Tuesday, 28 July 2015
Varoufakis has another questionable idea.
I dealt with one of Varoufakis’s debatable ideas here. He has had another: set out in this Financial Times article. The idea is as follows.
Greece has suffered from inadequate aggregate demand. Demand could be increased if what might be called “self extinguishing” pairs of debts could be extinguished more quickly. The example he gives is as follows.
“Suppose, for example, Company A is owed €1m by the state and owes €30,000 to an employee plus another €500,000 to Company B, which provided it with goods and services. The employee and Company B also owe, respectively, €10,000 and €200,000 in taxes to the state. In this case the proposed system would allow for the immediate cancellation of at least €210,000 in arrears. Suddenly, an economy like Greece’s would acquire important degrees of freedom within the existing European Monetary Union.”
That would certainly ameliorate what Varoufakis refers to as “the chronic liquidity shortage of a financially stressed public sector and its impact on the long-suffering private sector.” In short, it would lead to increased aggregate demand.
Problem is that any extra demand in Greece sucks in too many imports, which results in Greece being further in debt. Ergo an increase in demand just isn't acceptable till internal devaluation has put right the balance of payments or “external deficit” problem.
Of course there’s alternative to internal devaluation and the austerity needed to bring it about, and that’s Grexit combined with normal or regular devaluation.