Una risposta a Marc Lavoie sulla natura della crisi europea - A reply to Marc Lavoie on the nature of the Eurocrisis

Asimmetrie ha pubblicato un mio WP di riposta a Marc Lavoie sulla natura della crisi europea. Riproduco qui abstract e introduzione. Buona lettura e molti auguri.

WP 2014/06: Balance of payments or monetary sovereignty? In search of the EMU’s original sin – a reply to Lavoie

 22 dicembre 2014

In a recent paper Marc Lavoie (2014) has criticized my interpretation of the Eurozone (EZ) crisis as a balance of payments crisis (BoP view for short). He rather identified the original sin “in the setup and self-imposed constraint of the European Central Bank”. This is defined here as the monetary sovereignty view. This view belongs to a more general view that see the source of the EZ troubles in its imperfect institutional design. According to the (prevailing) BoP view, supported with different shades by a variety of economists from the conservative Sinn to the progressive Frenkel, the original sin is in the current account (CA) imbalances brought about by the abandonment of exchange rate adjustments and in the inducement to peripheral countries to get indebted with core countries. An increasing number of economists would add the German neo-mercantilist policies as an aggravating factor. While the BoP crisis appears as a fact, a better institutional design would perhaps have avoided the worse aspects of the current crisis and permitted a more effective action by the ECB. Leaving aside the political unfeasibility of a more progressive institutional set up, it is doubtful that this would fix the structural unbalances exacerbated by the euro. Be this as it may, one can, of course, blame the flawed institutional set up and the lack an ultimate action by the ECB as the culprit of the crisis, as Lavoie seems to argue. Yet, since this institutional set up is not there, the EZ crisis manifests itself as a balance of payment crisis.

Introduction

Within a general appreciation of my work on TARGET2 (T2) (Cesaratto 2013a), Marc Lavoie (2014) has criticized my interpretation of the Eurozone (EZ) troubles as a balance of payments crisis (BoP view for short). He would rather identify the original sin “in the setup and self-imposed constraint of the European Central Bank” (ibid: 12). Lavoie is not alone in this interpretation as it is shared by economists like Paul De Grauwe (2011; 2013), according to whom the EZ crisis is largely a liquidity crisis that became a solvency crisis. This stance is also accompanied by the idea that there cannot be a BoP crisis in a currency union endowed with payment mechanisms such as T2 and the ECB liquidity refinancing instruments. We shall define this interpretation as the monetary sovereignty view. This view belongs to a more general view that see the source of the EZ troubles in its imperfect institutional design (or institutional set up view).

I am not alone in supporting the BoP view that can in fact be seen as prevalent. International monetary historians like Michael Bordo, heterodox economists like Roberto Frenkel, conservative students like Werner Sinn and even official sources (EU 2009, 2010), inter alia, all share this view – with different shades of course. According to the BoP view there can be a BoP crisis in a flawed currency union (CU) like the European Monetary Union (EMU) since it still shares some features of a fixed exchange rate regime – in particular what Draghi called the “convertibility risk” - the role of T2 in slowing down the redde rationem notwithstanding. The definition of flawed CU includes, of course, the “self-imposed constraint” to the ECB action which does not seem, however, sufficient to explain the crisis. According to the BoP view, the original sin is in the current account (CA) imbalances brought about by the abandonment of exchange rate adjustments and in the inducement to peripheral countries to get indebted with core countries. While this kind of events is reminiscent of former BoP crises in fixed foreign exchange regimes, according to an increasing number of economists (lately Wren-Lewis 2014) the German neo-mercantilist policies have made the basic problems even worse.

Section 1 deals with the analogies between Keynes’s International Clearing Union and T2. Section 2 dwells upon the pros and cons of the conservative BoP view held by Werner Sinn. Section 3 reviews some less orthodox support to the BoP view. In the conclusions I will enlist some main analytical results.