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The European Crisis Online Conference

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The Conference web site is at

The Conference leaders are James Galbraith, Beniamino Moro and Victor A. Beker

The WEA online conference on the European crisis started on October 1st.

The Discussion Forum will remain open until December 1st. Comments are welcomed.

The conference aims to analyse the current crisis in the countries of the Eurozone. After the 2008 financial meltdown, the American crisis soon infected the European financial system, becoming both a sovereign debt crisis and a banking debacle in many peripheral Euro area countries.  The European crisis has shown that crisis can spread quickly among closely integrated economies. The implementation of austerity policies, prompted by the Troika (European Commission, European Central Bank and the IMF) have reinforced a spiral of economic contractions, and provoked a rising political rebellion against austerity, inspired in part (and especially in Spain, but also to a degree in Greece) by the successful exit from crisis of the South American countries in the past decade.

The following papers are being discussed:

Greece: Conditions and Strategies for Economic Recovery D.B. Papadimitriou, M. Nikiforos, and G. Zezza.

The Greek economy has the potential to recover, and in this report we argue that access to alternative financing sources such as zero-coupon bonds (“Geuros”) and fiscal credit certificates could provide the impetus and liquidity needed to grow the economy and create jobs. But there are preconditions: the existing government debt must be rolled over and austerity policies put aside, restoring trust in the country’s economic future and setting the stage for sustainable income growth, which will eventually enable Greece to repay its debt.

Signaling imbalances in the EMU, Nicola Acocella.

Markets show well known difficulties in delivering the right signals of looming imbalances, may underreact or overreact to them and cannot properly correct them. Pure monetary union add no significant system of signaling and re-adjustment and can even cause further imbalances. The more so if the asymmetries producing such imbalances have a structural nature, as in this case some markets, such as labour markets, may not work in an appropriate way. In this situation moral hazard and adverse selection are easy to arise, making correction of imbalances more difficult. The system should then be helped to deliver proper signals and to correct them. The OCA theory must be made to work and appropriate non-market institutions, mainly at the union level, should be created. In particular, a common financial regulation, fiscal, industrial and labour policies should be introduced, while devising consistent institutions at the country level.

The euro, long-run convergence and the impact of the crises. By Enrico Marelli and Marcello Signorelli.

In this paper we analyse two different issues concerning economic performances and policies in Europe after the introduction of euro: the long-run real economic convergence (or divergence) across Eurozone countries and the impact of the recent crises. Regarding the first issue, we review the relevant economic theories, with particular reference to the “Optimal currency area” theories. Then we accomplish some empirical analyses to assess the extent of long-run economic convergence (or divergence), the similarity of economic cycles and trade integration within the Eurozone countries, as well as in the EU in general. The results show that the role of the monetary union in favouring real convergence is disputable.

As regards the second issue, we speak of “crises” since after the global financial crisis and the Great Recession (2007-09) in Europe we had a second crisis – the sovereign debt crisis – causing a second recession and whose impact is long-lasting. Particularly worrying are the consequences on the labour markets, especially on youth unemployment. Our opinion is that the austerity measures undertaken in the area, especially in the peripheral countries, have caused a prolonged recession, stagnation and persistent unemployment.

In the concluding section, we emphasize the policy implications, related both to the radical reforms needed in the EU institutions and governance – in particular to guarantee a viable monetary union and favour real convergence of its economies – and the changes needed in current macroeconomic policies.

A Euro Area Government – A Dream Come True? Tom Vleeschhouwer and Tara Koning.

This paper studies three important problems that have led to or have aggravated the euro crisis: moral hazard in accumulating debt by sovereigns, lack of macroeconomic policy coordination and stabilization, and macroeconomic imbalances. We use both theoretical and empirical evidence to argue that these problems were largely caused by coordination problems. We will then investigate whether a supranational government, a layer of government above all euro member countries, can alleviate these problems. We will find that macroeconomic stabilization and macroeconomic imbalances can be improved by such a government, though moral hazard cannot be solved. The only, but certainly not insignificant, obstacle seems to be that politicians and voters may not be willing to transfer their authority to this government.

Parallel currencies, Varoufakis’ plan B and the ongoing debate on Euro, Jacques Sapir.

The last round of the Greek crisis has epitomized the European institutions nasty behavior. It has also put on the forefront the issue of the Euro. The European Monetary Union has turned into an instrument of enforcement of austerity and deflation all over the Eurozone. Its nasty consequences are going far over the Eurozone by the way. The crisis ended temporarily with an agreement that was forced upon the Greek government. It will have enduring consequences. But, in the process of this crisis have emerged the possibility of another way. What has been called Yanis Varoufakis “plan B” was an attempt to create a parallel payment system, and possibly a parallel currency. It was not intended to be a short road for Greece to return to the Drachma but it could have been so. This paper is then to study the process of this so-called “plan B” in the light of previous experiment with parallel currencies.

Economic Policy and Political Power in European Crises. By Gerson P. Lima.

This paper analyses the European Union crisis assuming that the economy is commanded by a veiled political power linked to the financial market. This connection is important for a financial crisis is consequence of financial capital supply excess, especially money supply excess, leading to risky operations and financial capital losses internally and abroad. A critical appreciation of the monetary policy reveals that it cannot deliver the promised price stability for the interest rent on public debt is mainly paid with new money printed by the central banks when buying Treasury bonds in open market operations. Inverse operations do not withdraw this liquidity for bond sales comprise interests. An experiment with US data is quoted to support the idea that the origin of the past and future American financial crises is the money printed to pay interest on the US public debt. Next it is demonstrated that the stock of money issued by government to make fiscal policy converges to a theoretical point of equilibrium. It is also observed that fiscal policy does not cause inflation for it is not always expansive and higher prices in this case are indication that people’s wealth increased; so, they are climbing the Maslow’s Pyramid and buying dearer stuffs. The European union are said to have two crises, the general one touching almost all countries where monetary policy prevails and its particular crisis, the risk of dismantling due to potential state members bankrupts. Collecting arguments, the conclusion is that there are evidences to support the Hellinger’s proposal of a parallel currency emission by state-members to make local fiscal policy. It is finally stated that even if this proposal is attractive to decision makers it must be, as any other economic policy, interesting to the political power and preserve democracy.

The Euro Area’s Experience with Unconventional Monetary Policy, Cristiano Boaventura Duarte and André de Melo Modenesi.

This paper discusses the role of monetary policies implemented by the European Central Bank (ECB) after the 2008 financial crisis, with a special focus on unconventional measures, analyzing to what extent they influenced Euro area’s macroeconomic performance in the period. After the 2008 shock in the USA, several conventional and unconventional monetary actions were implemented by the ECB. Although the initial measures prevented a massive failure of banks, they didn’t avoid the escalation of the situation into a serious sovereign and banking crisis, which had roots deeply inserted in the Euro area itself. Some programs like the SMP received strong criticism, but other measures like the OMT avoided the more acute risks of contagion through the Euro area. Nonetheless, with persistent economic weakness and risk of deflation, the ECB extended its stimulus programs in September 2014 (TLTRO, CBPP3, ABSPP) and in March 2015, with a broad unsterilized public sector purchase program (PSPP). As they corrected some of the problems from previous programs, and conveyed a strong commitment to fight deflation, those programs initially lead to positive effects on several macroeconomic indicators (sovereign yields, euro exchange rate, credit, output, inflation), although with some volatility on yields and the euro later due to intra and extra-Euro area factors. Considering that medium and long-term expectations still remain in low levels, the ECB intends to continue the program until it gets to its inflation objective of below but close to 2%, and may even review the program if it happens an unwarranted tightening of financial conditions. Nevertheless, serious problems remain for households (high levels of indebtedness and unemployment), enterprises (challenges for investment, financial volatility) and governments (fiscal, political and institutional constraints). It is argued that the path for a sustained growth recovery in the Euro area not only goes through unconventional monetary policies. They should also be complemented by a coordinated fiscal policy, more flexible (and countercyclical) in periods of economic downturns, coupled with adequate institutional reforms that together foster credit markets, encourage private and public investments in the long term and reduce regional asymmetries. Additionally, it is believed that a more robust and integrated financial supervisory framework (not only on banking but also on capital, insurance and pension markets) would contribute to reduce negative spillovers from financial volatility episodes, break the sovereign-bank “doom loop” and bring more financial stability to the zone.

At the Root of Economic Fluctuations: Expectations, Preferences and Innovation. Theoretical Framework and Empirical Evidences. By Carmelo Ferlito.

The present paper aim to develop the Austrian Theory of Business Cycle in order to conclude that economic fluctuations are unavoidable. The conventional version of Austrian business cycle theory focuses on a temporary imbalance between natural and monetary rates of interest. When, because of the role of monetary authorities in defining the monetary rate, the two values are in a situation of imbalance, the resulting expansion stage is followed by a recession. On the other hand, if instead the expansive phase arises without any interference by monetary authorities but through re-adaptation of the productive structure to a modified structure of temporal preferences, a period of sustainable growth begins that will not be followed by a crisis. The purpose of this essay is to demonstrate, on the other hand, that because of profit-expectations and the combined action of Schumpeterian elements (imitations-speculations and the ‘creation of money’ by banks), even a so-called ‘sustainable’ boom will be affected by a liquidation and settling crisis. What distinguishes the latter situation from the conventional case of imbalance between monetary and natural rates is not the onset or otherwise of a crisis but, rather, its intensity and duration. We will define as natural an economic cycle characterised by a stage of expansion considered to be ‘sustainable’ in the Austrian theory but followed by an inevitable readjustment crisis. In conclusion we will try to link our theoretical conclusions with the crisis emerged in the Western world in 2007, to test the explanatory power of our theoretical framework.

Unemployment around the North Atlantic, 1948-2014. By Merijn Knibbe.

In 2008 William Mitchell and Joan Muysken argued that after about 1978 there had been a shift from public policies aimed at full employment at the macro level to full employability at the micro level, accompanied by a larger emphasis on the budget balance of the government and low inflation. At the same time, unemployment rose to levels unheard of in decades. After 2008, however, unemployment increased to even higher levels, while extending the analysis to countries from the ‘fringe’ of Europe and to data on ‘broad’ unemployment reveals that extreme levels of unemployment in these regions were a rule instead of an exception.  Flow data on the labour market show that during crises there is a temporary and relatively small increase of inflows into unemployment and a decrease of outflows out of unemployment, which, however, combine into a fast increase in the stock of unemployment – which is not countered by higher rates of outflow and inflow after the crisis. This evidence shows that major crises tend to shift countries to a semi-permanent situation of higher unemployment. Instead of countering this situation, after 2008 public policies shifted away from even the idea of employability and, led by EU institutions, a public discourse which tended to stress the moral and ethical advantages of extreme unemployment, like increased levels of ‘discipline’, developed. At the same time and led by EU institutions, government transfers to banks increased, leading to a deterioration of government balances and less room for government spending.  The solution proposed by Mitchell and Muysken – a job guarantee financed by money printing and shredding – might still be a good idea but has to be accompanied by a central bank buying bad debts from banks (the catch: increased government guidance for bank lending) while, considering the elevated levels of unemployment, allocation of unemployed over the guaranteed jobs might have to be enhanced by using the same kind of planning algorithms which are, at the moment, used to match donor kidneys with patients.

From: pp.3-5 of World Economics Association Newsletter 5(5), October 2015

Download WEA newsletter Volume 5, Issue No. 5, October 2015 ›

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