Introducing a currency in parallel to the euro could help Greece repay its external debt and resume economic activity. This second column in a two-part series evaluates the different options and their effects on aggregate demand and fiscal sustainability. The authors propose a tax credit certificates programme, which they argue could generate new spending capacity and avoid the adoption of new austerity measures.
Tag: currency sovereignty
To prevent it from defaulting on its debt, the Greek government might need to introduce a new domestic currency, in parallel to the euro. This column, the first in a two-part series, compares the current proposals for a parallel currency and discusses how such a policy instrument could promote economic recovery.
As Greece staggers under the weight of a depression exceeding that of the 1930s in the US, it appears difficult to see a way forward from what is becoming increasingly a Ponzi financed, extend and pretend, “bailout” scheme. In fact, there are much more creative and effective ways to solve some of the macrofinancial dilemmas that Greece is facing, and without Greece having to exit the euro. But these solutions challenge many existing economic paradigms, including the concept of “money” itself.
The recent election of an explicitly anti-austerity party in Greece has upset the prevailing policy consensus in the eurozone, and raised a number of issues that have remained ignored or suppressed in policy circles. Expansionary fiscal consolidations have proven largely elusive. The difficulty of achieving GDP growth while reaching primary fiscal surplus targets is very evident in Greece. Avoiding rapidly escalating government debt to GDP ratios has consequently proven very challenging. Even if the arithmetic of avoiding a debt trap can be made to work, the rise of opposition parties in the eurozone suggests there are indeed political limits to fiscal consolidation. The Ponzi like nature of requesting new loans in order to service prior debt obligations, especially while nominal incomes are falling, is a third issue that Syriza has raised, and it is one that informed their opening position of rejecting any extension of the current bailout program.
The scenario I laid out for Europe for 2014 in three posts on the global economy last week is one of muddling through. However, whereas in the US, there are upside risks, in Europe the risks are mostly to the downside, politically and economically. A few thoughts on the situation follow.
In the case of Greece, with fuel, food, and medicine making up a large share of the import bill, further economic disruption and destabilization would likely result from a choice to exit the eurozone. Exiting the euro does not appear to be an option – at least not one without a large risk of introducing further turmoil. The task then becomes to thread the policy needle – namely, to exit austerity, without exiting the euro. The following simple proposal introduces an alternative financing mechanism, along with safeguards to minimize the risk of abuse of this mechanism, which may accomplish this threading of the needle.
Newman: “in my own book the explanation starts the cycle with government spending, thus adding to the money supply, and then issuing treasuries for roughly equivalent amount. The bond vigilantes really have it backwards.
Despite Europe’s continual moving of the goalposts to give countries more breathing room, the economic paradigm in Europe is still the same: austerity. This will dampen growth in Europe for the foreseeable future and increase government debt to GDP ratios, making debt deflation and crisis a background threat which will result in sovereign restructurings regardless of recovery.
Deficits present governments with the sole challenge of making good on future promises without inflation. For nations sovereign in currency, the constraint is inflation, not solvency.
The Eurozone’s tangle of conflicting goals – a series of ‘trilemmas’ – is not without precedent. This column argues that it is reminiscent of the interwar situation. The interwar slump was so intractable not just due to financial issues, but also a crisis of democracy, of social stability, and of the international political system. The big difference in the EZ is that nations cannot go off the euro as they went off the gold standard. That is why the initial EZ crisis may not have been so acute as some of the gold standard sudden stops, but the recovery or bounce back is painfully slow and protracted.
Summary: Below are some brief thoughts on the consequences of the US government shutdown and its aftermath. In general, I believe the consequences are more likely to be political and long-term without any significant short-term implications outside of a 0.5% drop in in annualized quarterly US GDP growth.
Summary: Recently, Niall Ferguson reminded us of the eurozone pessimism of 2011 and 2012 in a recent polemic against Paul Krugman. Without getting into the Krugman-Ferguson war, I want to hone in on this subject because I think it tells us something about the way crisis politics work.