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Exiting Austerity Without Exiting the Euro


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Fate of the Eurozone session at 12th International Conference

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Exiting Austerity Without Exiting the Euro

  1. 1. Exiting Austerity Without Exiting the euro Robert W. Parenteau, CFA 12th International Post Keynesian Conference UMKC September 27, 2014
  2. 2. Many Design Flaws of the Eurozone  Not an Optimal Currency Area: Different Sized National Responses to Shocks  Yet Imposes One Size Fits All Monetary Policy  Economic Union Without True Political Union  Competitive Depreciations Replaced by Competitive Deflations?  Weak (Contradictory?) Mechanism to Adjust Trade Imbalances  Constrained Fiscal Policy: Nations are Users (Not Issuers) of Currency
  3. 3. The Ultimate Design Flaw of the Eurozone  The Fatal Conceit of Neoliberal Economics: Changes in Relative Prices Will Always Tend to Guide Economies Back Toward Full Employment Growth Paths  Hence, Best to Restrict Available Policy Tools – No FX Control, Diluted Monetary Policy Influence, Restrict Fiscal Stimulus for Each Country – to Minimize Relative Price Distortions
  4. 4. The Ultimate Design Flaw of the Eurozone  Irving Fisher, JM Keynes, Hy Minsky Demonstrated Theoretically Why Price Adjustments Can Lead Economies AWAY From Full Employment  The Price Signals Leading Economies to Full Employment Growth are Weak, Unreliable, and Bounded (Keynes’ Uncertainty, Ch. 12 GT Asset Pricing Critique, Zero Nominal Yield Bound & Liquidity Preference Bound)  Worse Yet, Downward Price Adjustments in Economies with High Private Debt Loads Can Lead to a Self Reinforcing Debt Deflation (Falling Asset Prices and Incomes), Thereby Threatening Social Disintegration  History (Painfully, and Repeatedly) Concurs with Keynes/Fisher/Minsky
  5. 5. Private Sector not Public Sector Debt Misdiagnosis of the eurozone crisis
  6. 6. What were design flaws leading to private debt build up?  One size fits all monetary policy allows private credit booms in some nations  No mechanism to encourage recycling of current account surpluses into investment in tradable goods sector in chronic CU deficit nations  Focus on fiscal balances left private sector imbalances largely ignored
  7. 7. The Austerity Trap & a Coherent Macroeconomics  Neoliberals do not have a coherent stock/flow coherent macroeconomics: Godley, Minsky, & Keynes do; and many SFC models in development  Instead, Neoliberals are obsessed primarily with containing the government financial balance, and ignoring how that influences other sectoral balances  In other words, conventional macro is ignoring double entry book keeping  Government cannot reduce its deficit unless other sectors are willing and able to reduce their net saving position  An indebted private sector, and export led trade partners, may not “comply”, especially after a financial crisis
  8. 8. 8 The EMU Triangle: Nations with Chronic CUD, No FX Policy Influence Fiscal Surplus Current Account Surplus Very little room to also achieve DPS Surplus Fiscal Deficit Current Account Deficit Domestic Private Sector Financial Balance = 0 Fiscal Deficit Boundary = -3% of GDP -3%
  9. 9. EU Private Sector Still Trying to Deleverage: Adjustment Forced Through Imports
  10. 10. Is Fiscal Austerity Working?
  11. 11. Create Alternative Financing Instrument: Tax Anticipation Notes  Create a government liability (TAN) that has the following properties:  Zero interest coupon  Perpetual  Transferable  Denominated in euros  Available in 50 and 100 euro denominations in paper form, and as secured/encrypted electronic credits to bank accounts of recipients  Use TANs to Pay Government Employees, Domestic Suppliers to Government, and Beneficiaries of Transfer Payments  Government Accepts TANs at Par (1 TAN = 1 euro) as Payment for Taxes (Thereby Creating Demand for TANs)
  12. 12. Similar to Complementary Currencies Already Operating in Eurozone & Elsewhere  Bernard Lietaer has catalogued these in his recent books  WIR: Switzerland (since 1934, = 1 CHF)  Torekes: Belgium  Chiemgauer: Bavaria (= 1 euro)  Regiogeld: Germany, Austria Switzerland  Bristol Pound: UK (acceptable for some local taxes)  Ecuador central bank will issue electronic currency (convertible and equivalent to 1 US dollar) starting in December
  13. 13. The TAN Proposal Breaks the Austerity Trap Without Requiring Euro Exit  TANs Allows EU Governments to Contest Fiscal Austerity Policies  Full Employment Fiscal Policy Can be Pursued, Allowing Private Sector Deleveraging to Proceed Without Income & Price Deflation  Preferably through ELR & Trade Related Infrastructure Investments  Euros are Freed Up to Pay for Imports, Service External Held Public Debt  TANs Likely Become Acceptable as a Means of Payment/Settlement in Private Sector Transactions (Since Households and Firms Have Tax Liabilities to Pay)  Can be Pursued at National Level as Austerity Fatigue Sets In