Andres Velasco at INET

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There is an absolutely terrific talk by Andres Velasco here. It would be great if European (and Irish) policy makers would take these kinds of arguments to heart, but at this stage in the Eurozone crisis I am not sure that they will before it is too late.

36 Responses to “Andres Velasco at INET”

  1. Brian Mercer Says:

    Brilliant talk by an intellectual and charismatic politician, also very scary. Thanks for putting it up. Perhaps “Paddy” Enda’s imaginary friend might watch it and tell Enda about it. He seems to listen to him.

  2. John Corcoran Says:

    Unfortunately our political leadership is appalling. Excellent video and clearly the corset is nonsense.

  3. V Barrett Says:

    No credit, no currency of our own, heavily reliant on exports to drag us out of the mire. Fiscal contraction coupled with an over-valued currency – it should be obvious that a public debate on extracting ourselves from the Euro is paramount. I’m not saying it is the answer but there has been virtually no public discourse on the issue…

    It really disappoints me how few senior economists in this or any forum have at least tried to open up this debate – herd mentality?

    thank you for the link btw….really interesting and previous poster noted, charismatic character.

  4. Georg R. Baumann Says:

    Thanks Kevin!

  5. Aidan R Says:

    Excellent. I have heard many South American academics, at a variety of conferences, making the same argument. The INET are producing great stuff at the moment.

    http://ineteconomics.org/

  6. Paul Hunt Says:

    Impressive, but it doesn’t address the fundamental conflict between the creditor and debtor nations in the EU, with the various, powerful, sectional economic interests in the debtor nations determinedly refusing to contemplate the structural reforms required to reduce the burdens they impose on the vast majority of citizens and with their hands out for debt relief and fiscal transfers; and the creditor nations observing these cossetted ‘insiders’ and refusing to give them a free lunch.

    The creditor nations have been taken for fools once and they’re not going to put their relative economic success at risk by being taken for fools again. But the only means they have to compel the elites in the debtor countries to face reality is the crude and brutal tool of fiscal austerity.

    The creditor nations also have their cossetted ‘insiders’, but their antics have not put, nor are they putting, the creditor nations’ relative economic success at risk. And yes, the entire Euro Area is in denial about the state of its banks, but the fingers are tightly crossed that they’ll trade their way out of difficulty.

  7. Michael Hennigan - Finfacts Says:

    He’s an impressive guy but let us not fool ourselves now, the majority of the Irish would have opted for the likes of Charlie McCreevy as finance minister than the prudent Velasco.

    He was an appointed member of a one-term presidential administration and wasn’t under pressure in advance of an election. The current administration in Chile is now under pressure for claimed underspending on education and inequality. Protests about the latter could be a good thing in Ireland but the wrong people would likely turn up.

    On the euro issues, he would likely win plaudits from those who wish to see their status quo maintained and those who genuinely are eager to see progress.

    It is of course easier to apply fiscal rules to one country than 17. It’s doubtful that the situation would have ended up any different if the 3%/60% rule had been more flexible.

    The problem now is the difficulty of unscrambling the omelette.

    Devaluation advocates should note that export miracles can follow if a country is a producer of something like soybeans with an eager customer like China. Ireland produces little of what it exports.

  8. V Barrett Says:

    @ Paul Hunt

    “The creditor nations have been taken for fools once and they’re not going to put their relative economic success at risk by being taken for fools again.”

    The genesis for their economic success has largely been due (a) the protection of their profligate financial institututes following the financial crisis but more importantly (b) the benefits of an artifically undervalued currency relative to their domestic economies which was and has been held at that level as a consequence of peripheral nations remaining part of that union – who of course have a relatively over valued currency that is seriously damaging their abililty to help themselves. The disproptionate distribution of benefits from this imbalance is all going one way. Who are the fools again?

    Nevermind the political games that have to played in Germany in terms of appeasing the electrocate. Those in the know in Berlin are fully aware that Germany has a lot more to lose from a break up of the Euro than the likes of Ireland – it is an idictment on our politicians that we have not been able to exploit that fear to get a fairer deal.

    “But the only means they have to compel the elites in the debtor countries to face reality is the crude and brutal tool of fiscal austerity.”

    …their failure to shoulder their part of the burden of a flawed financial construct and forcing the pain on the periphery is not a tool to teach, it is a premium on top of the benefits it has and continues to enjoy as outlined above.

  9. Paul Hunt Says:

    @V Barrett,

    I you think “The genesis for their economic success has largely been due (a) the protection of their profligate financial institututes following the financial crisis but more importantly (b) the benefits of an artifically undervalued currency relative to their domestic economies” then we’ll struggle to find any common ground.

  10. V Barrett Says:

    @ Paul Hunt

    Well whatever about (a)…surely you are not suggesting that Germany has not benefitted significantly from (b)? What would have happened to a German DM and its exports this last couple of years if the Target2 balances played out in a free exchange environment?

  11. Michael Hennigan - Finfacts Says:

    @ V Barrett

    You present a simple view of successful global trading and most people are eager consumers of simple narratives.

    Can Apple’s success be attributed to movements in the dollar? It has been able to establish markets in Asia for the iPhone at the same prices as in Europe and not restricted to the rich.

    Germany is in the same boat in respect of its engineering. It’s a rare manufacturing plant in the world that hasn’t got some product of German origin.

  12. Michael Hennigan - Finfacts Says:

    @ V Barrett

    Eurozone countries like Italy, Spain and Greece have had trade deficits with Germany since at least 1980 — 20 years before the euro launch.

    The International Monetary Fund says the euro is a continuation rather than a structural break and the Fund’s statistics show that since 1999, Germany’s trade surplus with the rest of the world has grown faster than its surplus with the other Eurozone countries — and faster still with European nations that have not adopted the euro.

    I appreciate that professional economists make claims about Germany’s dependence on the euro but conventional wisdom becomes so from repitition – - usually without factchecking.

  13. Aidan R Says:

    The success of the German economy can be traced to stable institutions that provide a complementary relationship between fiscal, labour market and monetary policies. The Euro provides a comparative advantage for their trading sectors. The competitive advantage of these sectors are premised on the collective skill formation that results from their coordinated labour market institutions and social security system (i.e. organised capitalism or a social market economy). This is not the case in Southern European countries, and the region of Ireland. If the Euro is to survive it requires not just fiscal federalism but a coordinated labour market that links supply and demand.

  14. V Barrett Says:

    @ M Hennigan

    “Germany’s trade surplus with the rest of the world has grown faster than its surplus with the other Eurozone countries….and faster still with European nations that have not adopted the euro. ”

    Isn’t that precisely the outcome one would expect if Germany are benefitting from an artificially undervalued currency vis-a-vis its other EZ partners as i suggested?

    I am not btw disputing the indogenous attributes of German industry/enterprise that has meant they have been better able to exploit the benefits of their situation than others might.

    Furthermore, how much of the surpluses (that facilitated a flow of German bank credit) you referred to ended up financing whats now part of the NAMA portfolio….how much pain did these institutions have to take as a consequence of such profligacy? Are these same institutions now flooded with capital flight deposits from the periphery? Wheres the pain – whose the fools?

  15. BeeCeeTee Says:

    I take two points from the presentation.

    1) The Eurozone as a whole is making a mess of things.
    2) There’s no way out for big crisis countries, but the Baltics have shown that SOEs can fix their future through real devaluation, even under fixed exchange rate conditions.

    We can’t do much about 1, but as an Eurozone SOE we can and should do something about 2.

  16. Michael Hennigan - Finfacts Says:

    The World Bank’s Doing Business 2012 rankings of the ease of doing business in 183 countries puts Greece at 100, behind Yemen and Vietnam and just ahead of Papua New Guinea. This compares with Italy at 87, just behind the former communist ruled Mongolia; Spain is at 44; Portugal at 30 and Ireland at 10.

    It’s up to Greece to improve its attraction for FDI (foreign direct investment) and change the current dismal record of only about 1% of GDP from 2004 through 2010, as it has some critical strengths compared with its neighbours – - Turkey, Bulgaria and Romania who had an average FDI inflow of 8.1% of GDP in that period; Italy/Spain and Portugal 2.0% and an EU average of 3.7%.

    The main attractions Greece has in its region is its infrastructure – - its roads and ports are at a high standard – - and it has a high-quality workforce. Unfortunately, however, Greece’s current business environment is considered unattractive by potential investors. Too much bureaucracy, inconsistent tax policies, and a rigid labour market make it a challenge to do business there. Correcting these problems – - and creating a better climate for foreign capital – - will be an important step toward the country’s eventual recovery and future growth.

  17. The Dork of Cork Says:

    I was not that impressed .
    At this stage we should embrace the total destruction of the European market state experiment.
    It has brought nothing but pain & social dislocation.

    Never before has capital flows been so fluid and total…… trade balances was a nothing to it until it was not.
    Thank Christ it is over.

  18. Paddy O'Rourke Says:

    Interesting what he said about backloading the larger part of the fiscal retrenchment. Megan Greene of Roubini economics said something similar on Newsnight. If Lenihan had gone about this differently, say cuts and tax increases in the order of 3 billion(instead of 6), lot of people would have been in better shape to pay down more of their loans as we’re now doing and the balance sheet of the banks would be greatly improved.

    Of course that assumes he’d have introduced the much needed reform and that by the time the reforms ripen the econmy is growing and the retrenchment isn’t as severe by the time it’s required. 2008 was the chance to be radical with reform but they dithered.

    As regards Germany. It’s success in the past few years has largely been down to vendor financing it’s exports. Without that the Austerity introduced by Schroeder when Germany was in breach of the Growth and stability pact would have seen it sink like a stone.

    In General a lot of it’s power can be put down to it’s centrality and size. German universitys have long been the home of some of Historys greatest thinkers. France is much the same but in a different economic boat to the Germans(one with a hole). So yeah I suppose it’s fair to say that they manage their affairs better.

    But it’s as involved int he casino politics that underpins the Euro as everyone else. They were insistent on the Incompatible triad of no bailout no bankrupts and no exit. But in the end it’s cost them anyway.

  19. Colm Brazel Says:

    Andres Velasco, Krugman, sanity rules today. Bottomline, how does everybody get out of the strait jacket, without having to be Harry Houdini, or at the loss of 1700 hundred passengers on the Titanic ? The only way out of the meltdown for the peripherals is devaluation accompanied by adjustments that grow competitiveness; they cannot compete with the core or overcome their internal and external, debt problems otherwise.

    Pimco’s Bill Gross doesn’t trust the Spanish bond auctions:

    http://www.cnbc.com/id/47074259

  20. Shay Begorrah Says:

    @Aidan R

    The success of the German economy can be traced to stable institutions that provide a complementary relationship between fiscal, labour market and monetary policies.

    The problem of Germany for us is that they are convinced that Europe needs to adopt the policies that are not behind German success.

    In Ireland during the boom the establishment position was that we had found some new economic model (The PD’s small state Bostonomics) rather than gorged on a wave of cheap credit (from guess where?) with the only “sustainable” employment being FDI attracted by low corporate taxation and a young well educated English speaking workforce. The centre right consensus was very in much in favour of deregulation and financial innovation and they duly confused Irleland’s real strengths with their own goals.

    The same error of perspective where one attributes success to conscious choices rather than existing circumstances convinces Germany that their comparative success is due to currency hawkishness, wage repression and austerity rather than an artificially low currency, an excellent integrated industrial base that enjoys considerable agglomeration economies, being geographically central in the single market, having well developed routes for training and apprenticeship and a large domestic economy (even if they suppress demand).

    It may be impossible to convince Germany otherwise though so a plan B is required if the trap of German focussed EMU without being Germany is to be escaped.

  21. bazza Says:

    @Paul Hunt

    “but it doesn’t address the fundamental conflict between the creditor and debtor nations in the EU, with the various, powerful, sectional economic interests in the debtor nations determinedly refusing to contemplate the structural reforms required to reduce the burdens they impose on the vast majority of citizens and with their hands out for debt relief and fiscal transfers; and the creditor nations observing these cossetted ‘insiders’ and refusing to give them a free lunch.”

    Man, you are like a broken record.

    The point is that in the face real exchange rate problems, a broken banking system, a lack of credit and huge debt burden everything else is more or less irrelevant. Don’t you think they had inefficiencies in public and semi-state bodies in Chile? I didn’t hear the man say that the privatisation of state assets was a panacea.

    We get it, OK – the ESB and Bord Gais are inefficient and could be reformed or sold for a couple of billion -I agree. But it is not going to solve our problems.

  22. Gary O'Callaghan Says:

    Excellent. Thank you, Kevin.

  23. Ordinary Man Says:

    The current administration in Chile is now under pressure for claimed underspending on education and inequality. Protests about the latter could be a good thing in Ireland but the wrong people would likely turn up.

    ?

    God forbid !

  24. David O'Donnell Says:

    INET is producing good stuff – I like the Hudson piece as well

    @all

    France-Germany
    Merkozy is finished
    17 April 2012 La Tribune Paris

    Here we are touching on the key motive for the Merkozy suicide: like her former friend, Angela Merkel wants to hang on to her post in elections slated for September 2013. Her chances of continuing as Chancellor depend on two factors: she must ensure that her mandate is not contested by her own camp, and, at the same time, she must be careful to avoid a clash with the social democrats who will feature in another “grand coalition,” which she intends to lead.

    With this in mind, a victory for Nicolas Sarkozy is no longer the imperative that it was two months ago. On the contrary, in distancing herself from the UMP candidate’s sabre-rattling, she has demonstrated her good will to the SPD (social democrats) and shown an unswerving adherence to Ordoliberalism that will be welcomed by her own camp.

    So Merkozy has now been consigned to history. The only remaining hope for the special entity would be an election victory for Nicolas Sarkozy, in which case, the promises made over the last two months of the presidential race could, of course, be quickly forgotten.

    http://www.presseurop.eu/en/content/article/1825311-merkozy-finished

    And then there was Mer

  25. Michael Hennigan - Finfacts Says:

    @ Ordinary Man

    You’ve got the wrong end of the stick, methinks.

    About a decade ago, Martin Turner in The Irish Times had a cartoon of Bertie and Celia sunning themselves on a beach in the Canaries and Bertie appears to have tinnitus but it’s the distant rumble of a farmers’ tractorade rolling into the capital with the honour of a garda motorcycle escort, in advance of meeting a welcoming party of rural TDs in the city centre.

    Contrast that with the deregulation of taxis because the existing system was a restraint of trade while the legal cartel was the unseen elephant in the Four Courts. Further contrast it with the bonanzas for beet farmers and Greencore shareholders.

    The litany could go on about the imbalance of workers’ rights.

    Why is a defunct bank still among the biggest indigenous employers in the country while this week, employees of a collapsed SME will get their ‘cards’, basic redundancy and will not even have an occupational pension?

    Private equity types weren’t the only vultures who killed the Eircom goose. Insider workers/former workers made a cool €750m from the project.

    So when I refer to inequality it is to those who have been the main victims of the brutal recession and they have no countervailing collective power.

    This point doesn’t reflect the guilt of a comfortable D4 liberal who hasn’t yet been mugged!

    I did once work as a navvy in London and I wouldn’t be surprised if the author of that famous ditty, ‘The Foreman’s Job,’ sung to the tune of ‘The Red Flag,’ had an Irishman in mind.

  26. DOCM Says:

    @ BeeCeeTee

    You draw the one sensible conclusion as far as Ireland is concerned.

    I would not give up either on the capacity of the major countries of the EA to also emerge from the crisis. For a speech laying emphasis on the importance of politics, the speaker, and his audience, seem to be oblivious to the real reasons why the euro came into existence. Martin Wolf is not.

    http://www.ft.com/intl/cms/s/0/782965e6-87b1-11e1-ade2-00144feab49a.html#axzz1sEktaus1

  27. DOCM Says:

    @ All

    An interesting interview with Jacques Attali (with links).

    http://www.euractiv.com/euro-finance/attali-federal-europe-way-crisis-news-512213?utm_source=EurActiv%20Newsletter&utm_campaign=df18a63bab-newsletter_daily_update&utm_medium=email

  28. Michael Hennigan - Finfacts Says:

    @ DOCM

    Martin Wolf’s conclusion seems the realistic one.

    It takes two to tango and it won’t work unless there is a spirit of change on both sides.

  29. DOCM Says:

    @ MH

    I agree!

    Incidentally, where I would disagree with Attali is his view that a new dance routine is required for the tango. In fact, it is the political unwillingness to follow the existing dance routines set out in the treaties that is the source of difficulty. However, given the likley victory of Hollande, another round of institutional navel-gazing seems inevitable. If this helps unblock the political log-jam, it may be worthwhile. Europe does not need another civil war.

  30. David O'Donnell Says:

    FYI

    Links to other stuff, paper, presentations, videos, at INET in Berlin

    http://ineteconomics.org/conference/berlin/program

    INET – Institute for New Economic Thinking

  31. David O'Donnell Says:

    INET Videos available here:

    http://ineteconomics.org/conference/berlin/all-videos-day-1

  32. Paul Hunt Says:

    @DOCM,

    Thank you for the link to Martin Wolf’s piece. He has consistently been the most enlightening commentator on this crisis. He is right of course in asserting that “the pressure of adjustment falls on notoriously inflexible labour markets”, but this is not, nor should it be, the full story. Ireland is very much on the less inflexible end of this spectrum while most of the other ‘peripherals’ are positioned towards the more inflexible end.

    Unfortunately, for most mainstream economists and almost all of the centre-right governing politicians, labour market flexibility means the freedom of firms to hire and fire and to alter the terms and conditions of employees at will. When the amount available from the marginal value of labour to pay wages is below the wage level, the knee-jerk reaction is to cut wages or employment or both. But as is often the case, and this is particularly true in the sheltered sectors, it is glorious inefficiencies in non-labour inputs and costs that reduce the amount available from the marginal value of input to pay labour that drives it below the wage level.

    Therefore, in and economy such as Ireland’s, which exhibits far less labour market inflexibility, the burden of adjustment should fall on non-labour costs – and then any possible excesses in labour costs may be addressed. In addition, when the amount available from the marginal value of output to pay wages is below the wage level, it is totally counter-productive to drive down wage costs, because the, almost invariably, will drive down the marginal value of output.

    The simple moral of the story is that if the amount available to pay wages from the marginal value of output is below the wage level, this does not mean that it is entirely the fault of labour. This is the knee-jerk reaction. It is simply wrong. It may be the case to a considerable extent in the other ‘peripherals’, but I very much doubt it is the case in Ireland to the extent many would have us believe.

    It would be far better to focus on non-labour costs first, reduce their share of the marginal value of output, try to increase the share available for labour. And if the share avaliable for labour is less than the wage level, try to increase the marginal value of output. Only then should cuts in wages or employment or both be considered.

    This is the only way economic activity will be boosted in flat-lining domestic economies – and the tradable sectors will also benefit.

  33. David O'Donnell Says:

    Explaining ‘New Economics’ with Two Diagrams
    by Benjamin Mitra-Kahn on April 14, 2012

    http://ineteconomics.org/blog/playground/explaining-new-economics-two-diagrams

  34. Mike Hall Says:

    @ V Barret

    Well said, good posts.

    @ Kevin O’Rourke

    If you want to read the correct macro economic underpinings for the severe criticisms of the Euro area policies & the somewhat under stated criticisms of the Euro structure itself, you need to read MMT. Prof Bill Mitchell has written a great deal about the Euro mess.

    http://bilbo.economicoutlook.net/blog/

    (And MMT scholars wrote about the flaws of the Euro system before it was introduced)

    So, on the basis of your rating Mr Velasco as ‘terrific’, I’m giving you a ‘C’ on the basis that you are beginning to see the real problems, but there’s important aspects of your thinking you need to correct. Aspects that will lead you to realise that there are, in pure economics terms, much better policy options to relieve Ireland’s problems quickly & secure a prosperous future.

  35. Shay Begorrah Says:

    @Mike Hall

    So, on the basis of your rating Mr Velasco as ‘terrific’, I’m giving you a ‘C’ on the basis that you are beginning to see the real problems,

    Wow. You should probably check who Kevin O’Rourke is Mr Hall, you could follow the link at the top of the post and do some googling or read some of his opinion pieces, like this one:

    Europe’s Summit To The Death

    I think it is safe to say he did not come to this blog looking for affirmation.

    Also, negative points for using the word scholar unironically, thanks to the American Enterprise Institute and its ilk it now means “partisan hack” and/or “crazy person”.

  36. Mike Hall Says:

    @ Shay

    Well, from your link to the K O’R piece:

    “…What is needed to save the eurozone in the medium term is a central bank mandated to target more than just inflation – for example, unemployment, financial stability, and the survival of the single currency. A common framework for regulating the financial system is also required, as is a common banking-resolution framework that serves the interests of taxpayers and government bondholders, rather than those of banks and their creditors. This will require a minimal fiscal union; a full-scale fiscal union would be better still. Yet none of this was on the summit’s agenda….”

    and

    “…This summit should have proposed institutional changes to avert such a scenario. But if such changes are politically impossible, and the euro is doomed, then a speedy death is preferable to a prolonged and painful demise. A eurozone collapse in the immediate future would be widely perceived as a catastrophe, which should at least serve as a source of hope for the future. But if it collapses after several years of perverse macroeconomic policies required by countries’ treaty obligations, the end, when it comes, will be regarded not as a calamity, but as a liberation…”

    Fair enough, but I fail to see why Kevin then considers the Velasquez piece as ‘terrific’, which was the basis of my ‘C’? Harsh perhaps. However I think it’s long past time for so-called ‘progressives’ to stop pussyfooting around & well, follow thru’ with something actually progressive. The neo liberal/theo classical domination of the last 30 years has monumentally failed & continues to do so following the initial meltdown. Or to put it another way, the conduct of politics, led by bogus economics, has been exposed for precisely what it is. A an entire system that operates solely in the interests of the top few percent, at the expense of the rest (particularly in the financialised economy, now 10x beyond a size offering anything but ‘extraction’ from the real economy, for nothing in return). This is organised looting, not economics, & not ‘democracy’ either.

    Let me give you an idea of what I consider ‘terrific’.

    Former US regulator Bill Black (credited with jailing 100s of bank execs following the US S&L scandal) giving us the flavour of ‘integrity’ at work in the financial sector institutions here:

    “Formula for Fraud”

    http://www.informationclearinghouse.info/article31107.htm

    And Bill Mitchell’s assessments of the Eurozone here (amongst many others on his blog):

    http://bilbo.economicoutlook.net/blog/?p=18884

    http://bilbo.economicoutlook.net/blog/?p=18873

    It’s fairly obvious that finance & mainstream economics thinking isn’t going to throw off it’s neo liberal scam ideology overnight. (But we are 4 years + into this mess, notwithstanding all the warnings made prior to the adoption of a deeply flawed currency union.)

    However, I suggest that there is an obvious interim policy that could relieve all the (worsening) Euro area unemployment, recession & debt issues very quickly ~ 2 to 3 years. This would give Ireland the time to find common cause with other countries to press for & negotiate/design the needed reforms to the EMU, whilst restoring the economy to a position where a Euro exit, if needed, would be far less traumatic.

    The policy.

    An MMT style Job Guarantee available (voluntary & with the stated MMT conditions) to every unemployed person in the Eurozone, directly financed by money issued, debt & cost free, by the ECB suitably mandated as an ‘emergency’ measure. Governments could be allowed to keep the savings made to welfare budgets to reinstate some capital spend (adding to stimulus) & also pay down some debt, perhaps a 50/50 split.

    There’s no reasonable macro economic arguments not to do this.

    In due course measures will need to be agreed to apply sectoral spending cuts and/or tax measures to curb the inflation that will arise when (but not before) economies near full capacity to utilise labour & material resources.

    The question of dealing with inherent regional productivity & development imbalances is another key issue which needs to addressed.

    We would have some time to do this. But if it fails, a far more orderly break up of the Euro can occur.

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