Tuesday, 28 February 2012

Modern Monetary Theory will not solve Europe’s problems.

Some MMTers currently seem to claim that MMT offers a solution to Europe’s problems. I doubt it.

Describing the recent MMT meeting in Rimini in Italy, Michael Hudson says, “So what then is the key? It is to have a central bank that does what central banks were founded to do: monetize government budget deficits so as to spend money into the economy, in a way best intended to promote economic growth and full employment.” And there is more in roughly similar vein from Warren Mosler.

Well obviously that would bring back full employment in Euro periphery countries. Problem is that it does not deal with the fundamental problem (correctly identified by Paul Krugman), namely that periphery countries are not competitive. And that lack of competitiveness explains why periphery countries are in debt.

That is not to say that the EZ’s method of dealing with lack of competitiveness is all that wonderful: Greece is obviously a disaster area. But imposing severe deflation on uncompetitive countries so as to get their costs down (in Euro terms) is the only method or tool they’ve got.

Euro core countries are reluctant to allow the periphery any more credit because the periphery’s EXISTING debts are arguably not worth the paper they are printed on – never mind further debts. The continual granting of pocket money to uncompetitive debtors is of course a subsidy of those debtors. And no country joined the EZ on the basis that it was going to have to subsidise another country.



  1. I believe many of these countries joined to be subsidized.

    Not much of a surprise here.

    Reminds me of taking in the mooching relatives and wondering "what was I thinking?" without everyone becoming homeless.

  2. You can say that a similar problem exists in any country that has states and provinces. Some states and provinces are less competitive than others. But that does not in any way imply that those countries are disaster zones and the states cannot coexist. The rich states generally subsidize the poorer states. This is quite apparent in the US.

  3. "periphery countries are not competitive."

    I don't think that is anything to do with it.

    The issue is wanting a higher standard of living than your production warrants.

    If the Greeks want a laid back agrarian lifestyle then who are the rest of the world to deny them that.

    And if the rest of the world was stupid enough to 'vendor finance' their exports then they should stop complaining when the Greeks take advantage of their benevolence and say they can't pay their debt.

    The reason we have bankruptcy as an option is to make sure that creditors are more wary in their financing.

  4. Clonal,

    I agree that different provinces / areas can form a workable union if there is enough cohesion to induce rich or successful areas to support the laggards. But there just isn’t that cohesion in Europe.


    Like you, I have no sympathy at all with the creditors: I’d love to see them wiped out. And any MMTer organising the wipe out would have the sense to counter any deflationary effect with the required stimulus (which is not to say the process would be entirely dislocation-free).

    Re agrarian lifestyles, I applaud anyone who lives the simple life, but the trouble is that that’s not what Greeks want. They want a vast army and navy, plus cars, foreign holidays, early retirement, etc, and all without actually producing enough to pay for the latter goodies.

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  6. I don't think that is anything to do with it.

    The issue is wanting a higher standard of living than your production warrants.

    I think Neil is basically right. Lack of competitiveness can't explain why any country is in debt. Even a poor country can be abstemious in its borrowing.

    But I'm not sure that Greece's total desired amount of government spending is out of line with its output. Isn't the bigger problem just that Greece doesn't collect enough taxes? As a currency user rather than currency issuer, Greece needs to finance its government spending from taxes or borrowing.

    Greece's tax revenues are only 33.5% of GDP. Everyone else in the Eurozone seems to be somewhere between 40% and 50% of GDP. But Greek government spending as a percentage of GDP seems to be quite in lien with other Eurozone countries, and actually lower than many.

    So Greece is competitive and productive enough to support the size of the government it has chosen. But it just needs to tax its people more to pay for that government.

    The structural readjustments it needs will never come from an austerity program which, while is shrinking government is pounding away at revenues at the same time. The ECB should be replacing private bank financing of the Greek government with ECB financing so that the country can maintain spending and expand its tax collections in the context of a growing economy, and grow itself into a sustainable position with respect to its tax/spending ratio.

    It's true MMT sometimes doesn't talk as much about this as it should. But that's because the MMT discussion tends to be dominated by folks in the US and UK, which are sovereign currency issuers. So our challenges and paths forward are different.

  7. Competitiveness is about capital much more than labor


  8. Dan and Anonymous,

    I think Greek debt derives from BOTH its failure to collect enough tax AND lack of competitiveness. I should have mentioned the tax collection point above.

    I’ve no reason to doubt the claim by the Interfluidity article that the change in competitiveness of Greece compared to core countries is down to core countries’ better use of capital equipment etc rather than excessive pay for Greek workers. But if one country’s competitiveness declines relative to others for ANY reason, something has to give, else the country ends up with a balance of payments deficit. If the uncompetitive country can’t devalue its currency, it must cut wage increases, or even impose wage cuts.

    Dan: re your claim that “structural readjustments it needs will never come from an austerity program” – you could well be right. That just amounts to saying that Greece is a hopeless case. Indeed that is the thrust of the cartoon here:


  9. Dan: re your claim that “structural readjustments it needs will never come from an austerity program” – you could well be right. That just amounts to saying that Greece is a hopeless case.

    No it, doesn't Ralph. It just means that there is no recessionary path to structural readjustment. There is no sensible way to bring government revenues into line with government expenditures that consists in reducing expenditures and revenue at the same time.

    1. Dan,

      If you are saying that solving the “government isn’t collecting enough tax” problem does not require austerity, then I agree. I’ve actually put a longish article online making that point. The article is written with monetarily sovereign countries in mind, but some of the points apply to EZ countries. See:


      However I think that solving the balance of payments or “competitiveness” problem DOES require austerity (given the chronic way in which the EZ does this). And the austerity may be so great that the country collapses, exits the Euro, or God knows what.

  10. Right, the question is which were the motives for the Greek elites to push Greece into the euro. Obviously is them who have won the most out of it.

    The average Greek had decent quality of life already 10 years ago, even if Greece had a lot of dysfunctionalities already back then.

    The problem is not productivity or competitiveness, the problem is non-competitiveness when enforced into a gold standard to suppress labour. So there we are again, it's all about power, and ideologies are being used to wage war.


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