Commentaries (some of them cheeky or provocative) on economic topics by Ralph Musgrave. This site is dedicated to Abba Lerner. I disagree with several claims made by Lerner, and made by his intellectual descendants, that is advocates of Modern Monetary Theory (MMT). But I regard MMT on balance as being a breath of fresh air for economics.
Saturday, 13 August 2011
In a fiscally united Europe, would core countries subsidise the periphery?
Philip Pilkington (PP), a journalist and writer based in Dublin, has an article on the Naked Capitalism site attacking Otmar Issing (former member of the ECB’s executive board.). As far as I’m concerned it’s game, set and match to Otmar Issing.
PP tries to argue that the core does not subsidise the periphery.
To back his point PP implores us to take a “proper macroeconomic perspective”. OK by me. Unfortunately his article contains far more blarney than macroeconomics.
PP’s main point (towards the end of the article) is that Germans are privileged to be able to sell stuff to Ireland, Greece, etc because it keeps Germans employed. And without such a market, Germans would have to go for greater internal consumption in Germany, i.e. run a larger deficit. And Germans abhor deficits because of the Weimar episode.
The answer to the latter point is that if Germans have the same blinkered attitude to deficits as currently exists in Congress, then Germans (like members of Congress) need to study economics. Having done that, they’d have no problem at all doing without Greeks, the Irish or other periphery states.
But arising from the latter argument, there is the question, given a true fiscal union in Europe, of whether relatively high unemployment in periphery, core taxpayers would in effect be subsidising the periphery. Well it’s pretty obvious they would. And the solution to this problem would be, as it is now, to make the periphery more competitive: i.e. cut real wages in the periphery. That way, unemployment levels would be more or less the same in every country, thus no country would subsidies another.
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I thought PP's point was that in the present situation of 'bail outs' - as loans- to the periphery, there is zero cost to Germany. Risk, but no actual cost, and nothing charged to German taxpayers?
ReplyDeleteMikehall, Yes, PP does make that point. But it is easily enough demolished.
ReplyDeleteThe ECB has printed money and bought periphery bonds: bonds which everyone knows are pretty worthless. The effect of that is stimulatory / inflationary. So the ECB (other things being equal) will have to take some sort of deflationary measure, e.g. raise interest rates earlier than it otherwise would have. The net result is that defunct businesses called “Greece”, “Ireland” etc are kept alive artificially, selling poor value for money products. Core country consumers are induced to purchase these poor value for money products, which is a standard of living hit for core countries. That’s where the “tax” is – I think. Hope I got that right!?!
I'm not sure if that's a bit of a stretch? The size of the economies - and hence trade - of Ireland, Greece & Portugal, is tiny wrt to the core, say France & Germany. Any effect would surely be tiny, even barely discernible?
ReplyDeleteAlso, I thought you were an advocate of MMT economics, which would suggest that with such high unemployment - under utilised capacity - inflation would be marginal at most from even a much larger stimulus?
Greece & Ireland have some very important differences too in terms of their 'value for money products'. 58% of Ireland's exports are MNC products, IT & Pharma.
It's arguable that the period of low interest rates & flood of money from the core contributed significantly to Ireland's excessive property price inflation, with many knock on cost effects.
But perhaps a bigger issue is what exactly is the EMU is meant to be & how long existing imbalances are to be approached. An juxtaposing situation might be how a London government views the much poorer North East, say, & vice versa. There clearly are mutual benefits as well as risks following the end of a huge debt bubble period.
BTW, have you seen this paper by Prof Yamaguchi of Japan, modelling what I believe is broadly an MMT system & comparing with current?
http://www.monetary.org/yamaguchipaper.pdf
Seems quite an extensive effort (800+ variables), debt & (lack of) inflation graphs interesting.
Countries in the EU compete internally, so cutting real wages will just be a race to the bottom.
ReplyDeleteAnd yes, the core would subsidize periphery consumption, which would maintain their EMU-export markets healthy. It's their own choice. Do they want to keep low unemployment at home and high abroad, or allow wages to rise naturally (like they haven't for the last 10 years) and let demand spread more equally amongst the EMU-economies and thus get higher unemployment?
Personally, i think the Euro should be scrapped ASAP, as it risks the whole concept of a united Europe. Public opinion says no and a realistic view of politics in Europe says it won't work.
I mean, i'd prefer a common currency in a -working- union, but Europeans don't feel solidarity towards each other in the same way Americans do. They are also too emotionally attached to their national states for a complete political union or a fiscal union to work.
Mikehall, I agree the effect is small, but it’s important to get the theory right in case larger countries present their begging bowls to core countries, which looks like it might happen.
ReplyDeleteRe your second paragraph, if there is scope for a general increase in demand in mainland Europe then obviously the ECB should go for that: e.g. keep interest rates down. But when I said “other things being equal” in my comment above, what I kind of meant was “other things being equal because the ECB keeps demand at the maximum that is consistent with acceptable inflation”. I could have been clearer on that. On that assumption, then if the ECB prints money and buys periphery bonds, it will have to take some countervailing and deflationary measure, like raising interest rates.
Thanks for referring me to the Yamaguchi paper which I skimmed thru. I agree with it. He advocates an end to fractional reserve banking, which I agree with.
Anon: I think you could easily be right when you say there is not enough solidarity in Europe to make a permanent subsidy of the periphery by the core a political possibility.