Mon Oct 29th, 2012 at 05:37:00 AM EST
A correspondent sends me notice of the latest paper by Jean Pisani-Ferry of the Bruegel think tank: The known unknowns and the unknown unknowns of the EMU (26th October 2012). There is even a related video on the Bruegel website!
Bruegel, as some people may remember, is hardly my favourite think tank...
And given that Jean Pisani-Ferry and his Bruegel think tank live off reinforcing the Eurocracy conventional wisdom, I am actually pleasantly surprised to find the following paragraph in there:
The second reason has to do with what the Maastricht treaty did not include, ie the prevention of non-fiscal imbalances. When thinking about possible threats that EMU should be defended against, policymakers in Maastricht looked back at past experience and identified two: inflation and fiscal laxity. Financial instability was at the time perceived as being of minor importance and, even though currency unification was expected to reinforce financial integration, no provision was envisaged to deal with the effects of private credit booms-and-busts. EMU was conceived as an economic and monetary union, not as a financial union. True, the EU could have relied on the Broad Economic Policy Guidelines (BEPGs), a catch-all procedure rooted in the treaty, but it was in fact a weak, non-binding and rather neglected procedure. This view proved to be short-sighted. While public indebtedness in the southern countries remained broadly stable or even declined during the first decade of EMU, private indebtedness financed by capital inflows skyrocketed, resulting in the previously described massive macroeconomic divergence.
Which basically means that the Eurozone policy response and the crisis diagnosis itself have been terribly flawed for 4 years and continue to be flawed. Not one of the Eurozone's policy developments purported to respond to the crisis would have made a difference to the private financial sector dynamics of the past 10 years had they been in place from the start.
This is hardly surprising coming from a Eurozone economic policy establishment that didn't bat an eye when starting in 2009 the ECB bought outright, without "sterilization" and in the primary market, 60 billion Euros worth of Pfandbriefe at the behest of the Bundesbank. How different to the wailing and gnashing of teeth that accompanied any suggestion of secondary market support of public debt after 2010.
In any case, it is fascinating (no, not really surprising) how Pisani-Ferry manages to ignore Charles Goodhart and Wynne Godley in his survey of economic criticism of the Eurozone design in the 1990s...
Goodhart? Who he? From The Economist:
Why is this relevant for the euro? Here is Mr Goodhart writing in 1998, on the eve of the euro project.
The key relationship in the C team model is the centrality of the link between political sovereignty and fiscal authority on the one hand and money creation, the mint and the central bank on the other. A key fact in the proposed Euro system is that the link is to be weakened to a degree rarely, if ever, known before. ... There is to be an unprecedented divorce between the main monetary and fiscal authorities ... the C team analysts worry whether the divorce may not have some unforeseen side effects.The logical conclusion from this is not a new idea: the euro area needs greater fiscal integration. But the reason is different. It is not because Greece and Spain spoiled a perfect plan with their profligacy. It is because the euro enshrines the divorce of fiscal and monetary power. If you are a member of Mr Goodhart's C team this never made sense in the first place.
Not your usual eurosceptic Briton in any case:
"The European ideal has so much power that crisis and even division will not permanently prevail." So says Professor Charles Goodhart
Hope springs eternal in the human heart.
As to Godley, there's this (which I like to quote) from 1992: Maastricht and all that
But there is much more to it all. It needs to be emphasised at the start that the establishment of a single currency in the EC would indeed bring to an end the sovereignty of its component nations and their power to take independent action on major issues. As Mr Tim Congdon has argued very cogently, the power to issue its own money, to make drafts on its own central bank, is the main thing which defines national independence. If a country gives up or loses this power, it acquires the status of a local authority or colony. Local authorities and regions obviously cannot devalue. But they also lose the power to finance deficits through money creation while other methods of raising finance are subject to central regulation. Nor can they change interest rates. As local authorities possess none of the instruments of macro-economic policy, their political choice is confined to relatively minor matters of emphasis - a bit more education here, a bit less infrastructure there. I think that when Jacques Delors lays new emphasis on the principle of `subsidiarity', he is really only telling us we will be allowed to make decisions about a larger number of relatively unimportant matters than we might previously have supposed. Perhaps he will let us have curly cucumbers after all. Big deal!
Godley (among others) managed to predict the precise endogenous failure mode of the Eurozone, 20 years in advance. Was that dumb luck? I don't think so, and neither does Dirk Bezemer in No one saw it coming, or did they?
In Bezemer (2009), I document the models that got it right. The important question for economists is - how did they do it? What is the underlying model?
While there is obviously a diversity of approaches, one important strand of thinking is an accounting of financial stocks (debt and wealth) and flows (of credit, interest, profit and wages), as well as explicit analysis of both the real economy and the financial sector (including property).
The most detailed of these models, which has also been used to construct public projections and analyses, are "Flow of Funds" models of the US developed by Wynne Godley and associates at the Levy Economics Institute. ...
And what is the latest to come out of the Levy Institute's stock-flow-consistent macroeconomic analysis? How profligate was the Greek Government?
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.
Greece is now firmly "on the way to stability": the stability of the graveyard. From Paul Mason, Love or Nothing, the real Greek parallel with Weimar
Horrified inertia is now seeping from the world of the semi-outlawed young activists into the lives of ordinary people.