BlogSpot - September 20th, 2013
Thinking back at monetary unions and reflecting on the future of the eurozone
Laslo Andor, in a paper prepared for the European Policy Centre (commented by Matthew Dalton in Real Time Brussels), highlighted the difficulties to establish a workable currency union and criticizes internal devaluation policies which cannot be a general model for a large union whose overall exports and imports are balanced. Other adjustment levers are equally ineffective—labor migration is too limited (or counter-productive if it creates a brain drain) and central bank objectives reject the use of inflation to alleviate adjustment. Andor suggests better surveillance of euro-zone economies and a central fiscal capacity to support weak economies.
Zsolt Darvas and Silvia Merler, in a Bruegel Article, look at another difficulty in an asymmetric monetary union: the uniformity of the monetary policy rate across different economies. They estimate Taylor-rule interest rates for all euro area countries and finds that rates should be as low as -15 percent in some crisis countries and as high as 4 percent in Germany. This gap means that countries experiencing the most depressed economic conditions face very tight monetary conditions (accentuated by credit rationing and the negative feedback loop between sovereigns and banks). Their menu of solutions includes the usual suspects: strengthening intra-state adjustment capacity, developing a large federal budget, breaking the vicious circle between banks and sovereigns, and in the meantime, exploring ways to ease credit conditions in the South, such as improving the access of SMEs to credit, by means for example of a properly designed scheme for targeted central bank lending.
Yanis Varoufakis, in Naked Capitalism (hat-tip EuroIntelligence), argues that the market dominance of large companies from stronger countries makes an asymmetric monetary zone inherently unstable—with internal devaluation failing to bring about the necessary real adjustment. One cause is the fact that, no matter how structural reforms are undertaken, core countries’ corporations do not invest in the periphery. He concludes by writing that, to break the debt-deflationary spiral, a breakup in the asymmetrical monetary union is inevitable—it would need to survive through an effective extra-market surplus recycling mechanisms, difficult to implement when political will is weakened.
Dani Rodrick, in a presentation, argues that policymakers in Europe are confusing short-term with long-term issues. The former, Keynesian in nature, cannot be addressed through long-term structural remedies. In addition, the lack of strong democratic institutions, able to provide regulation, accountability and legitimacy is an issue.
Reading through the German election, a few days ahead
Kate Mackenzie, in FT Alphaville, writes a German election primer—looking at possible election scenarios: (i) a continuation of the existing coalition of CDU and FDP, i.e., more of the same and painfully slow compromises, or (ii) the CDU and FDP failing to win enough votes to form government together, but form a “grand coalition” with the centre-left SDP—which could potentially be a positive outcome. Yet Wolfgang Munchau writes that a grand coalition might be unstable, mostly because of conflicting pulls on the SDP, with Ms Merkel having a partner who could bail out at any time to form a three-way coalition of the left, or a two-party minority government with the Greens, tacitly supported by the Left party. Hence, the two most probable scenarios either an unstable government of the centre-right, which has no majority in the upper house, or an unstable grand coalition, which could fall apart at any moment.
A key question is how Merkel will govern over any coalition. Gavyn Davies says that despite Merkel’s conviction that the solution for Europe’s troubled economies is to “commit to becoming German clones, bound by firm legal agreements”, she does have an exception for the ECB, highlighted by her crucial decision to support Mario Draghi rather than Jens Weidmann in August last year.
Peter Spiegel and Alex Barker (also in the FT) lay out the tough agenda ahead for German policymakers—including two critical areas, the future of eurozone bailouts (Greece, Portugal, and Ireland) and the completion of an EU “banking union.”
In a Bruegel Blog Review, Jeremie Cohen-Setton looks at the legacy of ordoliberal ideas in the upcoming German elections, shedding some light on the reasons behind the European aversion towards countercyclical policy.
Stephen Silvia writes that the economics profession is much less ideologically diverse in Germany and dominated by a combination of neomonetarism and the free market ideology of the Freiburg school of “ordoliberalism,” influenced by Hayek—a point of view supported by Sebastian Dullien and Ulrike Guerot. Jan-Werner Müller translates that into Merkel’s vision for the Eurozone: rigid rules and legal frameworks beyond the reach of democratic decision-making, a consistent policy setter in the resolution of the eurozone crisis, according to Brigitte Young.
How does this view translate into policies? For Christopher Allen, the historical episodes of post-WWII rebuilding and Bismarck industrialization lay out a method of subordinated domestic demand to the needs of industrial capital and emphasize the importance of supply-side policies for reconstruction. Further,governments should regulate markets in such a way that market outcome approximates the theoretical outcome in a perfectly competitive market (Sebastian Dullien and Ulrike Guerot), with a vision of a strong strate providing the framework for economic competition (and price stability), as well as a social safety net (Jan-Werner Müller), allowing, according to Jürgen Stark, the economy to flourish in a sustainable manner if it adheres to “the interdependence of orders” (price stability; perfect competition; property rights; freedom of contract; and stability-oriented economic policies).
Why Keynesian ideas never took root in Germany. Christopher Allen notes that Keynesian ideas never took root in Germany, which thought that the depression was caused, not by a deficiency of aggregate demand, but by the state’s activist experimentation.
The euro approach after the German election. Sebastian Dullien and Ulrike Guerot write that the outcome of the election will affect policies little, given the consensus around ordoliberalism. Wolfgang Munchau writes that the SPD has not gained any traction against Angela Merkel because it has bought into the neoclassical economic policy consensus.
