Posted by: Dirk | July 23, 2015

Kaletsky on the political economy of the eurozone: is his optimism justified?

Anatole Kaltesky has a very interesting piece at Project Syndicate, arguing that out of the bad bail-out a good economic governance structure will arise. He writes:

Indeed, Europe has overcome what could be described as the “original sin” of the single-currency project: the Maastricht Treaty’s prohibition of “monetary financing” of government deficits by the ECB and the related ban on mutual support by national governments of one another’s debt burdens. In January, ECB President Mario Draghi effectively sidestepped both obstacles by launching a program of quantitative easing so enormous that it will finance the entire deficits of all eurozone governments (now including Greece) and mutualize a significant proportion of their outstanding bonds.

Moreover, European governments have belatedly understood the most basic principle of public finance. Government debts never have to be repaid, provided they can be extended in a cooperative manner or bought up with newly created money, issued by a credible central bank.

While I agree somewhat with this view that the prohibition of “monetary financing” was the “original sin” of the euro zone, and that public debts never have to be repaid, I am somewhat doubtful about Greece. Kaletsky sees a future in which austerity is imposed on Greece to a somewhat lesser extent, because Europe would have all the incentives to do so. In contrast, Varoufakis describes the last bail-out (if it goes through) as disastrous reforms that will fail.

However, the main problem I see with Kaletsky’s view is his optimism concerning German economists and policy makers. The NY Times recently carried an article describing the situation in the economics profession in Germany:

Clemens Fuest, of the Center for European Economic Research, who has advised Mr. Schäuble, kept reciting numbers about Greek debt and growth, and said the Greeks had failed at every level over the past several years to manage their debt. He believed they should simply be thrown out of the eurozone. Henrik Enderlein, of the pro-European Jacques Delors Institute, said that Greece should stay in the eurozone, but only if it applied more austerity and better management. Daniel Gros, director of the Center for European Policy Studies, theorized that Greek debt and economic woes could be countered only with better export numbers.

The author goes on to express his surprise that nobody blamed Germany. The net exports of Germany, so he thinks, are part of the problem of net imports elsewhere. Flassbeck Economics pointed out a while ago that Schäuble, Germany’s finance minister, has never acknowledge the systemic nature of BoP accounting:

Nirgendwo findet sich in Schäubles Äußerungen ein – und sei es noch so versteckter – Hinweis darauf, dass sich viele andere Länder Deutschland gar nicht als Vorbild nehmen können, selbst wenn sie es denn wollten, ohne ihre Wirtschaft vor die Wand zu fahren.

Nowhere in Schäuble’s utterances – and may it be hidden – can we find a clue, that many other countries cannot take Germany as a model, even if they wanted to, without driving their economy against the wall.

I would side with the pessimistic view, but certainly hope that Kaletksy is right. These are difficult times, and while I do not doubt Kaletsky’s authority, the fundamental uncertainty that surrounds the continent cannot be disputed.

Quo vadis, Europe? (for the gazillionth time)

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