – blames the ECB anyway. But it is a tad disappointing to read this from Brad Delong, who is among my intellectual heroes. I suppose the thousands of miles of clean air between the campus of Berkeley and the realities on the European ground have their part in this.
Es ist nicht nur die EZB
Ein Gastkommentar von Henry Kaspar
Paul Krugman und andere Kommentatoren singen den Schwanengesang des Euro, und behandeln das gewaltsame Auseinanderbrechen der Eurozone als sei es ein beschlossener Fakt. Krugman versucht sich ferner an einem ersten Entwurf für die Geschichtsbücher:
Lasst mich nur feststellen dass der Euro eine inhärent fehlerhafte Idee und nur hätte funktionieren können mit einer starken europäischen Volkswirtschaft, einem beträchtlichen Maß an Inflation, und unbegrenztem Kredit zur Verteidigung gegen spekulative Attacken. Aber die europäischen Eliten beschossen Ökonomie als Moralveranstaltung zu betrachten und bestanden auf Austerität für alle, restriktiver Geldpolitik trotz niedriger unterliegender Inflation, und waren zu sehr darauf bedacht Sünder zu bestrafen um wahrnehmen zu können dass alles auseinanderzufliegen drohte ohne einen effektiven Kreditgeber letzter Instanz (lender of last resort).
… was unausweichlich zur Schlussfolgerung führt:
Die einzige Chance so etwas zu verhindern erfordert dass die EZB ihre Position völlig ändert, und zwar schnell.
Ich bin weniger überzeugt dass des Euros letzte Stunde geschlagen hat (ich sehe zum Beispiel nicht wieso die jüngsten Ereignisse die Währungsunion zwischen Frankreich und Deutschland aufbrechen sollten – oder zwischen den Niederlanden und Deutschland). Aber davon abgesehen stimme ich Krugmans Post in vielem zu. Richtig, um funktionieren zu können braucht eine heterogene Währungsunion mehr Inflation als ein homogenes Industrieland. Aus diesem Grund kann die EZB nicht die Bundesank kopieren. Und einige europäische Politiker haben in der Tat einen übertriebenen und kontraproduktiven Hang zu quasi-moralischen Prinzipien, der pragmatischen Lösungen im Weg steht. Dies zeigte sich in der Weigerung dem EFSF eine Banklizenz zu geben – und damit praktisch unbegrenzte Munition – wegen angeblicher „Monetisierung fiskalischer Defizite“.
[aber dann, man vergleiche dies mit der anti-ökonomischen, pseudo-moralischen Prinzipienreiterei in Debatten US-republikanischer Präsidentschaftskandidaten….]
Und doch ist Krugmans Charakterisierung zu unvollständig um der Euro-Krise gerecht zu werden. Wie Kantoos und ich wiederholt argumentiert haben braucht eine Währungsunion nicht nur Inflation und unbegrenzten Kredit – Dinge bei denen man argumentieren kann sie lägen im Zuständigkeitsbereich der EZB. Sie braucht auch, und unabdingbar, die Fähigkeit und Bereitschaft der Mitgliedsstaaten zur Anpassung, um sicherzustellen dass sie solvent bleiben und ihre Volkswirtschaften wettbewerbsfähig. Und dies ist die Verantwortung der einzelnen Regierungen.
Unsere Kritiker haben solche Argumente zurückgewiesen mit Behauptungen wie “Italien ist nicht insolvent sondern das Opfer einer sich selbsterfüllenden, spekulativen Attacke“. Das Problem damit ist dass die Daten nicht zur Behauptung passen. Der „Italien ist nicht insolvent”-Teil ignoriert dass Italiens preisliche Wettbewerbsfähigkeit – und damit seine Fähigkeit zu wachsen und seine Schulden zurückzuzahlen – schneller erodiert ist als seit Euroeinführung als die einer jeden anderen größeren Euro-Volkswirtschaft, mit einem Anstieg der Exportpreise von 25 Prozent und der gewerblichen Lohnstückkosten von 8 Prozent relativ zum Rest der Eurozone. Und was den „sebsterfüllende, spekulative Attacke“-Teil angeht frage ich mich wie unsere Kritiker dies hier erklären (es ist nicht neu, ich weiß):
Wenn der Anstieg selbst-erfüllend ist – d.h., exzessive Risikospreads untergraben die Nachhaltigkeit öffentlicher Schulden, und führen damit zu immer höheren Spreads – warum erfasste er nicht Spanien, das mit Spreads von 100 bps über denen Italiens in die jüngsten Turbulenzen ging? Das Explodieren italienischer Risikospreads passierte nicht im Kontext einer allgemeinen Marktpanik, sondern war ein Italien-spezifisches Ereignis, das zusammenfiel mit einem politischen Sommertheater, währenddessen Italiens politische Klasse alles in ihrer Macht stehende unternahm Investoren von ihrer Reformunfähigkeit zu überzeugen. Die EZB stellte unterdessen massiv und beinahe bedingungslos Liquidität bereit. Es stimmt zwar dass sie einen schwachen Versuch unternahm Italiens Regierung zu Reformen zu bewegen, indem sie für eine kurze Periode die Anleihekäufe unterbrach – aber als es mit den Reformen nichts wurde kaufte die EZB die Anleihen trotzdem, und sie tut es immer noch. Und die Märkte wussten zu jedem Zeitpunkt dass genau dies passieren würde.
Zwei sind nötig für einen Tango, und es war Italiens Regierung die den Tanz verweigerte.
Dies wird zu einem weitergehenden Punkt: es ist zu einfach der EZB die Schuld für alles zuzuschieben was schief geht in Europa. Richtig, wäre die EZB in der Lage und willens sich von einigen Zwängen zu befreien, könnte sie, in manchen Fällen, effektiver sein. Aber das unterliegende Problem ist dass die Gründungsväter des Euro – die Helmut Kohls und Francois Mitterands – der EZB ein unmögliches Mandat übertrugen: eine Währungsunion auf eine Quasi-Bundesbank Art und Weise zu managen die aus extrem diversen Volkswirtschaften besteht, geringe Arbeitsmobilität und Arbeitsmarktflexibilität aufweist, und in der es weder Krisenbewältigungsmechanismen gibt noch Instrumente um nicht-nachhaltiges fiskalisches oder Privatsektor-Verhalten in einzelnen Volkswirtschaften einzudämmen.
Die EZB gleicht einer Feuerwehr von der verlangt wird das Feuer in einem Haus zu löschen bei dem Gas aus allen Gashähnen strömt – und die keine Befugnis besitzt die Gashähne abzudrehen. Die EZB kämpft einen tapferen Kampf und diesen Umständen, und sie sollte nicht die gesamte Schuld zugeschoben bekommen wenn das Haus Schaden nimmt.
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Ergänzung. Mehrere Poster haben auf Brad Delongs Artikel auf Project Syndicate verwiesen, welcher der “alles ist die Schuld der EZB”-Linie folgt. DeLong schreibt:
Als die Europäische Zentralbank ihr Programm für Anleihekäufe ankündigte ließ sie die Märkte wissen dass ihr die Idee gründlich zuwider war, dass sie sich der Maßnahme nicht vollständig verpflichtet fühlte, und dass sie das Programm sobald möglich revidieren würde. In der Tat, die EZB posaunte ihren Glauben heraus dass solche Anleihekäufe die Preise von Staatsanleihen allenfalls temporär stabilisieren könnten.
Es ist schwer sich eine selbstzerstörerische Art und Weise auszudenken ein Anleihenkaufsprogramm umzusetzen. Indem sie von Anfang an klarmachte dass sie ihrer eigenen Politik nicht traute garantierte die EZB praktisch ihr Scheitern. Da sie so offensichtlich kein Vertrauen besaß in die Anleihen die sie da kaufte, warum sollten Anleger das anders sehen?
Das Problem mit diesem Argument ist dass nicht die EZB den Finanzmärkten italienische Bonds verleidete, sondern die öffentlich ausgetragene, intensive und zähe Fehde zwischen Italiens Premierminister Silvio Berlusconi und seinem Finanzminister Giulio Tremonti. Kein noch so glückliches Lächeln und keine noch so überzeugte Pose Trichets beim Ankündigen des Anleihenkaufprogramms hätte den vernichtenden Eindruck ungeschehen machen können, den Italiens politische Führung hinterließ.
Ich bin nicht überrascht dass Paul de Grauwe – der vermutlich noch nie eine EZB-Entscheidung gefunden hat die ihm zusagt – der EZB trotzdem die Schuld zuschiebt. Aber es ist etwas enttäuschend dies von Brad Delong zu lesen, der zu meinen intellektuellen Helden zählt. Ich vermute dass die vielen tausend Meilen sauberer Luft zwischen dem Campus von Berkeley und den Realitäten in Europa ihren Anteil daran haben.
Brad DeLong thinks the central bank should not be given that mandate explicitly, but act so nevertheless. I think the argument is valid. http://delong.typepad.com/sdj/2011/10/the-ecbs-battle-against-central-banking.html
i agree that the euro problem cannot be solved in the middle and long term with more inflation and more money only. i suppose paul krugman talks only about short term measures in his post.
the relative competitiveness of the countries in a monetary union matters in the middle and long term, of course. following flassbeck (see e.g. here -> http://www.flassbeck.de/pdf/2011/August2011/IntereconomicsAug2011.pdf) one could possibly rephrase your argument as follows: in a monetary union, what matters is not only the average overall inflation rate. the inflation rate of any member country has to align to the agreed inflation target rate.
It follows that all member states of the monetary union have the mid-term obligation to adjust their labour costs to a common inflation rate if the union is to succeed (supposing that labour costs are the main factor for inflation and that labour has not the relative international mobility in the monetary union it has e.g. in the united states).
that means: no ‘concurrence of nations’ for relative competitive gains via labour cost reduction but alignment of socio-economical frames. that has not been done, neither by the southern states nor by germany or by other alleged ‘model states’ of the nord.
if you insist on ‘concurrence of nations’ for relative competitive gains via labour cost reduction in a monetary union, you would consequently have to show how labour mobility can be improved in europe very fast. not only in the next 20-25 years, but in the next 3-5. I don’t see any possibility for that.
it follows that the euro is doomed either because the alignment of socio-economical frame follows the german model and leads to deflation and depression and to subsequent political tensions and upheavals. or because the alignment does not happen at all because it does not fit to the market- ideology concerning countries (which is in principle highly questionable). in both cases, the money supplied by the ecb is irrelevant for middle and long term success of the union.
… my 2 cents
@ H.K.
If, as Paul Krugman claims, the currency union was an “inherently flawed idea”, then the only conclusion must be to give up this idea, i. e. the break of the currency union. If, on the other hand, he as well as Brad DeLong believes that the ECB is the cure for the crisis, then he should not “forget” to ask for the reasons a crisis developed and how others can contribute to heal it, before he demands that the ECB should act as an “effective lender of last resort”, i. e. “effective” understood as potentially unlimited which is arguable against its statues.
So I agree with you, but want to clarify your “open-ended-credit”.
Open-ended-credit is a contradiction to “ability and willingness to adjust”, if understood as unlimited credit.
The currency union needs as much credit as is required to help countries adjust for regaining economic competitiveness under conditionality. Since you insist on conditionality too, I suppose that’s what you understand by “open ended credit”.
Paul Krugman is not concerned with conditionality, at least not in the passage you have quoted, so for him open ended credit can mean unlimited credit. And indeed, it definitely means unlimited credit, since a lender of last resort does not turn the faucet off which is the presupposition for limited credit.
May I ask how much more inflation would be needed? And is the Euro really worth accepting that price?
HK,
What people like Avent and Krugman (even he is fallible and speaking in the past tense slightly mischieveous) seem to like is speculation about things that have no precedent.
Never in modern history has there been a collection of states that all gave up their national currency (not only pegged, fixed of even a currency board, not a gold standard either) in a virtually irreversible manner. Without having a central political authority (like a federation) to discipline members diverging from the appropriate economic path, or systems to transfer from winners to losers.
The arrangements made when the EUR was created, make it very costly for members to leave and impossible to expel delinquents. Of course we should never have let the financial equivalent of a failed state (greece) in. And there is an excellent case now to make an exception and simultaneously close the door. But Italy, Spain and Ireland are absolutely not in that category. In fact, re Italy I wonder about those competitiveness indicators. Italy’s most competitive sectors are partially in the informal economy.
So the question is, would the mechanism that ao Krugman suggest (fear about the Italian gvt being unable to meet its financial obligations,leading to bank run followed by a EUR break up) work, in the sense that the irreversibility status would end? (Of course that would not be the case if, say after 10 years only Greece had left the EUR zone -that would not constitute a break-up). If so, two questions:
- who would benefit from the EUR zone being reduced Austria, Germany and Holland (question marks over France and Belgium)? The Italians? The surviving EUR members? The rest of the world?
- what can be done/by whom to prevent this from happening (assuming question #1 has no satisfactory answer. By whom, at what cost, etc.
As everyone with rudimentary economics (but maybe not Nobel laureates) should be able to see is that we are dealing with an incomplete integration project already far advanced beyond the stage of customs union, and that that project forces and requires supply side change. And that process creates resistance from losers Boosting AD via monetary policy would be very helpful in the US (but it would ruin its trade politics) but it would not do anything for structural imbalances like we have here.
That does not mean that there is nothing the ECB can do. It should adopt a higher inflation target and especially stop paying interest on reserves/credit balances. And maybe this rating agency nonsense should be abandoned as well. This may sound silly, but most banks do not rely on external ratings for their internal credit decision making, in fact, it is considered highly unsophisticated to do so. They rely on ratings in their markets business, where ratings drive liquidity (or: marketability).
The ECB started out as an institution that would be a lender in last resort, and in that case liquid collateral is essential. Ratings were the obvious thing to adopt when accepting collateral. Besides, use of ratings avoided the embarrassing discussions between members of the EUR club about each others’ credit quality. However if one looks at its balance sheet now, it looks more like a real bank and it would be irresponsible to led ratings drive “haircuts”.
Much better would be for it to set up, for its longer dated liquidity provision activities (1) bank limits -at least for the systematically relevant banks- (the BIS has been doing this for ages). Those limits should be set in consultation with national supervisors and (2) contingents for collateral issued by those banks’ own governments. When the ECB then would announce a tender, it could split it in two ways: a general purpose tender under the present rules plus a series of nationally-focussed tenders, where bank limits and collateral contingents per country would apply. That would lead to local variation in bank funding costs and would allow the banks from the large countries with low ratings to defeat any bank run and, more importantly, to maintain adequate provision of liquidity to the local private sector while the gvt shrinks. Fear that such a system would cause the return of residential real estate speculation is unwarranted given the introduction of a more appropriate capital adequacy regime. Of course there would be cross border leakage, but that would in fact be a good thing. If German banks would find it more attractive to borrow from the ECB (under the German contingent) than to place money there, and instead lend unsecured funds in the interbank market to, say Italian banks, we would be back to normal.
This would reduce the supply from banks of paper in anticipation of a ratings cut and (by abolishing IOR) force strong banks from strong countries to adopt more normal commercial strategies. It would probably not result in a weaker ECB balance sheet than is the case now.
@ HK:
“And some European policymakers tend indeed to over-emphasize quasi-moral principles over pragmatic solutions. This was reflected in the refusal to grant the EFSF a banking license – and therefore quasi-unlimited firepower – due to alleged „monetization of fiscal deficits“ [...]”
I don’t know how you define the word “moral”, but I wouldn’t call the above mentioned argument (monetization) a purely moral one….
@HK
“…the euro’s founding fathers – i.e., the Helmut Kohls and Francois Mitterands – gave the ECB an impossible mandate:…”
Of course, but the ECB should have seen the crisis coming, and adjusted its framework, just in case a crisis happens. Disaster scenario planning. Every private company will have back-ups and plans and will be better prepared than the ECB, when a cirisis hits. The ECB have highly paid economists and experts which should run through problematic scenarios as we are experiencing now.
The ECB is responsible for inflation, but also for the whole monetary stability in Europe. That of course is implicit in its mandate. It has not done enough to help politicians to lead us out of this crisis.
I think the entire system is (very close to being) broken. To sort things out it is necessary to have a credible panic backstop first. That’s how I am reading and understanding the rapidly increasing number of distinguished economists and experts (Krugman, DeLong, Münchau, Wolf, Eichengreen, De Grauwe, Das – they’re legion, you name them) calling for the ECB to step in _now_ to get that breathing air which is badly needed for being able to honestly work on all those flaws in, of course, a democratic environment and fashion. That is in no way identical with putting all blame for the flaws on the ECB. The “broken system” surely refers to much more widespread broken credibility, trust and faith: The northern Merkozy clan mistrusts Papandreou and Berlusconi, citizens mistrust their governments, governments mistrust their citizens, banks mistrust each others, the ECB mistrusts the bonds it’s pressed to buy for preventing outright blow-up, and so forth – and all this in times when credibility, trust and co-operation are needed the most. When there’s no other better measure than the ECB right at hand why not even trying to use it at least to stop the spreading crisis-mode and get the time needed to find out what really needs be done in an orderly fashion – which is either repairing the fundamental flaws of the eurozone, or ultimately ending it as a failed experiment or as being incompatible with the rules of democracy? Why trying to pretend and extend with all the wrong, impotent, potentially dangerous, or dead-on-arrival weapons? All what has been tried so far has too soon turned out to be not working (or making matters worse) but what really hasn’t been tried yet is having the ECB stepping in boldly and seriously as an emergency force — which is not identical with saying that the ECB stepping up to the plate is already the cure for all flaws. It’s just having the ECB stopping the life-threatening bleeding first so that we can research and agree upon what the true reasons for that bleeding are and whether there are any profound causal cures to the EZ’s wounds and birth-defects as well as which of those cures (if any) the European citizens – as an orderly informed citizenry – really want to see applied to prevent future bleeding. To me, that would sound as a democratically and economically feasible and credible plan. It’ll not happen and I suspect that’s mainly because of misguided national self-interests and mistrust across the board. Surely, if the system is indeed all about competition then why trust your competitors? Maybe it was never meant to be all about a co-operative Europe (as they pretended and I believed) but then it was DOA rightout and we now just get to see the fact. Surely, nobody would want to admit this openly and that’s maybe why everyone’s just kicking an already rotten can. It’s as disgusting a self-manufactured tragedy as it can be, then. Personally, I can’t think of any other explanation anymore to make any sense of what the hell is going on here. Varoufakis was yesterday blogging that it’s only the hedge-fund-managers having fun right now, and Wigglesworth from the FT today cites one of them claiming “There’s a tidal wave of opportunities coming now!” Well then, that’s the “you-break-it-you-own-it-Europe” scenario, isn’t it? Yet, we haven’t even tried a serious ECB intervention beforehand, despite all those serious voices urgently calling for it … that’s ridiculous, no, it feels like it’s outright lunatic.
However, if you’re right about Italy being insolvent then it’s game-over anyways because nobody in charge has prepared anything to deal with that huge latin black swan. But then again, not all economists agree with that diagnosis, let alone all those MMT’ers. So, why and how in the world was it possible that we got such a highly complex, complicated and intertwined financial industry and a gigantic 17 nations currency union without having also economists that at least agree on so-called economic fundamentals?
From outside economics: I must say at this point, the differences between a Kaspar and a Krugman, to my untrained eye, are really marginal. The ECB as lender and last resort and “real” central bank, with a higher inflation target and money-creating powers, everybody agrees on as indispensable in the short term. Krugman does not address in any of his recent posts that I know of the need for medium-term systemic fiscal and banking reform within the EZ, but I suspect he would agree with the proactive capital and banking controls and policies Kaspar et al. seem to advocate. As for coordination or even unification of fiscal policies, who among either group is against that from a purely economic point of view? OK, why Italy is in trouble is still debatable, but while theoretically interesting, surely this is a side issue compared to all these other ones?
Having suffered for years when listening to all the “let the market run its course” nonsense which was so dominant until recently, I must say I revel in reading apparently orthodox economists calling for a reining it of “unusustainable private sector behavior”, or explaining that a central bank is a public institution with a public role including some sort of control of capital flows, or pointing out that complete freedom of circulation for labor, not only capital, is a sine qua non for a working currency union (coming from France, a country which has distinguished itself these past few years in the race to close its borders to everybody from Polish plumbers to disenfranchised Roms, this last point is pretty important to me…). And last but not least, everybody, Kaspar included, agrees that unification of disparate labor markets, which is what the EZ should be about, is bound to be painful -which should lead to some interesting discussion on how to minimize the pain (could German unification serve as a reference here?).
If I have read Kaspar AND Kantoos AND Krugman AND de Grauwe AND Wolf right (otherwise, do correct me…), pretty much everybody agrees that the EZ can survive and become an efficient, cooperative endeavor, if and only if these issues of regional competitivity are dealt with the way they are dealt with within any large country, through general, Europe-wide economic policies and a set of unified rules, especially for banks. That we can get economists from all over to agree on that much is truly a miracle to me, and dwarfs what I tend to see, out of ignorance no doubt, as technical quibbles. At any rate it sure does not sound at all like what I heard (an still hear) from the Wall Street Journal, and makes my day brighter!
PG
PS: The currency union between France and Germany would not resist a collapse of French banks and a run on France, IMHO. And that’s what an Italian default would mean… We would be back in 1955, with a Germany + Benelux core, and everybody else outside.
I think what we need is a new separation of powers.
Inspired by the MMT guys, I like the idea of giving the ECB “taxing rights” enabling them to contract the money supply without having to rely on collateral. (Such “taxes” don’t generate any income, because the money would be taxed only to be destroyed.) This would free the ECB to just print money and drop it on a per capita basis on each and every Eurozone citizen, targeting NGDP. Every Eurozone citizen would get a personal account at the ECB, the only account that would have deposit insurance. Such a ECB wouldn’t be a bank anymore, no lending, no interest. Its only goal would be fighting weak aggregate demand without any transmissions mechanism involving banks or states.
Banks and states could fail, without hurting aggregate demand. This would be a democratic, bottom up monetary policy without any negative side effect. (No asset price inflation, no credit booms, no government debt…) States would get their credit only from the markets or not. Banks would have no lender of last resort and no deposit insurance anymore. If States and/or bank missbehave, they are free to fail, this would not affect NGDP. The ECB could just print and drop money to keep NGDP on trend without bailing out banks or states. The economy would always get enough money from the bottom up, through the consumer and investor decisions of each and every citizen.
I learned from Scott Sumner and Nick Rowe that, in principle, monetary policy has nothing to do with credit, neither to banks nor states. And I learned from the MMT guys, you don’t need collateral, if you can destroy money by taxing it away. If you combine both insights, you get a complete separation of powers. Monetary policy would be totally independent from bankers and politicians and committed to just one goal: fighting weak aggregate demand. Any remaining unemployment would be a supply side problem, which monetary policy can’t solve.
Monetary policy isn’t everything, but everything is nothing without it. We must end the hijacking of monetary policy.
Inteeresting ideaa – and which democratic institution would control the ECB?
We already have a problem with that now. The ECB in effect set the interest rates on Italian Bonds. Who says it should set the rate at 6% (at which level the ECB intervenes in the market) and not 5% or 4%?
“Inteeresting ideaa – and which democratic institution would control the ECB?”
The ECB would get even more independent, printing or destroying money to fight weak aggregate demand, closing any output gap, without having to buy anything (open market operations) to set interest rates. Interest rates would be set by the markets. Do we need democratic control for that? Identifying output gaps is a job for technocrats. You have to decide if unemployment has a demand or supply side cause. A sure sign for supply side problems is a wage-price-spiral, accelerating inflation. But if inflation rises uniformly or inflation just shoots up temporarily and you have still unemployment, you can further increase the money supply. So you need a very flexible approach vis-á-vis inflation. Therein lies the beauty of NGDP targeting.
On the other hand, price stability as the primary goal, as we have it now, is a scandal! So it’s not only about ECB independence, it’s about the right goals for monetary policy. Lots of people, especially Germans or American tea partiers, think inflation is unjust, I think, on the contrary, sometimes having no or stable inflation is unjust.
The main problem with the Eurozone is the ECB setup. Fiscal austerity (debt ceilings) would be no problem, if -in the case of a recession- the ECB could keep NGDP on trend. But fiscal austerity and price stability together can’t work. The Eurozone has created a new gold standard, which is ironic, because the gold standard was arguably the main cause for the second world war. If Europe wants to live up to its true goals, “making war unthinkable” by overcoming nationalism, the new gold standard needs to be destroyed!
What about decoupling national governments and banks as proposed here:
http://www.voxeu.org/index.php?q=node/7086
In my opinion, given the fact that the common institutions (Commission and European Parliament) are still very weak in respect to national governments, the fact that national governments are hardly pressed by national banks can be a source of distortion in the decision making process, and maybe this is one of the causes of the long going political quasi-paralysis which characterized the European response to this crisis.
@GD
“What about decoupling national governments and banks as proposed here:
http://www.voxeu.org/index.php?q=node/7086”
Nicholas Veron is writing this nonsense. This guy works partly for the Peterson Institute – directors include Rothchilds et. al. You really have to look who is financing research – that stuff is highly dangerous market based nonsense.
Listen to this- right in the heading.
“Eurozone citizens will have to accept the surrender of economic policy decision-making on an unprecedented scale.”
You should stop reading right there – right wing anti-democratic clap-trap! We are not surrendering anything to these high priests of international finance.
Bruegel/VoxEU/Peterson Institute – It is part of the economic research set-up which seems to be financed by the banking industry and international finance operations. Just look at where the finance for these instutes comes from :Banks and the largest corporations in the World, mainly. Are they out to inprove the welfare of the citizens – or are they recommend things which helps financial terrorists and global oligarchs?
You never read anything which is pure common sense from these guys, such as: “Tax the income at 60% and the wealth at 5% of the richest 1% in your countries – and all your problems will disappear.” even though that is the truth. Nice try – GD – but we are cleverer than that!
@ matt
Das sind aber jetzt langsam genug Verschwörungstheorien…
@kantoos “Verschwörungstheorien…”
The important point I wanted to get across is that these European and US economic think tanks are financed by big business and financial interests. There does not seem to be one which is not financed by these interests!
If we have, in general, a problem with the financial sector, but the only economists giving us advice are paid, albeit indirectly, by the financial sector, there is obviously a conflict of interest.
No conspiracy theory really.
@HK
“The trouble with this argument is that it was not the ECB that made financial markets wary of Italian bonds,…”
True, but now that the ECB intervenes, the intervention is half-hearted. Draghi said today again, the bond purchase programme is temporary, limited and only there to support the “failure in the money transfer mechanism”. That does not translate to “big bazooka”. That is the same ECB speak which Trichet used That does not scare the markets, or impress them.
If the ECB intervenes at all, it should do it wholeheartedly, and not a little bit here and there, and control the whole yield curve. It easily has the power to do so.
A couple of reactions:
- “Krugman writes only about the short-term”, “you step in now, solve the medium-term problems later” – the ECB can only intervene convincingly if the debtor whose paper it purchases makes clear it is doing what it takes to remain solvent. Meaning: credible reform efforts by Italy are a necessary part of the short (!)-term policy package.
- “the ECB intervenes only half-heartedly” and “a little here and there”- well, does it? After the game of chicken with the Italian government this fall – that the ECB lost – every investor has understood the ECB will purchase Italian bonds without limit if needed, and is using this to get out of the Italian market (in this context and as for “keeping the entire curve low”: in recent days the ECB was the only buyer in the secondary market, and everyone in the market knew this. The price at which bonds change hands is then a political price set by the ECB – and everyone in the market knows this too. Making the price expensive is then a straight subsidy from the ECB’s owners – national governments – to existing bondholders. What for?).
As for the ECB’s communication, when it says “the bond program should be temporary and terminated once it is no longer needed” it is just stating the obvious. The ECB would undermine its own credibility if were to say anything else. It’s actually not clear to me what the Delongs have in mind as a superior alternative. Announcements like “we have discovered that buying the entire stock of Italian government debt and keeping it in our portfolio forever is the best monetary policy, and will do this enthusiastically from now on” would be widely understood as an act of revealed silliness and thus to the benefit of nobody.
- “inflation rates in Europe should be the same” – I don’t think so (but am not surprised that Flassbeck is of a different view). Economies in a currency union need means to adjust through prices, especially if there is limited labor mobility. At the moment Italy should deflate, Germany reflate. What the euro area needs is macro-prudential regulation at the national level to prevent unsustainable credit booms while economies reflate, not price developments in lockstep.
- “how much inflation is needed” – hard to come up with a precise number. But the inflation target of the Bank of England – 2.5, core, symmetric – would already be progress in terms of giving wages and prices room to adjust, while hardly creating severe damage to the inflation credibility of the ECB.
@Alex F
“You have to decide if unemployment has a demand or supply side cause. A sure sign for supply side problems is a wage-price-spiral, accelerating inflation. But if inflation rises uniformly or inflation just shoots up temporarily and you have still unemployment, you can further increase the money supply. So you need a very flexible approach vis-á-vis inflation. Therein lies the beauty of NGDP targeting.”
Well, Central Bankers are programmed to believe that unemployment only has supply side causes- that is the only thing they talk about – in Europe anyway. So we probably have to change the whole of the ECB board and all European National Central Bank presidents, who make the decisisons for the ECB.
If you would call it “unemployment targeting”, rather than “NDGP targeting”, it would allow the general public to see what it is for.
ECB intervention (buying bonds) will continue to finance Current Account Deficits in the periphery countries. This increases the total foreign debt of these countries.
If investors are scared that the foreign debt (net investment position) of a country will continue to grow, they might not come back after the ECB might want to stop its temporary assistance programme. I think that is a valid concern.
If private investors do not return after an intervention of the ECB has ended, I believe only pooled bond issues on the primary markets might help then (good bonds and periphery bonds parcelled up in one package.)
Details, (in German) which make that argument can be found here:
http://eurogate101.com/2011/11/04/anleihenkaufe-leistungsbilanzdefizite-und-die-ezb/
Im “Denkraum” finden sich deutsche Übersetzungen der hier kommentierten Krugman-Beiträge “The Hole in Europe’s Bucket”, “Eurodämmerung” und “Crats, Maybe, But Not Much Techno”: http://denkraum.wordpress.com/2011/11/01/paul-krugman-zur-euro-krise/ und http://denkraum.wordpress.com/2011/11/02/krugmans-euro-abgesang/
Juhuuu… allet in english. Sehr schön, da wird der Normalbürger nicht mit der Realität belästigt. Schade, das dem Blog der Elfenbeinturm näher ist als ein liebenswürdiges Sendungsbewusstsein… ;) Ist aber eine Entscheidung, die man akzeptieren muss. Leider.
“Geringe Arbeitsmobilität und Arbeitsmarktflexibilität” hätte ich dann aber doch gerne mal definiert. Was soll das heißen? Ab welchem Punkt ist die Arbeitsmarktflexibilität i.O.?
@ Mindtrap
Ich finde es unfair, was Du schreibst. Manche Dinge diskutieren wir gerne über die Grenzen Deutschlands hinaus, das hat mit Elfenbeinturm nichts zu tun, im Gegenteil: wir wollen mehr Leute erreichen und uns der Diskussion öffnen. Henry Kaspar aber macht lohnenswerterweise immer den Aufwand, seine Beiträge zusätzlich auch auf Deutsch zu verfassen (was manchmal aus Zeitgründen etwas dauert). Diesen Beitrag findest Du hier: http://kantooseconomics.com/2011/11/06/es-ist-nicht-nur-die-ezb/
@kantoos
Was ich ein wenig Oder zunehmend) in unserer Diskussion hier vermisse, ist nicht die Behandlung ökonomischer Fragestellungen, sondern die der politischen Ökonomie.
Ich sehe zum x Mal die CDC spreads tables und die differences Italy Spain:
wunderschön,
Nur wo bleibt der think out of the box hier, wo ist der grip on reality.
Was passiert denn im realen Leben wenn wir mal schnell im Modell adjust the prices and adjust the wages durchspielen?
Ich komme gerade aus Griechenland zurück und hatte die Chance eben nicht Athen und Thessaloniki zu besuchen sondern im Rahmen meines Jobs auch Dörfer und Kleinstädte. Die Auswirkungen der ökonomischen Krise sind erschreckend.
Und das ist die Realität und nicht die CDS spreads.
Und hier matt-us vorzuwerfen, mit seiner kritischen Einschätzung würde er zu Verschwörungstendenzen neigen….
Sorry aber die US befindet sich im Konkurrenzkampf mit Europa. Das heißt konkret an allen Fronten wird versucht seine Marktpositionen abzusichern. Dieses business beschränkt sich eben nicht nur auf die privaten Teilnehmer im Markt, sondern auch auf die jeweiligen Teilnehmer z.B. im G 20 Club.
Die sogenannte wissenschaftliche Neutralität befindet sich doch mehr oder weniger im Erosionsprozess. Das ist exemplarisch im Umweltbereich sehr gut zu beobachten und letztlich auch bei the think tanks im politisch wirtschaftlichen Sektor. Daher sollten wir doch etwas realistischer in unserer Einschätzung sein. und nicht die heile VWL Welt propagieren.
P.S. Ein Nachsatz zumn Thema Lösungsansätze, keiner der hier anwesenden Ökonomen hat bisher einen Satz über die ” Lösungsansätze ” in Island verloren.
Warum eigentlich. Nach Einschätzung des IMF war Island doch insolvent.
Passen die dortigen Lösungsansätze nicht in den mainstream der VWL?
@ Bolle
Warum genau sind CDS-spreads nicht “Realitaet”?
Ich halte es da mit Alan Blinder, der mal gesagt hat Oekonomen sollten weiche Herzen aber einen harten Kopf haben. Man muss die Ursachen und Wirkungszusammenhaenge der Krise verstehen, nur dann kann man sie auch loesen. Und dafuer spielen nunmal auch Risikospreads eine Rolle. Paul Krugman etwa schlaegt vor dadurch die Krise zu loesen inde die ECB unbegrenzt Anleihen der unter Druck stehenden Staaten kauft. Dies ist eine Loesung wenn die hoen Riskiozuschlaege dieser Laender Ergebnis einer allgemeinen Marktpanik sind; es ist keine Loesung, oder zumindest nicht fuer sich allein genommen, wenn die unterliegende Ursache mangelnde Reformfaehigkeit der betroffenen Staaten ist.
Ich meine dass der Versuch solche Unterscheidungen klar herauszuarbeiten hilfreich ist – sicher hilfreicher als das Beklaegen der Zustaende in griechischen Doerfern, sofern man es dabei belasst. Das allein ist Gejammer, und ein bisschen billig.
Und was das Peterson Institute angeht – ich kenne ein paar exzellente Oekonomen die da hingegangen sind, weil sie ihren Forschungsinteressen nachgehen wollten ohne Lehrverpflichtungen zu haben. Diesen Leuten pauschal vorzuwerfen sie steckten in der Tasche der US Finanzindustrie ist nicht nur Verschwoerungstheorie, es ist auch unverschaemt.
Aufschlußreich der etwas andere Ansatz von Richard Senett zur Frage Warum die zunehmene ökonomischen Krisen:
http://tinyurl.com/7pgebtq
Vorabdruck im NZZ Folio
Denn sie wissen nicht was sie tun
@hkaspar
Ich würde gerne ein paar Sachen klar stellen:
1. Ich habe nahezu 20 Jahren in Washington D.C. gearbeitet und im Rahmen meiner Tätigkeit einige think tanks kennengelernt.
Was deren Unabhängigkeit betrifft, die bewegt oftmals nur im Rahmen des vorgegebenen Budgets :-) (Ausnahmen bestätigen die Regel).
2.Während meines Jobs in einer Entwicklungsbank habe ich oft genug Lösungsansätze (analog den CDS spreads) gesehen, die in alltägliche Praxis umgesetzt, uns keinen Schritt weitergeholfen haben, weil es zum Beispiel darum ging in den Banque Centrale von Zaire aufzudecken, welche Manipulationen Mobutu und sein Clan vorgenommen hatten, um nur ein Praxisbeispiel zu nennen.
3.Ich weiß dass man Entwicklungsländer nicht mit Industrieländer gleich setzen kann, aber was sich derzeit in Griechenland und Italien abspielt ist nicht weit von den Verhältnissen in vielen Entwicklungsländern entfernt.
4.Ich habe persönlich habe nicht von Verschwörungstheorien geschrieben, sondern darauf hingewiesen, das wir in einem Gesellschaftssystem leben, dass auch durch wirtschaftliche Abhängigkeiten bestimmt ist. Da Sie im universitären Sektor tätig sind, brauche ich Sie sicherlich nicht auf die möglichen Abhängigkeiten in Bezug auf Zuwendungen vom Privatsektor hinweisen.
5.Ich habe nicht die Situation in der griechischen Provinz bejammernd, wie Sie mir das explizit unterstellen, sondern bin eher versucht, daraufhinzuweisen, was das in der Realität des Alltags für Konsequenzen hat, wenn man kurz über das adjustment of wages and prices am grünen Tisch diskutiert.
6.So sehr ich Alan Blinder schätze, mit seines quotes habe ich oftmals Schwierigkeiten, noch dazu wenn ich mich an sein Zitat zu Alan Greenspan erinnere:
His performance as chairman of the Fed has been impressive, encompassing, and overwhelmingly beneficial – to the nation, to the institution, and to the practice of monetary policy,
Das die CDS-spreads sicherlich in bestimmten Situationen einen Zweck erfüllen, da bin ich mit Ihnen d´accord. Aber ich stelle einfach infrage ob diese tools tatsächlich isoliert betrachtet uns heute in der Wirtschaftskrise weiterhelfen.
Ganz banal, was nützen uns die besten volkswirtschaftlichen Lösungsansätze, wenn die Wirtschaftsberater der jeweiligen Regierungen nicht in der Lage sind das know-how in die Realität des politischen Alltags umzusetzen. Kantoo versteht sich als politischer Ökonom. Sollten wir nicht daher auch die politischen Aspekte in die CDS spreads Diskussion mit einfließen lassen?
Und auch einmal provokativ gefragt:
Wo bleibt der Aufschrei der Volkswirte dass auf dem G 20 Gipfel die Fianztransaktionssteuer nicht eingeführt worden ist?
Viele Grüße von Ihrem konvertierten Kopf und Herz Ökonomen
Friedrich Bolle
P.S. Mea culpa das ich dieses Mal den Säbel herausgeholt habe, statt das Florett.
Aber zu meiner persönlichen Entschuldigung: Ich stehe vor der ökonomischen Krise und bin letztlich am Verzweifeln, dass so hochbezahlten Experten wie beim IMF, der EZB etc nicht in der Lage sind konkrete Lösungsansätze zu liefern :-)
Möglicherweise bedarf es für Italien einer gewissen Dramatik, um wirklich erforderliche Strukturreformen zu beginnen. Es ist halt sehr unpopulär so Dinge wie Rentenreform anzugehen, und wenn es auch ohne geht, warum soll man was ändern? Man darf die Mentalitätsunterschiede nicht unterschätzen, und wenn es wirklich drauf ankommt, wird es Italien auch schaffen. Warten wir mal ab. Die EZB jedenfalls sollte nicht jetzt schon ihr Pulver verschiessen, dafür ist es zu knapp.