Dollars, Euros, and Debt: How We Got into the Fiscal Crisis, and How We Get Out of It

192 Pages·2013·1.423 MB·English

by  Vito Tanzi (auth.)

Dollars, Euros, and Debt
AlsobyVitoTanzi
GOVERNMENTVERSUSMARKET
PUBLICSPENDINGINTHETWENTIETHCENTURY(withLudgerSchuknecht)
INFLATIONANDTHEPERSONALINCOMETAX
RECENTCONTRIBUTIONSTOPUBLICECONOMICS(2volumes)
Dollars, Euros, and Debt
How We Got into the Fiscal Crisis,
and How We Get Out of It
Vito Tanzi
©VitoTanzi2013
Softcover reprint of the hardcover 1st edition 2013 978-1-137-34646-9
Allrightsreserved.Noreproduction,copyortransmissionofthis
publicationmaybemadewithoutwrittenpermission.
Noportionofthispublicationmaybereproduced,copiedortransmitted
savewithwrittenpermissionorinaccordancewiththeprovisionsofthe
Copyright,DesignsandPatentsAct1988,orunderthetermsofanylicense
permittinglimitedcopyingissuedbytheCopyrightLicensingAgency,
SaffronHouse,6–10KirbyStreet,LondonEC1N8TS.
Anypersonwhodoesanyunauthorizedactinrelationtothispublication
maybeliabletocriminalprosecutionandcivilclaimsfordamages.
Theauthorhasassertedhisrighttobeidentifiedastheauthorofthis
workinaccordancewiththeCopyright,DesignsandPatentsAct1988.
Firstpublished2013by
PALGRAVEMACMILLAN
PalgraveMacmillanintheUKisanimprintofMacmillanPublishersLimited,
registeredinEngland,companynumber785998,ofHoundmills,Basingstoke,
HampshireRG216XS.
PalgraveMacmillanintheUSisadivisionofStMartin’sPressLLC,
175FifthAvenue,NewYork,NY10010.
PalgraveMacmillanistheglobalacademicimprintoftheabovecompanies
andhascompaniesandrepresentativesthroughouttheworld.
Palgrave®andMacmillan®areregisteredtrademarksintheUnitedStates,
theUnitedKingdom,Europeandothercountries.
ISBN 978-1-349-67456-5 ISBN 978-1-137-34647-6 (eBook)
DOI 10.1057/9781137346476
AcataloguerecordforthisbookisavailablefromtheBritishLibrary.
AcatalogrecordforthisbookisavailablefromtheLibraryofCongress.
Transferred to Digital Printing in 2013
Contents
PrefaceandAcknowledgments vii
1 Introduction 1
2 TheCrisisandtheCallsforPolicyResponses 11
3 CentralBanksasLendersofLastResort 23
4 ThePressuresonGermanytoHelpSavetheEuro 37
5 TheFiscalSituationbeforetheCrisis 45
6 TheEMURulesandGoodhart’sLaw 51
7 OnPublicDebts,FiscalDeficits,andtheMaastricht
Rules 63
8 FiscalPolicyDuringtheRecentCrisis 71
9 FiscalPolicyandtheFictionofFungibleLabor 89
10 TheEMUandtheUSA:WhatAretheDifferences? 95
11 TradeBalanceswithinMonetaryUnions 109
12 OnCentralBanks’PaymentSystemswithinUnions 117
13 StrategiestoGetOutoftheFiscalCrisis 133
14 IsThereaFundamentalLawofPublicExpenditure
Growth? 151
15 ConcludingRemarks 167
References 175
Index 183
v
Preface and Acknowledgments
During the most significant years when the euro was brought into
existenceandstartedoperations,IhadtheprivilegeofbeingDirector
oftheFiscalAffairsDepartmentoftheInternationalMonetaryFund,
from 1981 until the end of the year 2000, and Undersecretary for
EconomyandFinanceintheItaliangovernment,from2001to2003.
InthesepositionsIwasinasomewhatprivilegedpositiontoobserve
developments, especially in the public finance area, and to follow
someofthedecisionsbeingtakenonsomerelevantissues.
Intheclosingmonthsof2001,whenpreparationswerebeingmade
for the introduction of euro bills and coins, to physically replace
the national currencies of the members of the European Monetary
Union, I chaired a multi-institutional committee, within the Italian
government,thataddressedsomeofthelogisticproblemsthatwould
be encountered when, on 1 January 2002, the Italian lira would
no longer be the official money of Italy and would be replaced by
theeuro.
In the months that followed the physical change from the lira to
theeuro,Ioftenhadtomeetrepresentativesofconsumergroupsthat,
against all the statistical evidence available, kept arguing that the
introductionoftheeurohadledtoanenormousincrease(adoubling
theyclaimed)inconsumerprices,thusmakingtheItaliansimmedi-
atelypoorer.Somequestionedtheexchangeratethathadbeenused
in the conversion from the lira to the euro. Others argued that the
shopshadtakenadvantageofthechangeincurrencytoimmediately
raisetheirprices.Stillothersarguedthattheintroductionofcoins,in
place ofthe lirathathadused onlypaper,had increasedthe weight
inthepocketsofItalians,forcingthemtogetridoftheircoinsmore
quickly,thusincreasingthevelocityofthatpartofthemoneysupply.
Thisrelationbetweenweightofmoneyanditsvelocitywasonethat
hadnotbeentheorizedbyeconomists!
These and other more or less absurd beliefs were held with great
conviction, at times even by economists who should have known
better. At the same time some individual members of the Italian
vii
viii PrefaceandAcknowledgments
government,ofwhichIwaspart,expressedanembarrassingambiva-
lence, or, occasionally, even open hostility versus the change that
hadoccurred.Theeurohadnotbeenwelcomedbymanygroupsand
by some political forces that had continued to feel nostalgia vis-a-
vis the lira and perhaps for the occasional devaluations that it had
allowed. In the years that followed, the euro, born under a not-too-
welcoming star, would continue to be accused of crimes that it had
notcommitted.
After I left the Italian government, in July 2003, and returned to
live in Washington, given my background and professional inter-
ests,Icontinuedtofollowthefiscaldevelopmentsinmajorcountries
and in Europe and the European Monetary Union and to write arti-
cles,fornewspapersorformoreacademicvehicles,onpublicfinance
developmentsinEuropeandintheworld.
Some of the material in this study was presented, in earlier and
much shorter versions: at a seminar, given at the East India Club
in London, on 16 April 2012, organized by Politeia, a British think
tanklocatedinLondon.Aftertheseminar,Politeiapublishedapam-
phlet based on the lecture, which received useful comments from
Dr Sheila Lawlor, the director of Politeia. This book has borrowed
someoftheideasfirstpresentedinthatpamphlet;atthe“Consilium
2012” conference, held at the Hyatt Regency Coolum, North of
Brisbane(Australia),on24–25August2012,organizedbytheCentre
forIndependentStudies,animportantAustralianthink-tank;andata
conferenceinSestriLevante(Italy),on6October2012,organizedby
the Istituto Bruno Leoni, an Italian think-tank. I wish to thank the
organizers of these meetings for having given me the incentive to
thinkaboutsomeoftheissuesdiscussedinthisstudy,andultimately
forhavinggivenmetheideaofwritingthisbook.
I also wish to thank my son, Alexandre B. Tanzi, an economic
reporter for the Bloomberg Network, for numerous discussions on
issues related to this study, for helping me with some difficult-to-
get data, and for making me aware of articles published by the
BloombergNetworkthatwererelevantfor,andusedin,partsofthis
study.DiscussionswithGeorgeIden,formerlyfromtheIMF,andwith
CraigTorres,acolumnistatBloombergNews, onsome institutional
aspects of monetary policy, especially those concerned with mone-
tary unions, were also useful. My thanks go to both of them, while
anyerrorsofinterpretationremainwithme.
PrefaceandAcknowledgments ix
Finally,Imustexpressmydeepgratitudetomywife,Maria,afor-
mer IMF statistician, who, by discussing with me some aspects of
payment systems and by, additionally, taking upon herself the full
responsibilityforrunningthehouse,wastheperfectcompanionwho
createdtheidealenvironmentthatallowedmetowritethisbookin
ashortperiodoftime.
Bethesda,MD VITOTANZI
1
Introduction
The financial, economic and fiscal crises – the “Great Recession”–
thatrockedmanycountriesintheyearsafter2007havecontinuedto
influencetheeconomicdevelopmentsofseveralcountries,especially
butnotonlyinEurope,and,withinEurope,intheeuroarea.Insome
of their aspects, the crises have generated interesting and at times
unexpected reactions on the part of both economists and policy-
makers.Theseunexpectedreactionscouldbeinterpretedasreflecting
intellectualflexibilityonthepartofsome,opportunismonthepart
ofothers,andperhapsalsocontinuedoptimismonthepartofothers
still, with regard to the impact that particular policies can have on
economies.
Discretionary,oractive,fiscalpolicy–todistinguishitfromthepas-
sive kind associated with the response of truly automatic, or built-in,
stabilizers to economic fluctuations – was quickly resuscitated and
promoted, at times with almost religious zeal, by a few vocal and
well-placedeconomistsandfinancialcommentators,whenthecrisis
came. Because of the strong criticism that that policy had received,
especially during and after the decade of the 1970s (criticism that
had earned Nobel prizes for some economists), discretionary fiscal
policyhadseemedtohavelostsome,evenmuch,ofitsattraction,at
leastamongacademiceconomists.However,ithadremainedpopular
among politicians and economists working in international institu-
tions, in some think tanks, and in most governments. This would
havebeenobvioustoanyonelisteningduringmeetingsoftheExec-
utive Board of the IMF to the interventions of the Fund’s executive
directors.
1