Goodhart and Tsomocos on Adjustment within EMU

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This article in today’s FT offers yet another adjustment option: you can read it here.

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8 Responses to “Goodhart and Tsomocos on Adjustment within EMU”

  1. LorcanRK Says:

    Can I take it from your “yet another” comment that you are not in favour of the change suggested?

    While I am not against the idea as a concept (allows a devaluation by taking advantage of ‘money illusion’) to implement it would take a strong government that has the trust of its population. Unfortunately not something that exists in many of the peripheral EU states.

    As a thought experiment 10/10. As a policy, possibly not so high.

  2. JNixon Says:

    I can’t see how this is yet another option. Although the article poo poos the “Irish or Latvian road of a massive direct reduction in nominal wages and prices” as “politically unattainable”, the plan is to reintroduce the previous national currency so as to allow “wages and costs fall relative to their prior level”

    How is this different?

  3. christy Says:

    The easiest option is for EU members to signify that they would be prepared to act as a borrower of last resort for Greece.

    This will reduce the cost of borrowing for Greece and eliminate the chance of a sudden stop. It would also act to reduce the cost of borrowing for other members.

    What about moral hazard? – well, no solution is perfect and I’d suggest that we all have too much at stake to let them default.

    Moreover, there are very good reasons why a governmnet would decline to take advantage of the oppurtunity which this moral hazrd provides. Put bluntly, although a country may be able to take advantage of the opportunity, the government that pursues such a policy would likely be booted out of office by their voters for economic mismangament.

    Also, what often underlies the asumption that moral hazard is a substantial and serious concern (to the extent that it justifies refusing a bail out) in these circumstances is a belief that our fellow EU members, and by extension their citizens, pursue their own self interest with total disregard for the consequences on their fellow members. It appears to assume that they would avail themselves of the obvious opportunity presented by such a bailout to the full extent possible, or to the full extent consistent with their interests and have no regard for the consequences such a course of action would have on their fellow members or the health of the EU / eurozone. At the risk of attacking a straw man, I wouldn’t accept such an argument, because, amoungst other things, it appears to equate the behaviour of a securities trader with that of a democratically elected government.

  4. Graham Stull Says:

    Would this not run contrary to Treaty Law:

    Article 105a (TEU)

    1. The ECB shall have the exclusive right to authorize the issue of bank notes within the Community. The ECB and the national central banks may issue such notes. The bank notes issued by the ECB and the national central banks shall be the only such notes to have the status of legal tender within the Community.

  5. M.B Says:

    If anything this just proves the total idiocy of a common currency in the first place. It is now obvious that the decision to to run with the Euro was taken for political rather than economic reasons and that the EU jumped the gun.

    It is also interesting that it appears obvious to me that the biggest loser in all of this is Germany. It seems that everybody elses Banking problems, including our own have a direct consequence for the German Banks who have been a little too free in allowing their money to stoke everybody elses bubbles.

    Could it be that the problem and the solution now rest with the Germans?

  6. Pat Donnelly Says:

    M.B.
    Just a tad shrill and regressive? Prefer wars and pestilence to economic integration? Or just unaware of what is going on? Jaw, jaw better? Ja Ja! There are significant US forces that wish to damage EU strength. Why?

    christy
    Hmmmmm. Have we met before?!

    You place great trust in the elusive “common” sense of voters who are being bribed for their votes, by the Pasok and earlier governments. They are going to install people who will make their lives harder with more taxes? No evidence of that is there? Given that the opportunity to loot a country lasts only for a short while, the intensity will increase as they reward the voters for the chance to do so, at least that is the Irish model, and seems likely to be that of the Greeks also. You seem to be terminally naif, probably investing money with stockbrokers on a buy and hold basis? Yet you seem to be able to discern the lack of ethics of a securities trader? Odd combination, if true….

    LorcanRK
    Spot on, as usual…..

    Graham Stull
    Yeees…. but. If I choose to use cowrie shells and you do not recognise them, then I cannot trade with you using them as money. The EU will enforce your right to be paid in legal tender. However, if I and my buddies in an area choose to use them, then we are not committing an offence and we are excaping taxation, to boot! That is why bartering still exists in sophisticated circles and simple ones, too. There are areas of the US where a few local currencies are flourishing. Using gold etc can lead to confiscation in the USA and VAT in the EU.

    JNixon
    It seems that you have quoted the weakness of their thesis, Latvia and Ireland are examples of the success so far, of just such “unattainable” policies. So…attainable. Why complicate matters? Truth will out.

    Greece
    Was overrun by Turks and Ottomans. No longer a pure “demos”? They appear to have drunk deeply of certain waters and abandoned true democracy.

    Offensive naval supplies before economic sustainability. An odd choice to the peaceful and quasi-neutral Irish, perhaps, but when governments become corrupt they often stoke up resentment of foreigners in order to maintain control, while looting etc. Typical behaviour of politicians out of all voter control. Like the PLO? It seems to me that they are in need of local enforcement of their laws, Cyprus nothwithstanding.

    Academic economists can do little direct harm, but these papers do impress those who use argumnets like theirs as ammunition in a war on freedom and legitimate capital?

  7. Graham Stull Says:

    @Pat

    Right, but the dual currency system is only going to work if the MS govt enforces a parity swap to Escudos – otherwise everyone will insist on euro payment. But as soon as the national govt does this, there will be a million and one court cases to the ECJ (i.e. by individual Portugese citizens who want to get paid in euros not escudos). The ECJ will read the Maastricht Treaty and stumble upon article 105a in…oh…I don’t know….six seconds?

    Without enforcement, the escudo IOUs will be accepted by nobody (at least not at parity). Why would I choose to accept a currency (at parity) which I know is being introduced so that it can be devalued?

    So then voluntary escudos will only be accepted at the predicted exchange rate. Some deadweight loss for exchange risk and the cost inflation of the issuance will exactly counteract the benefit of the devaluation – no effect except lots of shoeleather costs.

  8. christy Says:

    @PD

    “You place great trust in the elusive “common” sense of voters who are being bribed for their votes, by the Pasok and earlier governments. They are going to install people who will make their lives harder with more taxes? No evidence of that is there?”

    Modern democratic countries, and in particular European countries, have the largest share of GDP devoted to taxes of pretty much anywhere in the world.

    I would suggest that this represents evidence that voters do install politicans that impose taxes.

    Also, there is alot of evidence that suggests that people do not in general vote simply by judging which party represnts their economic interests. A large proportion of people do precisily the opposite.

    Therefore, it is difficult to see how these people are being bribed for their vote.

    “Given that the opportunity to loot a country lasts only for a short while, the intensity will increase as they reward the voters for the chance to do so, at least that is the Irish model, and seems likely to be that of the Greeks also. You seem to be terminally naif, probably investing money with stockbrokers on a buy and hold basis? Yet you seem to be able to discern the lack of ethics of a securities trader? Odd combination, if true….”

    From my perspective your view of the political process appears cynical!

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