Tuesday, 30 December 2014
Quack cures for Eurozone austerity.
I have big reservations about a popular alleged cure for austerity in the EZ periphery. The alleged cure is STIMULUS.
Now do proponents of that cure think no one has thought of that?
The exact form of that stimulus needn’t concern us here: it can be conventional QE or what is sometimes called “QE for the people”. That’s printing new money and handing a dollop of money to every citizen. Another alternative is to have periphery governments borrow and spend more (and/or cut taxes). But that raises government debts.
The IMPORTANT point is that austerity is not being imposed on the EZ periphery just for fun, or because core countries are sadists. The central problem is that the periphery has become uncompetitive relative to the core. Ergo some way of cutting periphery costs must be found, and a period austerity or deficient demand will solve that problem (eventually).
Of course the latter “cure” involves serious costs, economic and social, but given the existence of the Euro, can you think of anything better?
Where each country has its own currency, lack of competitiveness doesn’t matter so much: uncompetitive countries can devalue. In a common currency area, they can’t. That’s the problem.
Another solution, or at least partial solution would be more EZ wide stimulus including more stimulus in core countries (aka Germany). That could easily mean more inflation in Germany. But arguably adjustments in relative competitiveness are less painful if brought about by inflation in competitive countries as opposed to deflation in uncompetitive ones.
On the other hand you can’t blame Germans for being sceptical: in the view of many Germans, any stimulus in Greece will simply result in Greeks doing what they’ve done before, namely put in for unwarranted pay increases, which makes them less competitive, which defeats the object of the exercise.
Another popular quack cure or at least questionable cure is fiscal union. You’ve probably seen it claimed a dozen times that the basic EZ problem is that the EZ has adopted monetary union without fiscal union.
Certainly fiscal union MIGHT help: it would involve hand outs by core countries to periphery countries in the same way as wealthier parts of the UK hand out assistance to less well-off areas of the UK. But there’s a limit to the generosity of wealthier parts of the UK or EZ. So fiscal union is no panacea.
If Germans don’t feel like being ultra-generous towards Greece under existing arrangements, presumably they’re not going to be ultra-generous given fiscal union.
Stimulus just isn't a cure for austerity in the Eurozone periphery: at least, if it’s going to be implemented, it first requires Germans to accept the possibility of higher inflation, and Germans are unlikely to do that.