Readers of this blog may be interested in an event taking place tomorrow at the Dublin Writers Museum. José Manuel González-Páramo, Member of the Executive Board of the European Central Bank since 2004, will be delivering an address entitled “Globalisation, international financial integration and the financial crisis: The future of European and international financial market regulation and supervision.”
More information can be found here
To register for this event call Shane on 01 874 67 56
There is a new CEPR report on this topic – this VOX column provides a summary.
A reader has pointed me towards this nice post by Michael Pettis, which strays from his usual Chinese turf to take a look at Europe. It makes the same points as the ones Martin Wolf has been making about the need for the large countries with ‘fiscal room’ in the Eurozone, particularly Germany, to do everything they can to maintain aggregate demand in the Eurozone.
This should be obvious to anyone with an understanding of intermediate macroeconomics, so I won’t comment on it. But Pettis also cites Barry Eichengreen’s classic Golden Fetters, which readers may not be familiar with, and in particular Barry’s views on the implications of democracy for the maintenance of the gold standard. That system required adjustment through deflation for countries suffering negative shocks. This was not necessarily a problem in the 19th century, when wages and prices were flexible, and universal suffrage was rare. By the 20th century, however, rigidities in the economy were such that deflation implied unemployment; and democracy meant that this economic cost translated into a direct political cost for policy makers. The gold standard, inevitably, broke down when confronted with the pressures of the Great Depression.
I don’t think it’s fair to compare the euro to the gold standard, as Pettis does. The ECB has lowered interest rates, not raised them, although not by as much as other central banks; and both the French and the Germans have applied fiscal stimulus to their economies. On the other hand, it is true that adjustment in the PIIGS now implies deflation there (unless, as the FT points out today, inflation in the Eurozone as a whole is increased). This is going to be both economically and politically costly, and will have unpredictable effects, especially if the Eurozone as a whole experiences a double dip recession.
I suspect that Ireland will find these adjustments easier to bear than most, since emigration gives us both an economic and a political safety valve. (That was a positive rather than a normative statement by the way.)
In today’s FT, Feldstein has spotted the obvious easy way out. Briefly, Greece should be allowed to leave the Eurozone temporarily, devalue, and rejoin. The drachma would start at one-for-one to the €, then fall (quickly!) to 1.3, at which point it would re-adopt the €. Greece would be competitive again. The only snag is that, as he puts it, ‘…other Eurozone members might object to giving Greece this improved competitiveness.’
In fairness therefore, everyone else would have to be given the same option.
Perhaps there could be an appointed day, once a year, when everybody could step out, as in Lanigan’s Ball, and then step in again, as soon as the competitiveness gain seemed adequate.
In the dollar zone, the lack of competitiveness in eg Michigan could be dealt with in the same way.
And thus the whole world could participate, with confidence, in sub-optimal currency areas, without fiscal discipline. I so wish I had thought of this.
With one brave bound…..
The Greek situation is regularly discussed as being “a threat to the Euro” and, on this blog and elsewhere in Irish commentary, it has revived the idea that the solution to our economic problems is to leave the Euro and re-establish our own currency.
This idea is often discussed as though membership of the Euro simply involves being locked into a disadvantageous fixed exchange rate, which we can address by getting out of the Euro. In fact, the process of leaving the Euro would be far more complex than that and could have many downsides that would offset the benefit of a more competitive exchange rate. Perhaps it’s been linked to on this blog before but this paper by Barry Eichengreen provides plenty of food for thought on this issue.
Update: Thanks to Philip for pointing out that Eichengreen has a new column on Greece and the Euro. Link here.