Merkel, Scholz, the German Social Democrats and the Meaning of the Left

Angela Merkel is stepping down, and as often happens in these circumstances (or when someone of historical importance passes; see here for my review of Thatcher and Volcker obits) there is a flood of analysis of their contributions. Merkel is no exception, and most 'serious' outlets have suggested that she was a great stateswoman, and that she managed to save the euro (an honor she often shares with Mario Draghi), the European Union and provided leadership in the midst of the vacuum caused by Donald Trump (see here, or here, for example). The newspaper of record, linked there, says that: "Chancellor Angela Merkel steered Europe through crises, and Germany has boomed during her tenure." I kid you not! Yes, boomed. The actual real GDP growth was about 1.1 percent on average during her tenure (as per graph; data from the Conference Board).

Note that there is no acceleration of growth, that has remained low since reunification with Helmut Kohl, and with the brief interregnum of Gerhard Schröder, the center-left (more on that below) leader of the social democrats in the early 2000s. The New York Times suggests, not incorrectly (at least on this) that she leaves many economic problems behind, but argue that those stem from lack of investment in education (the 'human capital' mantra) and on high-tech technologies. Note that investment often follows growth, and that has been anemic in Germany, and productivity follows growth, including in the high tech industries. It is demand driven. Merkel did not create the neoliberal model, but she certainly followed it.

Her legacy should be tied to the euro, and to Greece (I wrote quite a bit on Greece over the years; see here, and in the other blog here starting even earlier in 2010), and there her legacy of austerity, fiscal adjustment, which allowed Germany to maintain fiscal and current account surpluses (the measure of her success, I would guess), is an undeniable disaster. Greece GDP never recovered (see figure below; same source).

In other words, nobody should think that these is something to be emulated. The reason right-wing, photo fascist parties, like some of the craziest stuff that one can see in the United States are possible in Europe is because of the policies that she adopted. Of course, as I noted these policies precede her, and Kohl, the German version of Reagan and Thatcher deserves a lot of the credit, both as instrumental on the unification, which still has important implications for the levels of employment in the ex-Eastern Germany, and the policies that led to the euro. Of course, it took a social democrat, Schröder, to promote the labor market reforms (essentially, more flexible markets, making it easier to fire workers, and providing lower benefits for the unemployed) and a policy of wage compression.

And that brings us to Olaf Scholz, Merkel's finance minister, and the leader of the social democrats (which were in many ways a reference for the left globally at some point in the very distant past), which are uniformly described as center-left (NYTimes here). I will not spend too much time discussing that, but I would note that a left of center government must have policies to promote the wellbeing of the working class, including higher wages and something that resembles full employment. The German Social Democrats are not that. And if Mr. Scholz manages to form a coalition government, it will be with the Greens, which will push for degrowth (on that see this old post), and perhaps with the neoliberal Free Democratic Party, mostly people that have not seen a fiscal adjustment plan they did not like. So Merkel's legacy lives on.

The Wall Street Journal and the future of Greece

Greece’s Business Prospects Brighten After Lost Decade. Or so says the Wall Street Journal. I fail to see how. And the graph below is their illustration.

Note that the reason for the brighter situation is merely that it has stopped falling. I had a similar graph not long ago comparing it just with the Depression in the US.

Employment losses in historical perspective

My colleague Chris Magee sent this graphs around about employment losses during different recessions. The first one below show all the recession from the 1970s onwards.

The next one, which I modified to show just the Great Recession and the Great Depression, is below, and gives a sense of the dimension of the Depression.

The sheer size of the Depression is impressive. Even though the last recession is an outlier, it pales in comparison with the Great Depression. You can see in the graph very clearly the Roosevelt recession of 1937-38, and also the fact that the recovery was very slow, even though as one can see from the graph above the current recovery was also slow, by historical standards.

I'm not sure what lessons Chris derived from his graphs, but I would argue that is safe to say that both the macro interventions, the fiscal package and the alternative monetary policy(even if one might have criticisms about particular elements of both), and the more widespread existence of automatic stabilizers, worked very well and precluded another Great Depression. I would see that as some evidence in favor of the New Deal policies and institutions, which essentially were behind the macro policies, and of the importance of Keynesian ideas, which gave theoretical foundation to those policies.

Josh Bivens had a piece on EPI a few years back on the slow recovery which is still worth reading. Btw, his lessons seems to be that there was not enough fiscal stimulus, something that also explains to some degree the persistence of the Depression. I wrote, even longer ago, that one should also take into consideration the conditions of the labor market, and not just the employment recovery, to have a better picture of the economic conditions.

PS: I have done a similar graph with GDP losses comparing the US and Greece. That one indicates the costs of austerity (in Greece).

On mainstream Keynesianism

Looking up to Galbraith

The ASSA Meeting was this last weekend in Philadelphia. It was the bomb... cyclone (Nate Cline's joke; I'm sure many others too came up with that one). I don't have much to report actually. I did participate in one section, and will post a link to a preliminary version of my paper soon. I was at the Economists for Peace and Security (EPS) dinner, that honored Jamie Galbraith. This blog was named Naked Keynesianism, as you may know, because years ago Fox News accused him of teaching naked Keynesianism, and I thought that was both funny and a reasonable name for the stuff I did.

Anwar Shaikh was at the dinner, and suggested that Jamie has one foot in each side of the heterodox/orthodox divide, as a result of his paternal influence (Richard Parker noted that as father/son duos come, the Galbraiths do much better than the Friedmans or Steins, and as well as the Gordons), and that for that reason at EPS (presided by Jamie for more than 20 years) we got accustomed to be less segregated from the rest of the profession. That seems about right.

And to prove Anwar right, Joseph Stiglitz was at hand to discuss Jamie's many achievements, and  the many battles, including the one on Greece's debt crisis, and that is far from over, that he fought with Jamie.* Yet, while on policy issues there have been many battles that reasonable, and progressive mainstream Keynesians have fought with heterodox economists (a topic discussed here before), there are important differences between heterodox Keynesians, and their mainstream counterparts. For example, check Stiglitz's new paper on the last issue of the Oxford Review of Economic Policy (OREP).

He acknowledges that: "the economy does not quickly return to full employment," and that "simple models have been constructed investigating how structural transformation can lead to a persistent high level of unemployment, and how, even then, standard Keynesian policies can restore full employment, but by contrast, increasing wage flexibility can increase unemployment." That is essentially correct, and I should add, that perhaps Stiglitz has gone further than most mainstream economists pushing the need for the limits of what he refers to as equilibrium models (mostly of the Monetarist and New Classical/RBC type). But essentially his critiques derive from information problems and limits to rationality, coming from behavioral economics insights.

I often think of Olivier Blanchard when I have to discuss the inability of reasonable mainstream Keynesians incapacity to break with old ways of thinking. Perhaps because of his role until recently at the IMF (now that role was taken over by Maurice Obstfeld). Blanchard tells us in his new paper in the same issue of OREP that: "current DSGE models are flawed, but they contain the right foundations and must be improved rather than discarded."

This is essentially the point of Blanchard's paper on the natural rate too. He essentially suggests that not only the natural rate hypothesis is theoretically reasonable, but that it is relevant for policy makers. Not surprisingly the IMF has not changed its views on macro policy that much (on that see my previous post and the several links to older stuff).

Of course Jamie long ago suggested that the the concept of the natural rate itself should be abandoned. And he did it in the Journal of Economic Perspectives, a journal that was supposed to showcase alternative views in pluralist fashion, but that has failed in being inclusive of heterodox traditions. The inability to ditch the natural rate, even in the face of the last financial crisis (and something that Keynes suggested in the GT) is the main persistent failure of the mainstream.

* Stiglitz acknowledged that Jamie has been studying inequality since before Piketty made it a fashionable topic.

A few brief comments on Brexit and the postmortem of the European Union

Another end of the world is possible

There will be a lot of postmortems for the European Union (EU) after Brexit. Many will suggest that this was a victory against the neoliberal policies of the European Union. See, for example, the first three paragraphs of Paul Mason's column here. And it is true, large contingents of working class people, that have suffered with 'free-market' economics, voted for leaving the union. The union, rightly or wrongly, has been seen as undemocratic and responsible for the economics woes of Europe.

The problem is that while it is true that the EU leaders have been part of the problem and have pursued the neoliberal policies within the framework of the union, sometimes with treaties like the Fiscal Compact, it is far from clear that Brexit and the possible demise of the union, if the fever spreads to France, Germany and other countries with their populations demanding their own referenda, will lead to the abandonment of neoliberal policies. Austerity will most likely continue. On this matter, note that the United Kingdom did not ratify the Fiscal Compact, and austerity is a completely home made policy, consolidated by the current Conservative government, but also by the previous Blairite New Labor. And Socialist governments in France (you can say the same of Syriza in Greece) have also accepted austerity as the only alternative.

Most of the austerity policies imposed on the peripheral countries are actually the result of the euro, and are to a great extent independent of the existence of a broader political union. Of course the mechanisms for imposing austerity pass through the institutions of the union, but it is clear that progressive policies can be pursued within the union.

In order to understand the limitations of the European project it is important to remember that the original project, associated to the Treaty of Rome built on the European Coal and Steel community, was a policy that aimed at resolving the perennial Franco-German conflict, with the cooperation of the US, in the context of the Cold War. The project went hand in hand with Keynesian policies at home, and the development of the modern Welfare State, possible in part as a result of the Marshall Plan. On the other hand, the modern union is often confused and seen as being inextricably associated with the euro, which was designed after the Conservative resurgence in the 1980s, and consolidated in the 1990s after the collapse of the Soviet block. That is, the euro was created in the neoliberal Thatcherite world in which supposedly 'there is no alternative.' The context has not changed much, even if there is a revolt against neoliberal policies.

And that is why separating the euro project (the case of Grexit would be based on that) from Brexit is important. This is hardly the demise of neoliberal policies. Even the end of the European Union would not guarantee that pro-worker coalitions would win elections, or that if elected they would purse Keynesian expansionary policies (btw, it is also unclear that Grexit would solve all the problems in Greece, and that a default would be successful, although I do think the case is stronger there).

Globally, in fact, there is no evidence that neoliberalism is retreating. In Latin America, the opposite seems to be the case. In the US the same working class anger with neoliberal policies, austerity and stagnation has led to both Bernie Sanders and Donald Trump's insurgent campaigns, but we may end up with the same old neoliberal policies as always (yeah, I mean Hillary Clinton; and no Bernie and Donald are not the same, but that's another issue, and I would vote for Hillary). Even worse, some elements of the revolt of the masses in the US have led to a wave of anti-immigrant sentiment and outright xenophobia, not unlike the UK. And that is something that Nigel Farage and Boris Johnson have exploited in the UK. And remember that Jeremy Corbyn was for Remain, and that he may also suffer with Brexit, and with that the insurgence against neoliberal Blairism within Labor.

Personally, I cannot see that the disintegration of Europe would lead to a positive outcome. Sure the EU has a significant democratic deficit, and a bureaucracy that is seen as wasteful and inefficient (that is always, btw, part of the right wing propaganda for smaller government; you know, because private corporations are always so efficient and democratic, aren't they?). The same is true of American democracy. Ask the Bernie supporters re-counting votes in California (or Al Gore for that matter). So maybe secession should be the solution (yeah, in the US it's the right wing crazy lunatic fringe in Texas that thinks that this is a good idea). And yes, the right wingers in Europe are rejoicing (Trump too).

At a minimum the European Union provided an environment in which people could move freely, in which petty nationalism gave way to acceptance of foreigners and immigrants, something particularly relevant with the refugee crisis in the neighboring region. Some may suggest that this was very little to show for. And the alternative, does it have something to show for? If the European Union really collapses, there will be very little for progressives to be happy about.

An alternative for Greece

Nikolaos Bourtzis (Guest blogger)

There we have it again. Another one of those clashes between Greece’s creditors and the Greek government. For the millionth time, the Troika, I’m sorry I mean the institutions, are demanding that Greece comes up with policy suggestions that could bring in 3.6 billion approximately in fiscal savings.

This time, though, is different because these are going to be a “just in case” package, a buffer in case the government misses its fiscal targets. The government wants to finish the negotiations as soon as possible in order to remove the uncertainty that has grinded the Greek economy to a halt but it does not want to pass any preliminary measures. The negotiation on other issues is coming closely to an end, or so it is being reported, but this issue persists and the final decision is to come from the urgent Eurogroup meeting on Greece that will take place on the 9th of May.

Why all this fuss? Well, Greece urgently needs a disbursement of some of its 80 billion euros bailout money in order to cover its debt payments that are coming up in the summer. In addition, if the measures that are agreed upon during the negotiations are passed, the “forbidden” book of debt relief might be opened. The IMF insists that Greece’s public debt is unsustainable and some sort of debt forgiveness is necessary or else it won’t be able to take part in the bailout. And it might just be the case that the IMF is capable of doing anything in order to impose its ideology (Hint: The recent leaked discussion).

How is it that more austerity will make the public debt more sustainable, though? A form of debt relief was granted to Greece in 2012 with the so-called PSI. Interest rates on its official loans are at rock bottom; not having to pay 5 % or 10 % interest payments could be seen as a form of debt relief. How come that is not enough? This back and forth between the Greek governments that have passed by the last 6-7 years and the official creditors has always ended up with more austerity, more deregulation and well, more of the same; more of the same failed policies that are not even addressing the root of the problem; the depressed Greek economy. If the Greek economy were growing, nobody would be worrying about Greece’s debt. Public debt should never be a problem and it doesn’t have to be. The real issue that both the creditors and the Greek government are not paying attention to is how to get the economy back on its feet and put an end to the humanitarian crisis that is plaguing the nation.

There is only one way to put an end to this. Grexit; yes Grexit. It’s going to be difficult in the beginning but it might be the only sustainable long-term solution. The Bank of Greece would have to secure enough reserves, through some sort of external loans, to support the exchange rate and to pay for imports. Printing new bills would take some time so the euro and the drachma would probably have to coexist for some months. The banks would have to be nationalized since a bank run is very probable and no external funding would be available for them. But the point here is that Greece’s economy did not tank because public debt is high nor did it tank because it has severe structural issues, which it partly has. The Depression was a result of a severe fall in aggregate demand. The financial crisis took a toll on Greece’s banks, which then had to be nationalized. Lending contracted along with consumer and business spending. That’s where the government has to step in with aggressive fiscal expansion that will invigorate “animal spirits”. The structural reforms, that the creditors want Greece to pass, are not going to do anything to support demand, and austerity has depressed aggregate demand even more. That is the main culprit of this disaster. Government spending does not have to be constrained by borrowing. If Greece had its own currency, it could fund income support and employment programs with central bank credit; yes, by printing money. Mainstream economists will scream “hyperinflation” if anybody proposes such kind of policy. With the economy operating well below capacity, inflation is not going to be a problem and it’s actually needed. The economy is experiencing debt deflation right now. Unserviceable debts need to be dealt with immediately if consumer spending is to pick up for good and the only way to do it is if the government provides assistance to troubled borrowers.

That should have been the official “Plan B” of the Greek government; Grexit. The debt cannot be serviced and it needs to written off. The Greek economy and the Greek people have been sacrificed on the altar of debt servicing and it has to stop. There is a way to recovery that does not involve any more of the so-called “internal devaluation”, which is obviously not working. Wages have collapsed by almost 20 % and unemployment is still stuck at 25 %. Greece can rebuild its economy but only outside the Euro. A well-designed industrial policy could bring manufacturing back to life, employment and training programs can bring down the prohibitively high unemployment and the reversal of social spending cuts can help alleviate poverty. Comprehensive regulation of the financial system could prevent a repeat of a financial crisis and direct lending to the real economy. Finally, the labor laws that were repealed need to be brought back and labor unions need to be strengthened if wages are to go up. Labor unions and collective bargaining were one of the reasons for the thriving middle class all over the world until the era of neoliberalism in the 1980s.

Unless a government that is bold enough to stand up to the neoliberals of the EU and the IMF takes power, the theatrical negotiations will keep going, the government will keep caving in and more of the same failed policies will be implemented.

How bad is the Greek crisis in one graph

Real GDP starting in 1929 for the US and 2007 for Greece. Back then, with the New Deal, the US economy had essentially recovered after less than a decade. But there is no solution in sight for Greece now. This summer with more payments due, and the Brexit discussion on top, should bring new developments.

Unlimited Targets? Some pointers

By Sergio Cesaratto (Guest Blogger)

In this short note I will not add anything of substantial to the debate with Marc Lavoie on the nature of the Eurozone (EZ) crisis in view of Target 2 (T2). Readers have numerous papers to look at (including Lavoie 2015a/b, Cesaratto 2013, 2015a/b) and posts (Vernengo 2015, Ramanan, 2015). However, although most of relevance has already been said, there is perhaps still some space for few qualifications.

1. Subject of the dispute is on whether the EZ crisis can be considered a balance of payment (BoP) crisis in view of the existence of T2 and of the Eurosystem semi-authomatic refinancing mechanism, or if it should be considered a crisis derived from flawed institutional mechanisms that led, in particular, to a belated intervention by the ECB to sustain peripheral sovereign debts.

Marc believes that given the existence of T2 and refinancing mechanisms, a BoP crisis cannot occur in a monetary union:

“The point that I have tried to make on a number of occasions at conferences is that outflows are not limited by the amount of foreign reserves in the Eurozone context, in contrast to a country on a fixed or managed exchange rate regime. If a Eurozone country is running a current account deficit that banks from other Eurozone members decline to finance, or if it is subjected to capital outflows, then all that happens is that the national central bank of that country will be accumulating TARGET2 debit balances at the ECB. There is no legal limit to these debit balances. The national central bank with the debit balances, which pay interest at the target interest rate, has as a counterpart in its assets the advances that it must make to its national commercial banks at that same target interest rate. And the commercial banks can obtain central bank advances as long as they show proper collateral. Why would the size of current account deficits or TARGET2 debit balances worry speculators?” (Lavoie 2015: 158)

Marc correctly points out the difference in our views:

“Cesaratto (2015°: 151) and I agree when he concludes that “there are no definite limits to T2 imbalances”; he seems to disagree when he adds that “a political limit has been set by the imposition of harsh austerity measures on peripheral countries in order to obtain positive CA balances”. (ibid)

So the difference is that I see policy limits (perhaps political was not the right word) to T2 imbalances in the sense that policy makers cannot see them growing indefinitely, reflecting growing flow and stock foreign indebtedness and, correspondingly, mounting indebtedness of peripheral private and sovereign debts.

2. To give an example, would a central government with a sovereign central bank (CB) let one region (say Calabria) to expand its expenditure issuing regional bonds by letting its CB to guarantee an unlimited issuance? Notably this behaviour would let this region to accumulate an unlimited balance of payment deficit and foreign debt with the rest of the country and the rest of the world. At the minimum the other regions would like to imitate this (electorally) convenient behaviour. The reader can derive by herself the economic consequences of this behaviour.

If this does not complicate the life of readers, a reference to a view that cannot be suspected of fiscal timidity, that is to MMT, is useful here. Wray and Nersisyan (2010: 16) argue that although there are not “financial constraints [to sovereign debt and deficit] inherent in the fiat system”, nonetheless some arbitrary fiscal constraint, e.g. a balanced budget of the cycle, is necessary to avoid that the government “might spend ‘out of control,’ taking too large a percent of the nation’s resources”.

Would any national government let its CB to back a single region to behave this way? And should we expect the EU sustaining a single member, let alone a group of members, to behave this way? Or could we expect the U.S. printing dollars to check the Argentinian foreign debt crisis in 2001?

On a similar vein Ramanan (2015, italics added) pointed out:

“Let’s consider what happens if there is no federal government and if the ECB is the main supranational authority (ignoring other supranational institutions which have limited powers). Suppose the ECB were to guarantee the debt of governments of all Euro Area nations. There’s nothing to prevent, say, the government of Finland to increase the compensation of its employees every year by a huge percentage and thereby affecting Finnish corporations’ compensation of its employees. This will result in a reduction of competitiveness of Finnish producers and Finnish resident economic units will rely more on goods and services produced abroad. This will raise Finland’s net indebtedness to the rest of the Euro Area and the world. If someone believes that this debt is not a problem, how about the inflationary impact of this rise in demand on the rest of the Euro Area?... 

To summarize, the Euro Area problem wouldn’t have been a balance-of-payments problem had the official sector promised to act as a lender of the last resort to national Euro Area governments without any condition. As long as there are conditions, it is a balance-of-payments problem. One cannot pretend that the European Central Bank has or can be given such powers to lend without any condition. And hence the Euro Area crisis is a balance-of-payments problem.”

3. In this sense I do not agree with the ecumenical view taken by Matias Vernengo (2015) according to which:

“Cesaratto and Lavoie hypotheses are one and the same. The balance of payments and the monetary sovereignty views of the European crisis are two sides of the same coin. The fact that overdraft facilities involved in the TARGET2 system could be used to create credit to finance euro imbalances, or that the ECB could buy government bonds in the secondary market does not preclude the fact that the actual crisis is, in the absence of these policies, the result of the inability to manage a CA deficit.”

It can be noted that Matias eventually endorses the argument (that I refrain to attribute to Lavoie but that, perhaps, he might approve) that the absence of an unlimited credit by the ECB is the ultimate cause of the BoP crisis. My view is that it is unthinkable to believe in an open ended support by the ECB (or by the EU governance) of unlimited Target 2 imbalances. And this is, in my view, the ultimate cause of the imposition of austerity policies on the periphery. The ECB “whatever it takes” (threatened) intervention, finalised to alleviate the austerity costs by reassuring financial markets, was indeed subordinate to the adoption of austerity measures - so that no German court could protest, inspired by Werner Sinn, that the ECB was sustaining unlimited peripheral foreign debts.

In Lavoie’s and Paul De Grauwe (e.g. 2013)’s views austerity was functional to reassure the financial markets about the fiscal sustainability of peripheral debts given the absence of the ECB as lender of last resort (see Cesaratto 2015b for a review). Note that this view is exposed to a fiscal interpretation of the crisis (one that Lavoie and De Grauwe firmly oppose). And, indeed, the reader may wander what is the cause of the crisis, given that Lavoie and De Grauwe tend to neglect Robert Frankel’s and others’ story about the similarities of the EZ crisis with the typical financial crisis of emerging economies (see Cesaratto 2015b for a review)

The next are minor points.

4. Marc is correct when he argues that Roberto Frenkel does not reject the “unlimited Target 2 unbalances view”:

“Let me make a final point. Cesaratto (…) enlists Roberto Frenkel (2012) among the
economists who support his ‘balance-of-payments’ interpretation of the crisis. I got quite
a different impression when I read his paper. While Frenkel (2012: 13) agrees with Cesaratto that the adoption of the common currency was a mistake and that the crisis has its origin in ‘the conjunction of fixed exchange rates, full capital mobility and weak financial regulation,’Frenkel nevertheless believes that the size of TARGET2 balances is irrelevant and argues that the sovereign risk premiums observed with GIIPS countries were tied to the absence of a credible lender of last resort”

And indeed in my most recent paper (Cesaratto 2015b) I had already pointed out:

“A more nuanced position is taken by Frenkel (2014, pp. 13-14). On the one hand he regards the eurocrisis as a balance of payment crisis; on the other, he denies that there can be an “exchange rate risk” (the typical manifestation of a balance of payment crisis) in the euro zone presumably because of the combination of Target 2 and the ECB refinancing operations. The increasing sovereign default risk is then attributed to the absence of a lender of last resort. Notably, with OMT the ECB began to act as a lender of last resort but precisely to defuse what Draghi (2012) called in his most famous speech ‘convertibility risk’, that is the risk of a euro break-up.”

5. Finally, although this is less important, I’d like to point out, in Cesaratto (2015a) I was not so pretentious to claim that Lavoie (2015) was entirely devoted to discuss Cesaratto (2013). Unfortunately this is the impression that the reader may get from Lavoie’s incipit of his Reply. When I began my (2015) paper writing:

“In a general appreciation of my work on TARGET2 (T2) (Cesaratto 2013), Marc Lavoie (2015a) criticized my interpretation of the Eurozone (EZ) troubles as a balance of payments crisis”,

by ”general appreciation” I meant “positive reception” (see e.g. the Microsoft Window Word dictionary), but perhaps the way I expressed myself was ambiguous.

References

Cesaratto, S. 2013. “The Implications of TARGET2 in the European Balance of payments Crisis and Beyond.” European Journal of Economics and Economic Policy: Intervention 10, no. 3: 359–382. link

Cesaratto, S. 2015a. “Balance of Payments or Monetary Sovereignty?. In Search of the EMU’s Original Sin–Comments on Marc Lavoie’s The Eurozone: Similarities to and Differences from Keynes’s Plan.” International Journal of Political Economy 44, no. 2: 142–156. link

Cesaratto, S. 2015b. Alternative Interpretations of a Stateless Currency crisis, Asimmetrie, WP no.8. link

De Grauwe, P. (2013) Design Failures in the Euro zone - can they be fixed? London School of Economics, LEQS Paper No. 57/2013. Link

Frenkel, R. 2012. “What Have the Crises in Emerging Markets and the Euro Zone in Common and what Differentiates Them?”, link

Frenkel, R. (2014) What have the crises in emerging markets and the Euro Zone in common and what differentiates them? in Joseph E. Stiglitz, Daniel Heymann (eds), Life After Debt - The Origins and Resolutions of Debt Crisis, Palgrave Macmillan (quotations from the WP version link)

Lavoie, M. 2015a. “The Eurozone: Similarities to and Differences from Keynes’s Plan.” International Journal of Political Economy 44, no. 1 (Spring): 3–17. link

Lavoie, M. 2015b. “The Eurozone Crisis: A Balance-of-Payments Problem or a Crisis Due to a Flawed Monetary Design?” International Journal of Political Economy 44, no. 2: 157-160. (abstract)

Nersisyan, Y. and Wray, L.R. (2010) Does Excessive Sovereign Debt Really Hurt Growth? A Critique of This Time Is Different, by Reinhart and Rogoff, Levy Institute, WP No. 603

Ramanan (2015) Sergio Cesaratto’s Debate With Marc Lavoie on Whether the Euro Area Crisis Is a Balance-Of-Payments Crisis – II, The Case For Concerted Action

Vernengo, M. (2015) Greece on the verge, Nakedkeynesianism, June 30

Public debt crisis, austerity and deflation: the case of Greece

From the new issue of the Review of Keynesian Economics (ROKE). By Marica Frangakis from the Nicos Poulantzas Institute, Athens, Greece. From the abstract:

Greece is the country in which the eurozone's public debt crisis began in late 2009. The policy response of the EU elites was to provide financial assistance on condition that a strict austerity-cum-deregulation policy is applied under the watchful guidance of the European Commission, the European Central Bank and the IMF (the so-called Troika). Five years later, the country is in an economic, social and political limbo, as a debt-deflation process has set in. Greece, however, is not a special case. Rather, it illustrates the failures of the prevailing economic and political orthodoxy in the EU. At best, it can serve as an example of the cost of ignoring the lessons of the 1930s Great Depression.

Read full text here. 

Galbraith on the plan B for Greece

Slow (really slow) posting this summer. Here a few links to Jamie's role on the Greek Ministry of Finance Working Group convened by Varoufakis. Here he clearly says that: "At no time was the Working Group engaged in advocating exit or any policy choice. The job was strictly to study the operational issues that would arise if Greece were forced to issue scrip or if it were forced out of the euro." So it was a plan B in case of Grexpulsion, not a tactical negotiation tool or a threat of Grexit.

Below a podcast on the same topic (first half in which Jamie is interviewed).

Again it confirms it was a contingency plan, and no there was no plan to hack taxpayer accounts to prepare a return to the drachma.

More on Greece at the Rick Smith Show

Greece, Europe, and the United States

"A progressive Europe—the Europe of sustainable growth and social cohesion—would be one thing. The gridlocked, reactionary, petty, and vicious Europe that actually exists is another. It cannot and should not last for very long."

By James K. Galbraith

The full brutality of the European position on Greece emerged last weekend, when Europe’s leaders rejected the Greek surrender document of June 9, and insisted instead on unconditional surrender plus reparations. The new diktat—formally accepted by Greece yesterday—requires 50 billion euros’ worth of “good assets”–which incidentally do not exist—to be transferred to a privatization fund; all financial legislation passed since SYRIZA took control of parliament in January to be rolled back; and the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) to return to Athens. From now on, the Greek government must get approval from these institutions before introducing “relevant” legislation—indeed, even before opening that legislation for public comment. In short: as of now, Greece is no longer an independent state.

Comparisons have been drawn to the Treaty of Versailles, which set Europe on the path to Nazism after the end of World War I. But the 1968 Soviet invasion of Czechoslovakia, which ended a small country’s brave experiment in policy independence, is almost as good an analogy. In crushing Czechoslovakia, the invasion also destroyed the Soviet Union’s reputation, shattering the illusions that many sympathetic observers still harbored. It thus set the stage for the final collapse of Communism, first among the parties of Western Europe and then in the USSR itself.

Read rest here.

SYRIZA betrays the resounding NO vote of the Greek people and signs a 3rd troika austerity program

Not yet!

The Left should create a popular front against the EU

By Stavros D. Mavroudeas* (Guest blogger)

In the 5th of July 2015 the huge majority of the Greek people (61%) rejected the insolent demands of the EU for the extension and deepening of the austerity and pro-capital restructuring policies in Greece. These demands were codified in the so-called Juncker Plan for Greece that set barbaric terms for the extension of the previous austerity program (the 2nd Economic Adjustment Program for Greece) in exchange for releasing much delayed tranches of the troika loans to Greece. These tranches were urgently needed for repaying instalments of previous loans by the troika. As I have argued in a previous note (‘The Greek referendum and the tasks of the Left’) SYRIZA was led unwillingly to call this referendum because of the failure of its unrealistic program for a ‘decent compromise’ with the EU and for ‘staying in the Eurozone at any cost’. Moreover, the whole affair proved beyond any doubt that EU is a capitalist and imperialist integration that cannot be reformed towards serving peoples’ needs.

The referendum’s victory with such huge margin was unexpected even for the NO supporters. In the short one-week campaign the Greek economic and political elites unleashed a blatant terror and misinformation campaign through their mass media purporting that a NO vote would destroy Greece and that EU’s terms should be unconditionally accepted. In this unconcealed blackmail the Greek politico-economic elite was directed and abetted by the EU with direct interventions by J.C.Juncker, the German government and the rest of EU’s high priesthood. Moreover, the EU proceeded to literally slowly strangle the Greek economy by curtailing, through the ECB, the injection of liquidity to the moribund – because of the troika policies – Greek banking sector. This led the SYRIZA government – on top of foolishly (?) emptying the state coffers for paying previous troika installments – to impose capital controls the very day that pensions were going to be paid. This alienated significant portions of the middle and lower strata and turned the previously almost sure NO victory to a gamble.

On top of that, SYRIZA for almost half the campaign week dragged its feet; flirting with canceling the referendum, revoking its support for NO and with several of its prominent members and ministers covertly helping the YES coalition. Only the last two days SYRIZA actually threw its support behind the NO campaign. Last but not the least, the Communist Party also facilitated the elite’s assault by campaigning for a null vote or abstention; a move that cost it dearly in its electoral support. Only the independent and extra-parliamentary Left and grass-roots initiatives and movements fought from the very beginning for NO.

Despite all these adversities, the NO ended winning by a landslide. It was a silent landslide because in the mass media and the public debate there was a suppressing dominance of the YES instigated by the Greek politico-economic elite and by the incompetent acts of SYRIZA (particularly the banking ‘holiday’, the capital controls and the problems in paying pensions and wages). It was also a class landslide in that the working people, the peasants, the lower middle strata and overwhelmingly the unemployed youth voted for No whereas the bourgeoisie and the upper middle strata voted for YES (see http://www.publicissue.gr/en/2837/greek-referendum-2015-no-voter-demographics/).

It is now evident that SYRIZA’s leadership and systemic centers did not welcome this landslide. They expected the win of NO or YES to be by a small margin that would facilitate them to argue that there is no popular support for a confrontation with the EU and thus proceed to an agreement with EU’s high priesthood. As all evidence suggests the NO landslide caused panic not only to the politico-economic establishment and the EU but also to the SYRIZA leadership. Thus, immediately the day after SYRIZA threw away the referendum result and its clear message for a confrontation with the EU despite the financial strangulation by the EU and the pain already felt by ordinary people. A.Tsipras convened a meeting of the leaders of parliamentary political parties (excluding the neo-nazi Golden Dawn) which had either openly (New Democracy, PASOK, River) or implicitly (Communist Party) opposed the NO vote. In this meeting they all agreed – with the exception of the Communist Party – to field a new proposal to the EU that was exactly on the same lines of the rejected in the referendum ‘Juncker plan for Greece’. Moreover, after a few initial skirmishes, SYRIZA accommodated itself again with the systemic mass media that have implemented the terror campaign for YES.

EU’s high priesthood replied to SYRIZA’s new overtures by toughening its position and demanding even more austerity and anti-popular measures and threatening with the immediate strangulation of the Greek banking sector and even a Grexit. In front of this assault SYRIZA and Alexis Tsipras capitulated unconditionally and they themselves proposed a new 3rd austerity and restructuring troika program for Greece. This was a complete somersault the extent of which was unexpected even by most of SYRIZA’s harsher critics. It denotes that SYRIZA’s leadership aimed from the very beginning for a deal with the EU which they knew that it would be barbaric and they simply played for time in order to consolidate their power and their position in Greek politics. The EU played along but also indicated – and the SYRIZA leadership was fully aware of it – that a delayed deal would be more costly. In a nutshell the SYRIZA leadership delayed in order to gain ‘political capital’ at the expense of ‘economic capital’. Its last gamble was the referendum. Once this trick back-fired the SYRIZA leadership blinked and retreated in panic. It proposed not simply an extension of the previous troika austerity program under the conditions of the ‘Juncker plan for Greece’ but a new 3-year program in exchange for either a debt haircut or a debt reprofiling, a new loan and some funds for development aid.

On the other side of the fence, the EU had its own internal antagonisms. While all of them were united in blackmailing Greece to capitulate they were divided in how much pain they were to inflict after the capitulation. The French and the Italians, reminiscent of their own economic problems and the fact that their turn might come soon, were keen on milder terms. They were supported in this by the distant but non-negligible pressures by the US. The latter does not actually care about the Greek case as such but it uses it as a lever to weaken German hegemony and the ability of the EU to dispute its economic supremacy. One of the major issues of disagreement between the US (and the IMF) and Germany is whether the Greek program would involve a debt haircut or not; the former press for it and the latter bitterly oppose it.

In the end, a very onerous (for Greece) provisional deal was struck. First, in order to ‘regain the debtors’ trust’, the SYRIZA government should revoke all legislation contradicting the troika austerity program and also legislate through fast track procedures (that violate parliamentary rules) deep cuts in pensions and wages, extensive privatizations and the transfer of public property worth 50bn euros to an independent company (that initially was humiliatingly suggested to be based in Luxemburg but afterwards agreed to be in Athens). This first move essentially means that the conditions of the 5th review of the old troika austerity program should be fulfilled. Second, once this done, the EU and the ECB should slowly restore liquidity to the Greek banking sector and release some of the due funds in the form of a bridge-loan. Third, only after the legislation of several other austerity measures new negotiations would begin negotiations for a new 53bn euros loan. This new loan would comprise by old tranches, some new funds from the ESM and a 35bn euros very dodgy development plan. This last item is supposed to comprise of already available National Strategic Reference Framework (NSRF) funds that were not actually absorbed because of the deep recession of the Greek economy and the lack of proposals and supplementary national funding. Of course, all these would be under strict conditionality and a return of the despised troika in Athens for close scrutiny and control. In these future negotiations there is a vague reference that some alleviation of the Greek total debt (through either reprofiling or haircut) would be considered.

The new austerity measures are extremely recessionary and anti-labor. They cost more than 13bn euros only for the 2015-6 period that would worsen the crisis of the Greek economy. Moreover, they would be paid by the working people and the lower middle strata. Several other pro-capital structural reforms are included (e.g. mass firings, semi-automatic mechanisms for fiscal cuts if the public budget is derailed). The new 3rd austerity and restructuring program would push Greek economy and society further down towards impoverishment and Balkanization. They will definitely foment popular discontent as already shown from the current popular mobilizations.

This grave situation poses a serious challenge for the Greek Left. One futile course is followed by the SYRIZA left. They voted against the deal but support the government and refuse to leave the party. This will expose them to popular wrath as willing or unwilling accomplices to the new austerity. The second futile course is that of the Communist Party that preaches the coming of socialism as a solution to everything while at the same time recognizing that this is not on the current agenda. At the same time refuses to fight against the EU because it considers this as intra-capital antagonism. This alienates it from and rank and file communists and the working people as it does not offer a solution to the immediate popular problems and a transitional program for social change. If these two dead alleys prevail then only the extreme Right would remain as the receiver of popular discontent and wrath against the EU and its austerity.

It is of paramount importance for the Left not to leave the field free to the extreme Right as it had happened in West Europe. A Left popular front against the EU should be urgently organized. This should involve political forces and grassroots popular organizations, fight austerity and capitalist restructuring and strive for the total disengagement of Greece from EU (that is for a popular Grexit involving leaving the whole structure and not solely the monetary union). It is the task of the independent and militant Left and the combatant forces of labor to instigate this front.

* Stavros Mavroudeas is a Professor of Political Economy in the Economics Department of the University of Macedonia.

Web: http://stavrosmavroudeas.wordpress.com

Europe in its Labyrinth, Greece on its Knees

The results of the new Greek bailout announced Sunday should not be a surprise. The program requires tax increases, pension cuts, weakening of collective bargaining clauses, and “ambitious” primary surplus targets, which would require € 13 billion in spending cuts, in exchange for € 50 billion to avert default and the collapse of banks. The adjustment program will deepen the already incredibly prolonged and severe collapse of the Greek economy. It implements a draconian fiscal adjustment, that has utterly and visibly failed, and that was overwhelmingly rejected by the Greek people in a referendum last week. In many ways Prime Minister Alexis Tsipras and Syriza had an impossible mandate, to remain in the Eurozone, and to deflect the austerity policies that are the only solution accepted by the Troika – the European Commission, the European Central Bank, and the International Monetary Fund.

Also, the proposed program is not the end of the story. It is unclear that the new agreement would pass in the Greek parliament, and it seems that several members of Tsipras’s party will vote against it. Left Platform, a subgroup of Syriza, would most likely vote against it. If the bailout is approved, which seems probable, it will be with the support of the traditional parties and ultimately with those that supported the Yes vote in the referendum. In that sense, those that suggest the bailout was a coup d’état, and that it undermined democracy are on the right track.

...

Originally published in The Wire. Read rest here.

The Greeks Have Said No to Failed Policies, Not to Europe or the Euro

The referendum that just took place in Greece in which 61.3% of voters rejected the terms of an international ‘bailout’ package should not be read as a vote in favour of leaving the euro. The ‘No’ vote – όχι in Greek – is, as correctly pointed out by James K. Galbraith, the only hope for Europe. On the other hand, it may very well be used by the Troika – the European Union (EU), the European Central Bank (ECB), and the International Monetary Fund (IMF) – as an instrument for expelling Greece from the monetary union. If that happens, we have a Grexpulsion and not a Grexit, the more common name for the abandonment of the euro. After all, it is very clear that SYRIZA knows that the costs of leaving the euro may very well outweigh the advantages, and that Greece is not Argentina, as noted by its Finance Minister (as it turns ex) Yanis Varoufakis recently.

The relationship between West European powers and the Greek Left has been problematic for a long while. In the aftermath of World War II, the British and then the Americans, sided with collaborationists, rather than with the resistance, which had communist leanings, and was seen potentially allied to the Soviets. As Tony Judt says of Greece in Postwar: A History of Europe Since 1945, “despite a significant level of wartime collaboration among the bureaucratic and business elites, post-war purges were directed not at the Right but the Left. This was a unique case but a revealing one.” The British and Americans preferred a conservative government, even if it meant dealing with businessmen who had collaborated with Fascists, rather deal with a communist or socialist threat.

Read rest here.

The Greek referendum and the tasks of the Left

By Stavros Mavroudeas* (Guest blogger)

For six months, after its January 2015 election victory, the SYRIZA government began negotiations with the EU. In these negotiations SYRIZA was confronted with the stubborn and increasing intransigence of EU and its companion institutions (the ECB and the IMF). SYRIZA very soon accepted the logic and the structure of the troika program; that is the Economic Adjustment Program for Greece popularly called the Memorandum. It simply tried to modify it by making it less front-loaded (i.e. delaying the implementation of reductions in pensions and hidden wage cuts, reducing fiscal primary surplus targets and thus making fiscal policy less austere). It also asked for facilitating debt servicing (by rolling back debt, leveraging and ‘financial engineering’) and an increase in aid funds (through the fictitious Juncker plan) that would help to jumpstart the moribund after 6 years of austerity Greek economy. Last, it shyly asked for some commitment for a future reduction of the Greek debt. The EU, as soon it diagnosed this conciliatory mood by SYRIZA and since the whole game was played in its ground, begun pressing it for additional concessions. The more that SYRIZA slide towards capitulation the more the EU demanded. In the end it was politically infeasible for SYRIZA to accept all of EU’s demands, even despite its humiliating compromises and its blatant betrayal of even its mediocre electoral program. This led to the breakdown of the negotiations and the call, by the SYRIZA government, of a referendum on the troika’s demands.

The breakdown of the negotiations between Greece and the EU proved beyond doubt the true nature of the EU: it is the enforcers of the interests and prerogatives of the dominant capitalist powers of Europe. It imposes neoliberal austerity policies on the people and weaker countries of Europe for the benefit of capitalist profits.

Moreover, the negotiations’ breakdown demonstrates the unrealistic character of the SYRIZA government program for a ‘decent compromise’ with the EU that would be ‘neither a clash nor a capitulation’ and for ‘staying in the Eurozone at any cost’. If you want to stay in the Eurozone and the EU you have to capitulate to the demands of its dominant powers. There is no other way. Thus, even the 47-pages long SYRIZA proposal for a milder version of the troika austerity program was indignantly rejected.

The failure of the SYRIZA strategy and the simmering popular discontent with the return of the troika austerity policies obliged the SYRIZA government to reject the troika demands and put them to the public vote through a referendum. At the same time the SYRIZA leadership argued that in case of a ‘NO’ it would approach again the EU for new negotiations.

SYRIZA failed not only strategically but also tactically. It did not touch the deep state structure that continuous to be manned by obedient servants of the Greek oligarchy and, on top of that, SYRIZA used more of them in several crucial positions. For example, SYRIZA did not acquire control of the central bank and also accepted or even appointed several ‘men of the system’ in the directorship of commercial banks and other crucial public enterprises. SYRIZA emptied the state coffers by stupidly paying all the due tranches to IMF and the international creditors. Thus, once the referendum was called the EU, in close co-operation with the Greek bourgeoisie, created a condition of asphyxia for the banking sector and obliged SYRIZA to impose very severe capital controls on the very day that the huge mass of Greece’s badly paid pensioners (that support also another big portion of the population) were paid. In this way a referendum that was going to be an easy NO to troika’s demands victory was turned into a close call.

On top of that the Greek bourgeoisie immediately created its own united front (by setting aside political and economic differences), mobilized every means available (mass media, bosses’ pressure on employees etc.) and embarked on a blatant terror, slant and misinformation campaign. Its aim is to terrorize the rest of the population (and particularly these significant segments of the middle strata that have survived the crisis and had not been proletarianised) that unless Greece surrenders unconditionally to the EU then all hell would break loose.

Against this assault SYRIZA oscillated for a critical period toying (because also of internal pressures) with the idea of canceling the referendum and offering more concessions to the EU which the latter – having smell blood – humiliatingly rejected. Only then SYRIZA began to embark on a campaign to win the referendum but at the same time assuring that afterwards a deal will surely be struck with the EU.

In the rest of the political spectrum of the Greek Left only the main forces of the extra-parlamentary Left took up the challenge and energetically fight for a massive popular No to the EU. The Communist Party, betraying all the communist traditions in Greece, declared that it will put in the ballot box its own ticket. Practically, this means that is suggests an invalid vote and it implicitly helps the YES campaign.

Sunday’s referendum is a crucial battle. What is at stakes is whether the Memorandum’s barbaric restructuring of the Greek economy and society will continue or another course will be inaugurated.

This conflict is being fought along very clear class lines. This is almost obvious if you stroll around in Athens’ neighborhoods or in work places. In bourgeois areas and in managerial functions there is an unforeseen mobilization of even apolitical people in favor of YES. On the one hand, in working class and popular quarters there is an evident majority of NO. Middle class areas tend to divide between haves and have nots.

The prevalence of systemic forces of the YES, irrespective of whether SYRIZA remains or not in the government, would mean that Greece would move towards our poorer (and further impoverished by the EU) Balkan neighbors and compete with them in a ‘race to the bottom’ who would be more cheaper – in wage costs and asset prices – in order to get a small reward from EU’s masters.

A victory of the NO would block this course. It will come only through the return of the mass popular mobilization that existed before everything was erroneously delegated to a SYRIZA electoral victory that was proved inefficient. This will also dispute SYRIZA’s unrealistic and conservative attempts for a new renegotiation of the Memorandum program. It will bolster popular confidence that the EU and the Greek bourgeoisie are not unbeatable and that another course outside the shackles of the EU is feasible.

It is the responsibility of the militant Left and the vibrant forces of the working class to take this battle on their hands.

* Stavros Mavroudeas is a Professor of Political Economy in the Economics Department of the University of Macedonia. Web: http://stavrosmavroudeas.wordpress.com

Weisbrot: Greece should vote no

Mark Weisbrot on why Greeks should vote no.

"Well, I would go for a no-vote, because you have to look at who is responsible for this mess, who is responsible for six years of depression, who is responsible for the bank closing right now. 

It’s because the European Central Bank decided last Sunday to limit the amount of emergency liquidity assistance, so that the banks wouldn’t have enough money to open. And they did this very deliberately, I think, to intimidate the voters into voting yes. 

Everything that comes out of the mouths of the European officials right now is trying to scare and intimidate people to make them feel this pain and tell them this is what you’re going to get if you vote no. This is what you’re going to get if your government is audacious enough to insist not on everything they want or even half of what they want, but just a deal that allows the Greek economy to recover and unemployment to come down. 

That’s really all that they have been asking for. And the European authorities have been stubborn and frankly pretty mean about it."

The whole transcript here. The whole video of Mark Weisbrot debate on the Greek crisis below.

Mark correctly points out that right now the crisis is caused by the European institutions, and that it is to punish and possibly oust a left of center government.

Greece on the verge

Jean François Ponsot, Jonathan Marie and @NakedKeynes

I'm in France for a talk at the Université de Paris XIII, invited by Jonathan Marie and Dany Lang. The Greek crisis looms large in everybody's minds. I gave a talk based on two papers, one published here, and the other (specifically on the Spanish crisis) just finished, which will soon come as a working paper. But I discussed to a great extent the debate between Sergio Cesaratto and Marc Lavoie on the nature of the European crisis, that is, whether it is a balance of payments crisis or a monetary sovereignty one.

Cesaratto argues that a balance-of-payment crisis is possible in a currency union, and that the financial crisis of the Eurozone is indeed such a balance-of-payment crisis. Arguably Pérez and Vernengo (2012; the one linked above) suggest the same, even though the paper was written to argue that the crisis was not fiscal, as per the mainstream hypothesis, and the actual policies pursued by the Troika, which require fiscal adjustment as a solution (presumably because the problem was fiscal).

In the balance of payments or Cesaratto hypothesis, the problem would be that there are no federal transfer payments from the surplus to the deficit countries to help compensate the negative impact of CA deficits on GDP and budget balances. Or to make it more correct, it would be that there are no fiscal transfers from a federal government to the federated units, as has been shown is the case by Nate Cline and David Fields here for the US case.

Yet, as noted by Lavoie, the Eurozone crisis seems to have been mainly caused instead by a banking problem, which transformed itself into a public debt problem. In other words, the currency issue, and the functioning of the monetary union seem to be at the core of the crisis, not a balance of payments one. The monetary union clearly eliminates exchange rate risk, but not country risk, which might explain the interest rate differentials between euro countries. So some countries remain more vulnerable than others.

Marc suggests that the interbank payments system, the so-called TARGET2 (Trans-European Automated Real-time Gross Settlement Express Transfer System), used by the European Central Bank (ECB) can be seen as being at the heart of the problem. In his example, if a Spanish firm imports cars from a German firm, the ECB credits the German firm in a German bank and debits the Spanish one in his correspondent bank. There is no limit to the debit position that the Banco de España, the Spanish central bank, can incur at the ECB. The overdraft capacity of the ECB is unlimited.* So in this view the solution would be for the ECB to use its overdraft capacity to create the conditions for the euro periphery to continue to function without austerity.

Alternatively, this could be solved if the ECB bought bonds from the member countries. However, the rules of the euro imply that the ECB cannot purchase sovereign debt, and, hence, the mechanism by which a risk free asset is normally created is precluded to function. The creation of the risk free asset is the essential function of the central bank in relation to financial stability. According to Lavoie the Eurozone setup should have incorporated a central bank that holds and purchases large amounts of securities issued by the participating national governments. Something that was done in the US by the Fed after the crisis.

My argument, discussed briefly here before, is that the Cesaratto and Lavoie hypotheses are one and the same. The balance of payments and the monetary sovereignty views of the European crisis are two sides of the same coin. The fact that overdraft facilities involved in the TARGET2 system could be used to create credit to finance euro imbalances, or that the ECB could buy government bonds in the secondary market does not preclude the fact that the actual crisis is, in the absence of these policies, the result of the inability to manage a CA deficit. In his example, the origin of the debit position of the Banco de España is an import of German cars, which presumably corresponds to a current account deficit position.

In this sense, the European crisis is caused by the failures of the euro design, but it is also one that forces countries with banks that over-borrow, or that have firms that over-import, to adjust by reducing its imports through austerity, and, hence, increasing its ability to repay. Note that leaving the euro (in particular for Greece, i.e. Grexit), which would imply some degree of depreciation of the newly created currency, might not be sufficient (or even necessary) to solve the crisis. I discussed this here before. Yanis Varoufakis, the Greek finance minister, has also been skeptical about depreciation and Greexit.

* Marc compares TARGET2 to Keynes bancor, and suggests that Keynes might be, more than Mundell, the father of the euro. Two things come to mind. I think in principle, the adjustment rules based on austerity, are closer to Mundell than Keynes (poor Keynes, this institutional mess should not be pinned on him). Second, Keynes' plan also implies that there is a need for surplus countries to finance deficit ones. What really matters in this is who creates the overdraft, who has the power to create money, so to speak. Normally that has nothing to do with having surpluses. National governments are not in surplus against its subunits. Globally the US is a deficit country, and is still the one issuing the global currency.

Stiglitz and Krugman on Troika’s Attack On Greek Democracy

By Joseph Stiglitz

The rising crescendo of bickering and acrimony within Europe might seem to outsiders to be the inevitable result of the bitter endgame playing out between Greece and its creditors. In fact, European leaders are finally beginning to reveal the true nature of the ongoing debt dispute, and the answer is not pleasant: it is about power and democracy much more than money and economics. Of course, the economics behind the program that the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) foisted on Greece five years ago has been abysmal, resulting in a 25% decline in the country’s GDP. I can think of no depression, ever, that has been so deliberate and had such catastrophic consequences: Greece’s rate of youth unemployment, for example, now exceeds 60%.

Read rest here.

By Paul Krugman

It has been obvious for some time that the creation of the euro was a terrible mistake. Europe never had the preconditions for a successful single currency — above all, the kind of fiscal and banking union that, for example, ensures that when a housing bubble in Florida bursts, Washington automatically protects seniors against any threat to their medical care or their bank deposits. Leaving a currency union is, however, a much harder and more frightening decision than never entering in the first place, and until now even the Continent’s most troubled economies have repeatedly stepped back from the brink. Again and again, governments have submitted to creditors’ demands for harsh austerity, while the European Central Bank has managed to contain market panic.

Read rest here.

Greece Has Made Tough Choices. Now It's the IMF's Turn

By James K. Galbraith

The International Monetary Fund's chief economist, Olivier Blanchard, recently asked a simple and important question: "How much of an adjustment has to be made by Greece, how much has to be made by its official creditors?" But that raises two more questions: How much of an adjustment has Greece already made? And have its creditors given anything at all?

In May 2010, the Greek government agreed to a fiscal adjustment equal to 16 percent of GDP from 2010 to 2013. As a result, Greece moved from a primary budget deficit (which excludes interest payments on debt) of more than 10 percent of GDP to a primary balance last year -- by far the largest such reversal in post-crisis Europe.

Read rest here.