Nakedkeynesianism ha pubblicato questa ulteriore nota sulla discussione con Marc Lavoie, che spero non mi citi in tribunale per stolking. Ma Marc è una persona amabile.
Unlimited Targets? Some pointers
Sergio
Cesaratto
In
this short note I will not add anything of substantial to the debate with Marc
Lavoie on the nature of the Eurozone (EZ) crisis in view of Target 2 (T2).
Readers have numerous papers to look at (including Lavoie 2015a/b, Cesaratto 2013, 2015a/b) and posts (Vernengo
2015, Ramanan, 2015a/b). Links in the references. However, although most of relevance has already been said, there is perhaps still some space
for few qualifications.
1.
Subject of the dispute is on whether the EZ crisis can be considered a balance
of payment (BoP) crisis in view of the existence of T2 and of the Eurosystem
semi-authomatic refinancing mechanism, or if it should be considered a crisis
derived from flawed institutional mechanisms that led, in particular, to a
belated intervention by the ECB to sustain peripheral sovereign debts.
Marc believes that given the existence of T2 and
refinancing mechanisms, a BoP crisis cannot occur in a monetary union:
“The
point that I have tried to make on a number of occasions at conferences is that
outflows are not limited by the amount of foreign reserves in the Eurozone
context, in contrast to a country on a fixed or managed exchange rate regime.
If a Eurozone country is running a current account deficit that banks from
other Eurozone members decline to finance, or if it is subjected to capital
outflows, then all that happens is that the national central bank of that
country will be accumulating TARGET2 debit balances at the ECB. There is no
legal limit to these debit balances. The
national central bank with the debit balances, which pay interest at the target
interest rate, has as a counterpart in its assets the advances that it must
make to its national commercial banks at that same target interest rate. And
the commercial banks can obtain central bank advances as long as they show
proper collateral. Why would the size of current account deficits or TARGET2
debit balances worry speculators?” (Lavoie 2015: 158)
Marc
correctly points out the difference in our views:
“Cesaratto (2015°: 151)
and I agree when he concludes that “there are no definite
limits to T2 imbalances”; he seems to disagree when he adds that “a political limit has been set by the imposition of harsh
austerity measures on peripheral countries in order to obtain positive CA
balances”. (ibid)
So the difference is that I see policy
limits (perhaps political was not the right word) to T2 imbalances in the sense
that policy makers cannot see them growing indefinitely, reflecting growing flow
and stock foreign indebtedness and, correspondingly, mounting indebtedness of peripheral
private and sovereign debts.[1]
2. To give an example, would a central
government with a sovereign central bank (CB) let one region (say Calabria) to expand its
expenditure issuing regional bonds by letting its CB to guarantee an unlimited
issuance? Notably this behaviour would let this region to accumulate an unlimited
balance of payment deficit and foreign debt with the rest of the country and
the rest of the world.[2] At the minimum the other regions would
like to imitate this (electorally) convenient behaviour. The reader can derive by
herself the economic consequences of this behaviour.
If
this does not complicate the life of readers, a reference to a view that cannot
be suspected of fiscal timidity, that is to MMT, is useful here. Wray and Nersisyan (2010:
16) argue that although there are not “financial constraints [to sovereign debt
and deficit] inherent in the fiat system”, nonetheless some arbitrary fiscal
constraint, e.g. a balanced budget of the cycle, is necessary to avoid that the
government “might spend ‘out of control,’ taking too large a percent of the
nation’s resources”. [3]
Would
any national government let its CB to back a single region to behave this way? And
should we expect the EU sustaining a single member, let alone a group of
members, to behave this way? Or could we expect the U.S. printing dollars to
check the Argentinian foreign debt crisis in 2001?
On
a similar vein Ramanan (2015a, italics added) pointed out:
“Let’s consider what happens
if there is no federal government and if the ECB is the main supranational
authority (ignoring other supranational institutions which have limited
powers). Suppose the ECB were to guarantee the debt of governments of all Euro
Area nations. There’s nothing to prevent, say, the government of Finland to
increase the compensation of its employees every year by a huge percentage and
thereby affecting Finnish corporations’ compensation of its employees. This
will result in a reduction of competitiveness of Finnish producers and Finnish
resident economic units will rely more on goods and services produced abroad.
This will raise Finland’s net indebtedness to the rest of the Euro Area and the
world. If someone believes that this debt
is not a problem, how about the inflationary impact of this rise in demand on
the rest of the Euro Area?...
To summarize, the Euro Area
problem wouldn’t have been a balance-of-payments problem had the official
sector promised to act as a lender of the last resort to national Euro Area
governments without any condition. As long as there are conditions, it is a
balance-of-payments problem. One cannot
pretend that the European Central Bank has or can be given such powers to lend
without any condition. And hence the Euro Area crisis is a
balance-of-payments problem.”
(see also the most recent post by Ramanan, a bit sarcastic)
(see also the most recent post by Ramanan, a bit sarcastic)
3.
In this sense I do not agree with the ecumenical view taken by Matias Vernengo
(2015) according to which:
“Cesaratto and Lavoie hypotheses are one and the same.
The balance of payments and the monetary sovereignty views of the European
crisis are two sides of the same coin. The fact that overdraft facilities
involved in the TARGET2 system could be used to create credit to finance euro
imbalances, or that the ECB could buy government bonds in the secondary market
does not preclude the fact that the actual crisis is, in the absence of these
policies, the result of the inability to manage a CA deficit.”
It
can be noted that Matias eventually endorses the argument (that I refrain to
attribute to Lavoie but that, perhaps, he might approve) that the absence of an
unlimited credit by the ECB is the ultimate cause of the BoP crisis. [4]
My view is that it is unthinkable to believe in an open ended support by the
ECB (or by the EU governance) of unlimited Target 2 imbalances. And this is, in
my view, the ultimate cause of the imposition of austerity policies on the
periphery. The ECB “whatever it takes” (threatened)
intervention, finalised to alleviate the austerity costs by reassuring
financial markets, was indeed subordinate to the adoption of austerity measures
- so that no German court could protest, inspired by Werner Sinn, that the ECB
was sustaining unlimited peripheral foreign debts.
In
Lavoie’s and Paul De Grauwe (e.g. 2013)’s views austerity was functional to reassure
the financial markets about the fiscal sustainability of peripheral debts given
the absence of the ECB as lender of last resort (see Cesaratto 2015b for a
review). Note that this view is exposed to a fiscal interpretation of the
crisis (one that Lavoie and De Grauwe firmly oppose). And, indeed, the reader
may wander what is the cause of the crisis, given that Lavoie and De Grauwe
tend to neglect Robert Frankel’s and others’ story about the similarities of
the EZ crisis with the typical financial crisis of emerging economies (see
Cesaratto 2015b for a review)
The
next are minor points.
4.
Marc is correct when he argues that Roberto Frenkel does not reject the
“unlimited Target 2 unbalances view”:
“Let me make a final point. Cesaratto (…) enlists Roberto Frenkel (2012) among the economists
who support his ‘balance-of-payments’ interpretation of the crisis. I got quite a
different impression when I read his paper. While Frenkel (2012: 13) agrees
with Cesaratto that
the adoption of the common currency was a mistake and that the crisis has its
origin in ‘the conjunction of fixed exchange rates,
full capital mobility and weak financial regulation,’ Frenkel
nevertheless believes that the size of TARGET2 balances is irrelevant and
argues that
the sovereign risk premiums observed with GIIPS countries were tied to the
absence of
a credible lender of last resort”
And
indeed in my most recent paper (Cesaratto 2015b) I had already pointed out:
“A more
nuanced position is taken by Frenkel (2014, pp. 13-14). On the one hand he
regards the eurocrisis as a balance of payment crisis; on the other, he denies
that there can be an “exchange rate risk” (the typical manifestation of a
balance of payment crisis) in the euro zone presumably because of the
combination of Target 2 and the ECB refinancing operations. The increasing
sovereign default risk is then attributed to the absence of a lender of last
resort. Notably, with OMT the ECB began to act as a lender of last resort but
precisely to defuse what Draghi (2012) called in his most famous speech ‘convertibility
risk’, that is the risk of a euro break-up.”[5]
5.
Finally, although this is less important, I’d like to point out, in Cesaratto
(2015a) I was not so pretentious to claim that Lavoie (2015) was entirely devoted
to discuss Cesaratto (2013). Unfortunately this is the impression that the
reader may get from Lavoie’s incipit of his Reply. When I began my (2015) paper
writing:
“In
a general appreciation of my work on
TARGET2 (T2) (Cesaratto 2013),
Marc Lavoie (2015a) criticized my interpretation of
the Eurozone (EZ) troubles as a balance of payments crisis”,[6]
by ”general appreciation” I meant “positive reception” (see e.g. the
Microsoft Window Word dictionary), but perhaps the way I expressed myself was
ambiguous.
References
Cesaratto, S. 2013. “The Implications of TARGET2 in the European Balance of
payments Crisis and Beyond.” European Journal of Economics and Economic
Policy: Intervention 10, no. 3: 359–382. link
ID 2015a. “Balance of Payments or Monetary Sovereignty?. In
Search of the EMU’s Original Sin–Comments on Marc Lavoie’s The Eurozone:
Similarities to and Differences from Keynes’s Plan.” International Journal
of Political Economy 44, no. 2: 142–156. link
De Grauwe, P. (2013) Design Failures in the Euro zone - can they be fixed? London School of Economics, LEQS Paper No. 57/2013. Link
Frenkel, R. 2012. “What Have the Crises in Emerging Markets and the Euro Zone in Common and what Differentiates Them?”, link
Frenkel, R. (2014) What have the crises in emerging markets and the Euro Zone in common and what differentiates them? in Joseph E. Stiglitz, Daniel Heymann (eds), Life After Debt - The Origins and Resolutions of Debt Crisis, Palgrave Macmillan (quotations from the WP version link)
Lavoie, M. 2015a. “The Eurozone: Similarities to and Differences from Keynes’s Plan.” International Journal of Political Economy 44, no. 1 (Spring): 3–17. link
ID 2015b. “The Eurozone Crisis: A Balance-of-Payments Problem
or a Crisis Due to a Flawed Monetary Design?” International Journal of
Political Economy 44, no. 2: 157-160. (abstract)
Nersisyan, Y. and Wray, L.R. (2010) Does Excessive Sovereign Debt Really Hurt Growth? A Critique of This Time Is Different, by Reinhart and Rogoff, Levy Institute, WP No. 603
Ramanan (2015) Sergio Cesaratto’s Debate With Marc Lavoie on Whether the Euro Area Crisis Is a Balance-Of-Payments Crisis – II, The Case For Concerted Action, link
ID (2015b) Sergio Cesaratto on Target 2 balances link
Vernengo, M. (2015)
Greece on the verge, Nakedkeynesianism, June 30, Link
[1] Eventually, it is
the sovereign that bails out private (typically banks’) debts.
[2] Of course, foreign
imbalances due to a reckless spending of a regional government become a problem
for the country as a whole, unless it issues an international currency.
“With a sovereign currency, the need to
balance the budget over some time period determined by the movements of
celestial objects or over the course of a business cycle is a myth, an
old-fashioned religion. When a country operates on a fiat monetary regime, debt
and deficit limits and even bond issues for that matter are self-imposed, i.e.,
there are no financial constraints inherent in the fiat system that exist under
a gold standard or fixed exchange rate regime. But that superstition is seen as
necessary because if everyone realizes that government is not actually
constrained by the necessity of balanced budgets, then it might spend ‘out of
control,’ taking too large a percent of the nation’s resources.”
[4] This argument is
perhaps closer to that of Roberto Frenkel recalled below.
[5] I also agree with
Marc (2015b: 159) that there are two version of the BoP interpretation: one
conventional that interprets core-periphery capital flows as foreign saving
flows (what he labels “excess saving view”), and a second one that sees the
origin of the peripheral foreign unbalances in endogenous credit/money creation
by peripheral or core banks. In my papers I always insisted on this difference.
[6] Marc reported my
sentence mistakenly: ““In
a general interpretation (I wrote
‘appreciation’) of my work on TARGET2 (T2) (Cesaratto 2013), Marc Lavoie (2015a)
criticized my interpretation of the Eurozone (EZ) troubles as a balance of
payments crisis”
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