Duncan’s Economic Blog

There is no Eurozone Crisis

Posted in Uncategorized by duncanseconomicblog on September 20, 2011

The Eurozone doesn’t have a debt crisis. Individual Eurozone countries obviously do – and these individual problems are being exacerbated by the common currency. But at the level of the zone as a whole the debt dynamics look pretty robust.

The two charts below (data from the IMF’s April World Economic Outlook database) clearly demonstrate this.

All of which makes a Eurobond more appealing as a crisis solution – but as Chris notes maybe the problem is that I’m seeing this as a technocratic rather than a moral problem?

For the most vivid demonstration of this – I highly recommend the Eurozone crisis explained with Lego (as explained by JP Morgan)…

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10 Responses

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  1. Migeru said, on September 20, 2011 at 9:19 am

    It’s not your problem that you’re seeing this as a technocratic rather than a moral problem. The problem is that the policymakers are seeing this as a moral, not a policy problem. They’re raining fire and brimstone on deficit/debt “sinners” (to quote prominent German opinion makers).

    As a whole, the Eurozone has balance trade. So the trade imbalances of Eurozone countries are all internal to the Eurozone.

    This is clearly a political crisis, manifesting itself as inability to solve an economic problem without making a huge economic crisis out of it.

    Technocratic analysis will only get us so far. At best, one can try to show the moralistic zealots what the economic consequences of their zeal will be.

  2. Dave Holden said, on September 20, 2011 at 9:51 am

    Nice!

    The problem on the whole, certainly in the short term , isn’t government debt and never has been – it’s only become one because of their insistence in bailing out banks and bond holders at the expense of the tax payer.

  3. Dave Holden said, on September 20, 2011 at 9:56 am

    Oh on the Eurobond – my understanding is that the Germany constitutional court has ruled that illegal and I don’t see it taking off without Germany.

    • duncanseconomicblog said, on September 20, 2011 at 9:58 am

      Yeah – don’t see a Eurobond coming without fiscal union.

  4. JakeS said, on September 20, 2011 at 1:05 pm

    Um, no. There most definitely is a Euro crisis.

    The problem with your analysis is that you perpetuate the myth that this is a debt crisis. It is no such thing: There is no perceptible correlation between coming under attack and having high debts and deficits. The correlation (and by now it is incredibly striking) is between current accounts deficit and coming under attack.

    This is a currency crisis. It always was a currency crisis. All this talk about government debt is ideological gobbledygook perpetuated by people who suffer from an emotional hangup when it comes to effective fiscal policy.

    – Jake

    • duncanseconomicblog said, on September 20, 2011 at 1:13 pm

      Jake,

      I think we disagree on this – and no I’m not an MMTer, interesting though some of it is.

      Greece has a debt crisis. Austerity can’t solve that crisis but it has one.

      Italy has a growth crisis. Spain has a banking sector debt crisis, ditto Ireland.

      I’m not at all sure fiscal policy alone can solve any of those.

      Yes though – a common currency (especially given ECB policy) has made all of those problems worse.

      • metatone said, on September 20, 2011 at 4:47 pm

        Surely the point is not whether or not fiscal policy can solve any of those alone, but whether or not any of them can be solved by anything in the absence of fiscal policy.

      • JakeS said, on September 24, 2011 at 9:18 am

        I think we disagree on this – and no I’m not an MMTer, interesting though some of it is.

        I don’t usually self-identify as one either. But when they’re right, they’re right. And they’re right about the inability of bond markets to stage a run on sovereign debt in the sovereign’s own currency, unless the central bank permits them to. “The markets” can stage a run on the currency if the central bank has made inadequate provisions for currency reserves during non-crisis periods, but an on-the-bounce central bank can always accumulate enough hard currency during the years when there is not a crisis to serve as lender of last resort during a currency run if they are prepared to surrender the lower bound of their exchange rate (incidentally, this also imposes a negative feedback on the current accounts deficit, thus reducing the need to accumulate ForEx reserves).

        The operational constraints on a sovereign central bank are its access to hard currency, the productive power of the jurisdiction over which it can issue legal tender and the required real return to equity of the private sector (since banks may fund in the stock market if the rediscount rate goes above this, while publicly traded firms may not generally fund at the discount window). That’s it. The rest is politics.

        Greece has a debt crisis. Austerity can’t solve that crisis but it has one.

        You keep saying that, but that doesn’t make it true. The US has consolidated public debt and deficits on the same order as Greece did when the run on the Greek €-Mark peg began, but the US does not have a debt crisis.

        Spain has a banking sector debt crisis, ditto Ireland.

        The Spanish banking crisis is the inevitable consequence of constrained fiscal and currency policy in the presence of a structural current accounts deficit. I may not be an MMT’er, but I do believe in basic double-entry bookkeeping.

        Unconstrained fiscal policy cannot, by itself, solve the structural current accounts deficit – you need industrial and currency policy for that. Which is why you get a currency crisis when you lock yourself into a currency peg that is prima facie incredible in the face of a structural CA deficit.

        Unconstrained fiscal policy can, however, solve the banking crisis, because there is no banking crisis so deep that a sovereign with unconstrained fiscal policy cannot solve it.

        Of course, unrestricted fiscal stimulus a la Japan is not the smartest way to solve a banking crisis. But it’s certainly doable. And, more to the point, a proper banking resolution requires unconstrained fiscal policy, because a proper banking resolution requires recapitalising those banks whose asset base cannot cover their insured deposits and/or those creditors of the banks which are judged to be of strategic importance to the state. You cannot do that if you have to be mindful of the risk of a run on your government bonds.

        The Irish banking crisis is a consequence of a failure to regulate the Irish banking sector. There is nothing wrong with Ireland that default and better banking regulation in the future won’t solve.

        I’m not at all sure fiscal policy alone can solve any of those.

        It certainly can solve some of the problems. Not all of them, but then nobody here is asking fiscal policy to solve all the problems. Fiscal policy is one of a portfolio of policy options, most prominently including currency and industrial policy. You will notice that currency policy is also restricted by joining a currency union, while industrial policy is hamstrung by having to operate within the straitjacket of constrained fiscal and currency policy.

        – Jake

  5. Titos Christodoulou said, on September 23, 2011 at 8:44 am

    It is surely felt as a debt crisis and a payment crisis in Greece, and I can’t think how low could drachma would have to fall to reflect the cumulated balance of payments problem now.

    • JakeS said, on September 24, 2011 at 9:22 am

      That obviously depends on how much of your hard-currency debt you were to simply repudiate.

      But yes, currency crises suck. That’s why you should make sure that you don’t peg to indefensible exchange rates and that you accumulate enough hard currency reserves during non-crisis times for your central bank to act as lender of last resort during runs on the currency.

      And yes, when you have to stop running a CA deficit, you will become poorer. You will become a lot poorer by imposing wage suppression, however, than by permitting the currency to depreciate, because wage suppression will destroy demand on top of taking away the free stuff you got from the CA deficit. Finally, and more importantly in my view, depreciation of the currency is more distributionally sound than wage suppression.

      – Jake


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