Today’s Instant Solution to Greece’s Problems

Not wanting to be outdone by Martin Feldstein, Laurence Kotlikoff (recently based known for his Limited Purpose Banking proposals) is the latest US-based economist to bring his analytical skills to bear on the Greece’s problems to diagnose an instant solution:

Is there some way that Greece can devalue without devaluing?

There is, indeed. The government can implement wage and price controls for, say, the next three months, with these controls covering not just the growth in wages and prices over the next three months, but also their initial levels. Specifically, the Greek government would decree that all firms must lower their nominal wages and prices by 30 per cent, effective immediately, and not change them for three months. After three months, everyone would be free to put prices and wages back up.

This is an interesting proposal. Indeed, if this decree-based approach proves to be successful, it could then be applied to other areas. For instance, in the sphere of justice, the Greek government could decree that people should obey the ten commandments. And, if it works in Greece, we should try the decree approach here. After all, we’re all in favour of evidence-based policy formulation.

Globalisation, international financial integration and the financial crisis: The future of European and international financial market regulation and supervision

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

Bailing out the banks: Reconciling stability and competition

There is a new CEPR report on this topic –  this VOX column provides a summary.

Pettis on Europe (and China)

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.)

A Bonzer Wheeze, by Martin Feldstein

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…..