Friday, July 26, 2013

The euro's Original Sin?

Simon Wren-Lewis takes a look at The Eurozone’s Founding Mistake Mainly Macro 07/18/2013:

It really was predictable. Take away the ability to control national interest rates, and you create a potential for patterns of demand to diverge, leading to movements in competitiveness that would have to be painfully unwound later on. The good news was that you could use countercyclical fiscal policy to moderate these movements - an entirely conventional macroeconomic idea. But it was not what the architects of the Euro wanted to hear.

This is how my paper just published in Global Policy starts. So instead of countercyclical fiscal policy, we got an obsession with budget deficits and the possibility of fiscally profligate governments. Even with this obsession the Eurozone failed to spot its one member that was behaving in this way until it was too late. But in looking in the wrong direction, the Eurozone allowed just the kind of competitiveness imbalances to take place that fiscal policy might have been able to do something about. [my emphasis]
In this context, countercyclical fiscal policies would have to be pursued by the northern European countries, especially including Germany, would have to stimulate their economies and accept higher inflation in order to pull the rest of the eurozone oout of the depression.

But German Chancellor Angela "Frau Fritz" Merkel adheres to an ideology of "ordoliberalism" that rejects real-world economics. Instead, she's concentrating of inducing real deflation by suppressing wages and salaries in Cyprus, Greece, Italy, Ireland, Portugal and Spain, including pressure for the favorite neoliberal policy of privatization. As Wren-Lewis says of Merkel's doctrine, "The ordoliberal logic on this has never really been spelt out, and it seems more like an article of faith."

He argues that there was a widespread expectation that the euro would encourage lax fiscal discipline but that experience with the particular euro arrangements indicates that the opposite was the case:

Yet we now know (and I do not think anyone really foresaw this) that this last argument is completely wrong. Not having your own central bank means that market discipline on Euro members' fiscal policy will be much greater, once it is understood that national default can occur.

I do not think this point has sunk in yet among many macroeconomists. The standard line, backed by academic papers, was that joining a common currency would reduce market discipline on fiscal policy. Yet that analysis ignored default, and the possibility of a bad equilibria generating a self-fulfilling crisis. Countries will not forget the events of 2010-12 in a hurry, so the danger now is that we have too much, not too little, market discipline influencing fiscal policy. [my emphasis]
And he rightly says of Merkel's Fiscal Suicide Pact: "The Fiscal Compact is exactly the opposite of what the Eurozone requires right now." (emphasis in original)

In Greek news, Greece does enough to unlock more bailout funds - economy Euronews 07/26/2013, Greece gets more bailout money issued. These are funds agreed to under previous agreements. But their disbursement to Greece is made conditional on procyclical economic "reforms" that further depress their economy:

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