Ecco il video dell'incontro in Bocconi, pubblico numeroso e attento, chapeau.
The European Economic Constitution (the facto, I am not concerned with the legal aspects)
• Traditional targets of economic policy: full employment and price stability (and the equilibrium of the balance of payments)
• Traditional (macroeconomic) instruments: monetary policy, fiscal policy (and exchange rate policy)
• Assignment of instruments to objectives in the European economic and monetary union (EMU)
• Monetary policy (independent CB) à price stability
• Fiscal policy à neutral (or restrictive bias)
• A very rigid version of neoclassical theory (marginalism). You all know the story:
• The Phillips curve is vertical in the long-period (or even in the short). Monetary policy ineffective; independent CB; fiscal policy crowds out private investment
• It is better that wet countries tie their hands leaving monetary policy to a foreign central bank
• (The experiences of Guido Carli in 1973 when he declared that the refusal to finance the public debt would have been a “seditious act”, or when Paolo Baffi opposed the Italian participation to the EMS, should not be repeated)
• In this world there is never a problem of AD (certainly not in the long period). At the “natural interest rate” all savings are invested.
What is wrong with this theory?
• Both in practice and in theory investment does not depend on the interest rate.
• Pratice: empirically investment depends on expected demand (the accelerator) and not on in. Krugman calls it “the little dirty secret” (in his blog, not in the textbook!)
• Theory: Sraffa (Piero not Angelo, the son not the father) initiated the controversy on capital theory (the controversy between the two Cambridges) that destroyed the foundations of neoclassical theory. More specifically, the demand functions for “production factors” are not “well behaved”. This was acknowledged (by the MIT side), and rapidly forgotten. Any honest scholar would recognize that all that you have studied (including the labour and capital demand curves, Solow’s model, the Heckscher-Ohlin theorem, monetarism, DSGE models, Endogenous growth theory, almost everything you studied) is analytically wrong. But honesty has not prevailed in Economics, after David Ricardo’s death in 1823, as Marx taught us.
Going back to the theoretical background to the European economic constitution
• The central point is that in this view full employment is a national problem (to be tackled with labour market flexibility)
• This vision is precisely the opposite to that which prevailed before the monetarist counter-revolution of the seventies.
• In the Keynesian view full employment was an international question.
• By this view (especially in its long-run, more genuine, version) output depends on AD. Income distribution matters for aggregate demand (inequality is an obstacle to growth, as Larry Summers has lately admitted, acknowledging that PK economist are far ahead in this respect).
• Monetary and fiscal policy cooperate to sustain AD (fiscal dominance). Income policy takes care of inflation (corporativism) ßthis worked imperfectly in Italy, hence the ill-fated search for an external discipline
• Controls over capital flows assured a degree of independence of monetary policy in the Bretton Woods regime.
• Democracy: elections decide in which point of the Phillips curve the majority wants to stay
Necessity of an international Keynesianism: why?
• The balance of payment equilibrium was the main constraint to national full employment policies. The classical example is the Mitterand government in the early 1980s. If partners do not cooperate, you cannot pursue national Keynesian policies.
• Traditionally, Germany has opposed international keynesianism
• Unless: trade controls (not opposed e.g. by Federico Caffé), or exchange rate flexibility.
• Prof. Amato à Keynes’ proposal of an International clearing union that somehow obliged surplus countries to recycle their surplus (there is a similarity with the arcane European payment system called Target 2, but this would lead us too far away).
Germany: the European and global problem?
• Since the early 1950s Germany has deliberately pursued a neo-mercantilist model.
• Let the others adopt inflationary Keynesians policies; with fixed exchange rates our exports will take off
• Rationale à Michal Kalecki (the Marxist Keynes) à Profits derives from the capitalists’ surplus (the difference between net output and wages ß Ricardo/Sraffa). Lower wages à higher profit rate, but also, lower wages à lower domestic demand. Necessity of external markets à government spending, autonomous consumption, exports.
• A mercantilist strategy combines wage repression with high profits in fixed exchange rates regimes (BW, EMS, EMU).
• Called Monetary mercantilism by the German leading economic-historian Carl-Ludwig Holtfrerich. Violation of game rules of a MU.
Why did the other countries accept fixed exchange rate regime with Germany? A few words on Italy
• Rigid fixed exchange rate regimes are a cap over social conflict [in this sense inconsistent with democracy (Eichengreen, Rodrick)]
• France: the defence of the parity between the FF and the DM cost a lot in terms of interest rates, so better to proceed with a full monetary unification
• In Italy 1979-1981 à change of the monetary regime (from the ‘permissive’ regime of Carli and Baffi): participation in the EMS, “divorce” between BdI and the Treasury (plus progressive dismantlement of capital controls)
• Consequences: loss of external competitiveness àvictim: public debt
• 3 channels: 1) high interest rates to finance the BoP gap; 2) lower E and higher M à lower GDPà less fiscal revenues; 3) countries with persistent or expanding CA deficits are often obliged to run fiscal deficits to maintain aggregate demand: ‘Without fiscal deficit, they will have high unemployment’ (Stiglitz 2010, p. 235)
• Note that I am reversing the traditional “twin deficits” hypothesis from the traditional fiscal deficit à CA deficit to CA deficit à fiscal deficit
EMU discipline: two components
• FISCAL DISCIPLINE: Transfer of monetary sovereignty to a foreign central bank à fiscal discipline à a government without a central bank is at the mercy of the markets and can default
• WAGE DISCIPLINE à the exchange rate flexibility does not accommodate inflation any more
EMU’s victim: productivity growth
• Labour productivity depends on AD (“the division of labour depends on the extent of the market”, Kaldor-Verdoon law, economies of scale and investment depend on AD)
• From 1995 on the Italian economic policy has been more consistent and fiscal policy more conservative. The external competitiveness regained in 1992 was slowly eroded. Both factors might explain the stagnation of labour productivity from 1995.
Fixed exchange rate regimes as heralds of financial crises
• Apart from Paul DeGrauwe who in an article on the FT envisaged a construction bubble in Spain, fuelled by capital inflows, followed by a BoP crisis, nobody foresaw that the EMU might incur an internal BoP crisis. Note that Giavazzi and Baldwin arrived at this obvious interpretation with years of delay.
• Incomplete monetary union generates financial crisis (indebtedness of the periphery, sudden stop of capital flows, default). In Europe the financial (BoP) crisis did not explode because of TARGET 2 (Sinn) and the delayed ECB intervention (whatever it takes, OMT). Very complicated story.
• Of course you do not meet BoP crises in the US. This leads us to the basic flaws of the EMU: the US are a complete, viable monetary union, the EMU is not (and will never be).
Deflationary bias in an incomplete monetary union (MU) with no political union (and with the dominant country refusing to exercise leadership)
• Mundell (1961) with Germany in mind à a monetary union in a non-OCA would lead to competitiveness shocks in the periphery and to the refusal of core country to expand à deflationary bias
• In a full, viable MU a federal budget (assisted by a cooperative CB) operates fiscal transfers and anti-cyclical policies. Full financial integration and a full banking union avoid a doom loop between local banks and governments.
• In a viable MU the fiscal parameters on national budgets make sense
• A full, viable MU implies a political union.
Barba & De Vivo: federal budget irrelevant in the eurozone
Is a federal, progressive Europe possible? Next question, please.
• Hayek 1939: the opposition of core countries to a tax-transfer union implies that only a liberal (ordoliberal as by now everybody has learned to say) Europe is possible.
• Europe is the Mecca of the liberals (in the European sense), and not of the liberals (in the American sense).
• The nation-State is the traditional arena of the social conflict (that is of democracy) over income distribution (direct and indirect wages) and economic policy.
• Supra-national institutions humiliate national democracies (that ordinary people is incapable of taking care of themselves is openly declared by the most honest pro-Europeans, and of course by mainstream economists).
• International cooperation between sovereign democracies is not synonym of sinister nationalism (this is an odious accusation)
• Macron’s proposed reforms of the EZ were very timid (much fanfare about nothing)à a tiny federal budget
• Germany said no. The German interpretation of the crisis is that too little and not too much discipline characterised Europe.
• So the German proposals aim to remove the control over national budgets from the Commission (too political bargaining) and assign it to technocratic authorities like the EMF.
• The rest of the proposals are just financial engineering (once the Eurobonds are taken off the table)
What could realistically Italy fight for? Conclusions
Ddt = (rt – gt) dt-1 - st
• where d is the public debt/GDP ratio, r is the average nominal interest rate paid on the public debt, g is the nominal growth rate, and s is the primary balance/GDP ratio.
• The past decades have seen various combinations of these variables. This graph is from a paper I co-authored with Gennaro Zezza (Levy Institute and Unicass)
What could Italy fight for? Conclusions
• Since long ago (Appellodeglieconomisti 2010) some economists proposed a stabilization of the Italian Public debt/GDP ratio (I hope we all agree that there is not any magic number for this ratio)
• With a sufficiently low interest rate (lower than the growth rate) the stabilization is consistent with a primary fiscal deficit, that is a moderate expansionary fiscal stance.
• A similar proposal from Folkerts-Landau (chief economist of the DB): a grand bargain between Italy and Europe comprised of low interest rates and support for Italian growth in exchange of a firm commitment to fiscal stabilization.
• Current situation r > g, s > 0. We need g > r and s < 0 (we also need a German-led recovery to avoid BoP problems à but Berlin refuses to expand).
What could (realistically) Italy fight for? Conclusions
• In my view, it would be unacceptable for Italy to implement this on the terms proposed by Folkerts-Landau, i.e. through an application of the ECB's Outright Monetary Transactions (OMT) accompanied by a memorandum of understanding and an intervention of the European Stability Mechanism (ESM). But an honourable solution could be found.
• The question is the lack of credibility of the last governments in Italy (all prime ministers included) and the lack of will (and economic ignorance) on the European (read, German) side.
• The question might become actual again in case a new financial crisis with the spread going up.
• 3 problems:
• Gross foreign debt denominated in euro
• Possible ouster from Target 2 (in principle also non-€ countries use Target 2) à possible retaliation
• Other trade retaliations
• Better to avoid it. Yes, of course.
• Hopes in a change of Europe? None
• Internal change of Italy à there will be no institutional change (in a wide sense) without growth
Suggested readings (from where you can collect further references)
• On the Classical surplus approach, the criticism to neoclassical theory and Keynes:
Cesaratto, S. (2019) The modern revival of the Classical surplus approach: implications for the analysis of growth and crises, in T. Gabellini, S.Gasperin, A. Moneta (eds.) Economic Crisis and Economic Thought – Alternative theoretical perspectives on the economic crisis, Routledge, Abingdon & New York, pp. 111-134. WP version: https://ideas.repec.org/p/usi/wpaper/735.html
• On the EMU:
Cesaratto, S. (2017) Alternative Interpretations of a Stateless Currency crisis, Cambridge Journal of Economics, Volume 41, Issue 4, July 2017, Pages 977–998, free download: https://academic.oup.com/cje/article/41/4/977/2964673
Cesaratto, S. (2018), The nature of the eurocrisis. A reply to Febrero, Uxò and Bermejo, Review of Keynesian Economics, Vol. 6 No. 2, Summer 2018, pp. 240–251 (working paper version.
• On Italy and Europe
Cesaratto, S., & Zezza, G. (2019). What went wrong with Italy, and what the country should now fight for in Europe. in H.Hansjorg, J.Priewe&A.Watt (a cura di), Still Time to save the Euro, Berlin: Social Europe Publishing. https://www.socialeurope.eu/book/still-time-to-save-the-euro
Cesaratto, S. Italy: A Question of Interest Rates and Trust (Editorial), Intereconomics, Volume 53, November/December 2018, Number 6. https://archive.intereconomics.eu/year/2018/6/italy-a-question-of-interest-rates-and-trust/
Servaas Storm, (2019) How to Ruin a Country in Three Decades, https://www.ineteconomics.org/perspectives/blog/how-to-ruin-a-country-in-three-decades?fbclid=IwAR17WzDWXFzngSwtA__43A1_YjtGJU2U248lE7CIzYIdBiep_FmyzYGKXBI
S.Cesaratto (2016) Sei lezioni di economia - Conoscenze necessarie per capire la crisi più lunga (e come uscirne), Imprimatur editore,3a ristampa*
Cesaratto, S. (2018), Chi non rispetta le regole? Italia e Germania, le doppie morali dell'euro , Imprimatur, Reggio Emilia.*
Sergio Cesaratto & Gennaro Zezza, 2018. "Farsi male da soli: Disciplina esterna, domanda aggregata e il declino economico italiano," WorkingPapers 2018-05, Universita' di Cassino, Dipartimento di Economia e Giurisprudenza (forthcoming in L’industria in a special number in memory of Marcello De Cecco).
* Unfortunately the publisher has closed. A new edition of the best-selling Sei lezioni should be published next autumn with a new publisher .