Ramanan again su Target 2, Lavoie and me

Rilancio un post dell'ottimo Ramanan (un ottimo blogger indiano, postkeynesiano ed esperto di finanza) sul dibattito con Lavoie sulla natura della crisi Europea.
"I echo Sergio’s example (on Calabria) with a similar example of my own. If nations in a monetary union cannot face a balance-of-payments crisis, why not have the whole world join the Euro Area and adopt the Euro as their currency and have the ECB as the central bank of the world and guarantee all government debts without any condition? Surely, that should be the solution to the problems of the world! Not! ...The ECB alone cannot resolve the crisis. "
Qui il post completo.

Target due sulla natura della crisi europea

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.

Nuovo Working paper su Asimmetrie

 Paper appena pubbliato da Asimmetrie.org che ringrazio per ospitalità e sostegno finanziario.

 

Alternative Interpretations of a Stateless Currency crisis 

Sergio Cesaratto 

Abstract

A number of economists holding Keynesian or pragmatic monetarist views warned that political union was a necessary premise for a viable monetary union. Inspired by Goodhart, we name this the Cartalist view. The European currency union was, however, strongly influenced by New Classical Macroeconomics, which gave new strength to older traditions, like ordoliberalism, that back separation of monetary and fiscal policy, legitimizing a Stateless currency. Again like Goodhart, we call this the Metallist view. This distinction is particularly relevant for assessing two alternative perspectives of the nature of the Euro area crisis. On one hand, there are those who argue that the crisis is akin to a traditional balance of payment crisis of the kind typically occurring in fixed exchange rate regimes. On the other, there are those who attribute the crisis to obstacles to more resolute intervention by the European Central Bank (ECB). Accordingly, belated intervention by the ECB led to worsening of the fiscal crisis of peripheral Euro area states, subsequently exacerbated by austerity policies. In this view, a classical balance of payment crisis can be excluded as a cause of the crisis, because Target 2, a payment mechanism analogous to Keynes’s International Clearing Union, protects the Euro area. In this paper, I argue that although a balance of payments crisis cannot exist in a viable sovereign monetary union, it is still conceivable in a flawed, stateless monetary union like the Euro zone, possibly obscured by Target 2. In this regard, I also show that, while timely and resolute ECB intervention would have been appropriate, in the absence of federal institutions (particularly a federal budget controlled by a European democratic parliament), once this intervention finally took place, austerity measures necessarily accompanied it to check moral hazard possibilities of peripheral member countries. I argue that the German neo-mercantilist orientation and the influence of the predominant mainstream credo that monetary policy should be detached from politics and fiscal policy are obstacles to a viable federal union. I also warn about the risk that the Parliament of such a union would be divided according to national rather than ideological/class interests. Virtue out of necessity, Hayek pointed out long-ago that a currency union among different nation-States could only survive with a minimalist federal State.

Ramanan su Cesaratto su Lavoie

Io scrivo poco ora, ma per fortuna su quel poco c'è chi scrive su di me, come l'amico Ramanan, uno dei più attivi blogger postkeynesiani.

The Case For Concerted Action

Post-Keynesian Ideas For A Crisis That Conventional Remedies Cannot Resolve

Sergio Cesaratto’s Debate With Marc Lavoie On Whether The Euro Area Crisis Is A Balance-Of-Payments Crisis

by Ramanan on 22 December 2014

Sergio Cesaratto has a new paper Balance Of Payments Or Monetary Sovereignty? In Search Of The EMU’s Original Sin – A Reply To Lavoie. (html link, pdf link)
I obviously agree with Sergio Cesaratto.
As long as there is no supranational fiscal authority, a Euro Area nation’s economic success is more restricted by its exports than otherwise as there is no mechanism for fiscal transfers. The European Central bank can of course backstop and to some extent it has done so, but it cannot let fiscal policy of nations become independent of balance of payments beyond a certain extent. If it does so, nations’ public debt will rise together with net indebtedness to foreigners relative to output and this will become unsustainable. The European Central Bank (the Eurosystem less the domestic National Central Bank) will become a huge creditor and this will not be acceptable to the rest of the Euro Area. (There is of course the question whether this would be morally right but I do not think it is immoral beyond a limit).
To some extent, Mario Draghi has acted the opposite and pushed austerity, but one cannot assume unlimited power for the ECB (Eurosystem to be precise).

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.

E' la crisi dell'eurozona una crisi di bilancia dei pagamenti? Is the Eurozone crisis a BoP crisis?

Parlatene male, ma parlatene.
Un po' di controversia internazionale - che mi aspettavo - sul mio paper su Target 2 e la crisi europea come crisi di bilancia dei pagamenti. Chi mi critica è (ops!) un MMT. Grazie al mio amico Ramanan (un noto blogger indiano) per la difesa della mia tesi, sia nei commenti a Plikington che nel suo ottimo blog Concerted action.Grazie naturalmente anche a Pilkington per l'attenzione.

CRITICHE http://fixingtheeconomists.wordpress.com/2013/08/31/can-a-country-without-a-currency-have-a-currency-crisis/
RAMANAN http://www.concertedaction.com/2013/08/31/balance-payments-crises/

Con l'occasione (e a proposito di India), il mio amico Bergamini mi segnala questa intervista di Jayati Gosh, una straordinaria economista indiana, il termine inglese "sharp" rende perfettamente l'idea. Utile e chiara sulla crisi indiana (e cinese).
http://www.spiegel.de/international/world/indian-economist-jayati-ghosh-warns-of-chaos-and-violence-a-919048.html#js-article-comments-box-pager

A little of international controversy - that I expected - on my paper on Target 2 and the Eurozone crisis as a BoP crisis. The critic is (ops) an MMT. Thanks to my friend Ramanan to take my defence both in his comments and in his blog. Thanks also to Pilkington, of course, for paying attention to my paper.

I take this occasion to suggest an interview to the always sharp Jayati Gosh from Spiegel on the current troubles in India (and China).

Replica a Wray - Parte 2

Ecco la seconda parte. La risposta di Wray è qui http://www.economonitor.com/lrwray/2012/08/29/minsky-and-mmt-in-the-news/. Utile perché contrappone due scuole: Kaldor-Thirlwall per i quali il vincolo della bilancia dei pagamenti è l'ostacolo principale alla crescita, l'altra (l'MMT) secondo cui con una moneta sovrana, oplà, il problema scompare.

A reply to Wray - Part 2

“The EMU could easily have self-destructed even with no current account deficits anywhere.” (Wray here)

“Trade issues within the eurozone …will remain a point of economic and political stress even with a full resolution of the liquidity issues…” (Warren Mosler)

In the part 1 I reviewed the MMT view that full monetary sovereignty is the key to full employment policies in all countries, provided that those with current account (CA) troubles have safe access to alternative sources of foreign liquidity - what is not the case in reality. I also examined the MMT’s claim that the Eurozone (EZ) cannot suffer from internal balance of payment (BoP) troubles as long as fiscal transfers from a significant federal budget backed by a genuine European CB are provided - what again is not the case in reality. In this post we shall return on Wray’s denial of the BoP origin of the EZ crisis. I agree with Wray, Bell-Kelton and other MMTs that in a currency union local states are partially deprived of fiscal policy as a tool to sustain aggregate demand[1]  (without forgetting that this power is anyway in many countries subject to the foreign constraint even with full monetary sovereignty), while the institutional design of the EMU is not able to assure full employment and the preservation of the traditional European welfare state in a non-OCA. As Godley 1991 pointed out:

“The fact that individual countries no longer have their own currencies and central banks will put new constraints on their ability to run independent fiscal policies. However, the collective formulation of fiscal policy would be a far more difficult business than passive ‘coordination’. Fiscal policies of the whole Community could be co-ordinated and expansionary: but they could also be co-ordinated and contractionary. How is the common formulation of fiscal policy to be achieved? By what institutions and according to what principles?”

But Godley found even

“more disturbing … the notion that with a common currency the ‘balance or payments problem’ is eliminated and therefore that individual countries are relieved of the need to pay for their imports with exports. Quite the reverse: the existence or a common currency makes a country more directly dependent on its ability to sell exports and import substitutes than it was before, particularly as it will then possess no means whereby it can (in the broadest sense) protect itself against failure” (hat tip to Ramanan).

Indeed, the crisis did not stem from an undisciplined fiscal behaviour of some peripheral countries  – they knew very well that “markets” would have punished them (the EMU was designed for this purpose) – but from the loss of competitiveness of some member countries, as Godley feared, and from some additional events brought about by monetary unification that nobody (with one exception) foresaw.

Replica a Randall Wray - Parte 1

 Nakedkeynesianism ha appena pubblicato la prima parte della mia risposta a Wray, e a seguire inserirà la seconda. Certamente degli amici italiani le tradurranno. Buona lettura. La risposta di Wray è qui http://www.economonitor.com/lrwray/2012/08/29/minsky-and-mmt-in-the-news/. Utile perché contrappone due scuole: Kaldor-Thirlwall per i quali il vincolo della bilancia dei pagamenti è l'ostacolo principale alla crescita, l'altra (l'MMT) secondo cui con una moneta sovrana, oplà, il problema scompare.

A reply to Wray - Part 1

 “The fact that individual countries no longer have their own currencies and central banks will put new constraints on their ability to run independent fiscal policies. … But more disturbing still is the notion that with a common currency the ‘balance or payments problem’ is eliminated and therefore that individual countries are relieved of the need to pay for their imports with exports. Quite the reverse: the existence or a common currency makes a country more directly dependent on its ability to sell exports and import substitutes than it was before…”. Godley 1991

There are two aspects of the discussion that has taken place in the last weeks (here, here, here, here). The first mainly concerns my first post and regards whether monetary sovereignty is a condition both necessary and sufficient for any country to pursue development and full employment policies; the second concerns the Eurozone (EZ) crisis and was the subject of my second post. Wray mainly focuses on the second issue, and I will do the same. In part 1 of my reply I will, however, briefly dwell on the first aspect that is anyway preliminary and which will lead us to touch upon the EZ troubles anyway. The two questions we deal with in part 1 will, respectively, be: are balance of payments (BoP) preoccupations irrelevant for countries endowed with full monetary sovereignty? Can a currency union suffer of internal BoP troubles? Part 2 will then be devoted to Wray’s explanation(s) of the EZ crisis.

Una nuova critica a Wray e all'MMT

Nakedkeynesianism ha pubblicato una mia nota critica (ma non ostile) a Wray e agli MMT (grazie Matias!). Nonostante essi ritengano di aver capito per primi la crisi europea, questo non è vero, sebbene ne abbiano capito prima di altri un elemento importante e di ciò gli va dato atto (ci mancherebbe). L'elemento è la rinuncia a una banca sovrana da parte degli stati nazionali. Il problema è che i toni che usano gli impediscono un dialogo sereno, non accorgendosi della parzialità delle loro tesi (a mio avviso, nel complesso, la crisi europea non l'hanno capita). In fondo v'è un po' di discussione (grazie Ramanan!).

(further, further discussion here and here)

Degli amici stanno procedendo alla traduzione in italiano.

The spurious victory of MMT

Sergio Cesaratto (Guest Blogger)

In a widely read blog aggregator Randy Wray has declared victory of MMT and that we are all MMTs by now. Victory on who? And I personally do not feel MMT, or better I feel MMT, Sraffian, Kaleckian, Marxist and many other things, each taken with a degree of salt. Fanaticism and over-excitement is not part of heterodox Economics, let alone of academic work, and the fact that Wray got so nervous after a initial critical comment by a reader is telling that we might be far away from a cool and equilibrate economic dialogue. MMT has provided a lot of important insights, as other approaches, about the European crisis. Also intellectual adversaries like Werner Sinn have contributed to our understanding of the crisis, in this case over the role of Target 2 (that for the first time or so Wray mentions). MMT has, indeed, missed the main feature of the EZ crisis: its nature of a balance of payment crisis. Anyway, I do not see the MMT explanation as alternative, but as complementary to the BoP crisis view. In this regard, more modesty would help everybody in our common scientific and political enterprise. While my own view of the EZ crisis as a BoP crisis is here (this WP is a longer version of an article in a book that will be published likely by Routledge, a blog version is here), below you can find some critical remarks on the MMT view of the EZ crisis part of a longer paper that will be published in Spanish. These remarks develop a bit further the post on MMT already published here which is also a section of the WP. Having said so, I am ready to acknowledge that along Godley 1992, De Grauwe 1998, Kelton and Wray (and few others like Barba and Pivetti) have provided prescient predictions of the forthcoming crisis, each emphasises one aspect of it.