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So, how do you propose infrastructure spending in the periphery would have happened after 1999 in the absence of "credit card spending"?

The issuance of sovereign debt seems reasonable, as does private equity (not "private equity" as in LBO variety, but equity as in the opposite of debt) investment if the latter were not forthcoming at a great enough scale.

So, the Growth and Stability pact and the Illegal State Aid rules are unreasonable since you propose that during the Euro era peripheral Europe should have issued sovereign debt to fund equity investments in new productive assets...

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 09:32:28 AM EST
[ Parent ]
The Growth and Stability pact makes no sense. When you introduce a common currency in an area which hardly can be described as an optimal currency area, it's economics 101 that the interest rate weapon will become blunter, and that fiscal policy will have to play a greater role. Both to stimulate the economy during downturns and to cool it at the top of the business cycle. This requires much weaker restrictions on deficit spending, but it also requires a much lower level of sovereign indebtedness over the business cycle, so as to not make the burden of debt overbearing and make stimulus impossible for that reason. The EZ required a 60 % government indebtedness to join. Clearly as events has shown, this level was much too high.

Also, I said the private sector should have supplied the equity, not direct-state investment in productive assets, even if such do make sense in certain industries. Power and infrastructure comes to mind.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Dec 14th, 2011 at 09:40:31 AM EST
[ Parent ]
Which is why the Stability and Growth Pact is to be replaced with a Stability and Growth Union with constitutional debt brakes for all, in the middle of a depression.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 09:44:59 AM EST
[ Parent ]
Our great leaders are oh so wise. :p

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 09:58:16 AM EST
[ Parent ]
The total consolidated government debt (municipal, state, federal, cash, central bank reserves, insured deposits in excess of bank reserves and what have you) is to a considerable (but not complete) extent endogenous.

That is to say, if you want state-level (and below) consolidated government debt to be less than 60 % of GDP, you will have to let federal consolidated government debt (in the Eurozone that means central bank reserves and cash, but not ensured deposits in excess of the bank's reserves and cash position) to be in excess of 40 % of GDP (the consolidated government liabilities to GDP ratio is on the order of 100 % for most advanced industrial societies).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Dec 14th, 2011 at 10:33:15 AM EST
[ Parent ]
I don't see why. Every debt is to another person a claim. As debt is reduced the claimant receives his cash back, and he certainly need not lend it to someone else. It can just as well be invested as equity, and the result is a society with less gearing.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 10:41:53 AM EST
[ Parent ]
Cash is a part of the consolidated government debt.

Or, to put it in another way: Government bonds are a part of the money supply.

With a properly run central bank, cash and government bonds held by own residents contribute precisely equally to society's gearing: Not at all. (Foreign government bonds are different.)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Dec 14th, 2011 at 11:26:17 AM EST
[ Parent ]
But in the Eurozone things don't work that way, at least legally...

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 11:45:57 AM EST
[ Parent ]

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