The Euro and International Financial Stability

296 Pages·2014·2.112 MB·English

by  Efthymios G. Tsionas (auth.)

Financial and Monetary Policy Studies 37

Efthymios G. Tsionas
The Euro and
International
Financial Stability
Financial and Monetary Policy Studies
Volume 37
Series Editor
Ansgar Belke
Institute of Business and Economics
University Duisburg-Essen
Essen, Germany
For furthervolumes:
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Efthymios G. Tsionas
The Euro and International
Financial Stability
123
EfthymiosG.Tsionas
Athens Universityof Economicsand Business
Athens
Greece
ISSN 0921-8580 ISSN 2197-1889 (electronic)
ISBN 978-3-319-01170-7 ISBN 978-3-319-01171-4 (eBook)
DOI 10.1007/978-3-319-01171-4
SpringerChamHeidelbergNewYorkDordrechtLondon
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(cid:2)SpringerInternationalPublishingSwitzerland2014
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Lenin is said to have declared that the best
way to destroy the capitalist system was to
debauch the currency […]. The process
engages all the hidden forces of economic
law on the side of destruction, and does it in
a manner which not one man in a million is
able to diagnose.1
1 Keynes JM (1920) The economic consequences of the peace, ch. VI. Harcourt Brace, New
York,p228
Contents
1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2 What Went Wrong with the Euro?. . . . . . . . . . . . . . . . . . . . . . . 5
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3 Public Debt: Introductory Remarks . . . . . . . . . . . . . . . . . . . . . . 17
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4 Was the Eurozone an Acceptable Currency Union?. . . . . . . . . . . 21
5 Preconditions of a Monetary Union. . . . . . . . . . . . . . . . . . . . . . . 23
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6 What was the Theory Behind the Formation of EMU? . . . . . . . . 27
7 Will the Eurozone Dissolve into its Constituents? . . . . . . . . . . . . 29
8 Can There be an Efficient Dissolution of a Monetary Union?. . . . 37
9 Complete Fiscal Freedom in the Transition Period?. . . . . . . . . . . 45
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
10 Understanding Crises and Recessions . . . . . . . . . . . . . . . . . . . . . 51
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
11 Will Bailouts Lead to a Dissolution of the Euro?. . . . . . . . . . . . . 57
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
12 On the Destabilizing Effects of Bailouts. . . . . . . . . . . . . . . . . . . . 61
Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
13 On Sound Money and Credit Conditions. . . . . . . . . . . . . . . . . . . 65
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
vii
viii Contents
14 The Case of Free Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
15 The Explosion of Public Debts . . . . . . . . . . . . . . . . . . . . . . . . . . 85
16 The Current Policies of the ECB. . . . . . . . . . . . . . . . . . . . . . . . . 89
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
17 Some Remarks on the Greek Problem. . . . . . . . . . . . . . . . . . . . . 99
18 Can There be Stable Currencies After the Euro? . . . . . . . . . . . . 105
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
Some Important Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
19 The Gold Standard and Free Banking. . . . . . . . . . . . . . . . . . . . . 119
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
20 An Unexpected Supporter of the Gold Standard . . . . . . . . . . . . . 127
21 Fundamental Problems of The Eurozone. . . . . . . . . . . . . . . . . . . 131
Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
22 Stability and the Eurozone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
23 Conditions for Genuine Financial and Monetary Stability . . . . . . 149
24 International Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . 153
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
25 On Monetary Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174
26 A New Fiscal Policy? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184
27 The ‘‘Price Puzzle’’. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
28 Re-distributional Effects of Austerity Measures. . . . . . . . . . . . . . 187
Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
29 Further Remarks on International Financial Stability . . . . . . . . . 193
Contents ix
30 The Accommodation of Public Debt by Commercial Banks . . . . . 209
Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214
31 The Consequence of the Market’s Responses. . . . . . . . . . . . . . . . 215
32 Is Eurozone Effectively a Socialist Commonwealth?. . . . . . . . . . . 219
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229
33 Banking Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
34 Banking and Regulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245
35 Policy and Institutional Change in Southern Europe . . . . . . . . . . 247
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254
36 Was the Euro a Bad or a Good Idea?. . . . . . . . . . . . . . . . . . . . . 255
The Issue of Deficits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255
‘‘Bailouts’’ of Southern Economies and ‘‘Financial Stability’’ . . . . . . 256
Asymmetric Shocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257
Differential Inflation Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258
Restoration of Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . 260
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263
37 The Role of the Rate of Profit. . . . . . . . . . . . . . . . . . . . . . . . . . . 265
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272
38 International Industrial Structure. . . . . . . . . . . . . . . . . . . . . . . . 273
39 Capital Structure and Financial Stability . . . . . . . . . . . . . . . . . . 279
40 International Empirical Evidence on the ABC’s of Recessions . . . 285
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285
Summary of the Austrian Business Cycle Theory . . . . . . . . . . . . . . 286
Empirical Investigation of the ABC Theory . . . . . . . . . . . . . . . . . . 287
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287
Testing for Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288
Testing for Co-Integration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288
Estimating the Co-Integration Vector. . . . . . . . . . . . . . . . . . . . . 292
Testing for Causality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296
Summary of Findings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308
Chapter 1
Introduction
We are witnessing a fundamental dualism in the eurozone, many ‘‘real euros’’ in
place of a single currency (the euro) that would maintain financial stability and
promote growth. This manifests in countries like Greece and Italy (and also
Portugal and Spain to some extent) experiencing problems with their public debt
forcing them to adopt austerity measures to manage their public deficits and
spending. If a country is unable to maintain financial and economic stability as
well as growth in the framework of common currency, then in practice the euro
operates differently in the country compared to other members of the monetary
union. To state it in simple terms, the euro is not the same in countries with
different demand curves for money arising from different fundamental economic
conditions.
WhyisitsodifficultfortheEUtomaintainthestabilityofitscurrencyagainst
market forces? Because market forces, in the final analysis, determine the real
economic processes which affect growth, public debt, deficits and monetary sta-
bility. It is, of course, a fact that the EU does not have the cohesion in terms of
political processes that we observe in the US. Different US states behave differ-
entlyanditmayseemnecessaryattimestoenforceparticularfiscalpoliciesatthe
state level to maintain financial and monetary stability. But that is not the whole
story. It is not only that the US has achieved the political cohesion that the EU is
currentlylacking:ItisalsothehigherproductivityandgrowthoftheUSeconomy
that created a real process of convergence at the state level along with more
flexibility in factor mobility and free markets. The market forces are largely
ignored in the EU with the view that control at the highest level of European
Councilorthe EPC can substitutethese forces. Thisis, infact, a sui generis form
of quasi-socialist thought that still survives in certain quarters of the EU at the
highest level.
WhentheEU bureaucracyrefersto‘‘markets’’moreoftenthannot, itrefersto
‘‘speculators’’, ‘‘speculative attacks on the euro’’, ‘‘profiteers’’ and the like. But
stillthemarketsarethemarketsandwecannotignorethem.A‘‘speculativeattack
ontheeuro’’wouldneverhappenifspeculatorsdidnotseeaprofitopportunityin
the first place. Aprofit opportunitywill mostlikelyarise when andif the demand
and supply conditions for money or capital differ widely among EU states as the
E.G.Tsionas,TheEuroandInternationalFinancialStability, 1
FinancialandMonetaryPolicyStudies37,DOI:10.1007/978-3-319-01171-4_1,
(cid:2)SpringerInternationalPublishingSwitzerland2014
2 1 Introduction
result of asymmetric conditions in terms of overall productivity, efficiency, the
average rate of return on investment, competitiveness and the structure of the
balance of payments.
In the case of Greece, the prototype that we have so far for an analysis of the
fundamentalproblemsoftheeurozone,theaveragerateofreturnoninvestmentis
quitelowandthereisexcessivedemandformoney.Thenaturalwaytoproceed,if
marketswerefree,wouldbeanincreaseininterestrates.Theartificialwaychosen
bythebureaucracywastoincreasemoneysupplythroughthevariousmemoranda
signed between the EU and the Greek government in the context of EFSF. Of
course, the EFSF is simply a bailout programme for the Greek economy, not real
monetary policy that could have positive impact in the short run on incomes and
aggregate demand. In fact the austerity program in Greece is nothing but the
equivalentofadecreaseinmoneysupply,whichconstitutesasuicidalpolicyinthe
midst of a severe depression expressed in an expected -6 to -10 % growth rate
for GDP in 2012.
If the EFSF was not simply a bailout program, it would have a chance to
succeed. But the funds will be used to pay for wages and pensions as well as
interest payments on the public debt. So, in fact, it is maintaining the current
standardoflivinganditslargestpartgoesbacktoforeigncreditors.Butthecurrent
situation calls for an increase in interest rates to maintain financial stability or
financialaidtoGreece,notbailoutschemes.Financialaidasopposedtobailoutis,
of course, restructuring monetary policy inside the EMU. It requires political
determination, which is lacking, but what is really lacking is something deeper:
The regional policy of the EU in the past 30 years has been disappointingly
misguided. Vast resources have been largely wasted without real effects on
cohesion. If that is not so, then we should observe similar patterns of competi-
tiveness and productivity among different countries, regions or sectors.
Under these conditionstheobviousansweris thatunless economiccohesionis
achieved, and that unless different comparative advantages are allowed to arise,
there is no way for the euro to survive.1 However, this view is naïve and incon-
sistent.Indeed,ifcomparativeadvantagesexist,andasweknowtheyexistalways,
disparities and differences are likely not only to arise but also persist over time.
Therefore,itisnotcohesionorsimilarityofindustrialorproductionstructuresthat
guaranteesmonetarystabilityandstabilityofagivencurrency.Onemayobjectto
thatasfollows: Afterthe MaastrichtTreaty theEU has setstrictgoalsfordeficits
andtheECBfollowsverystrictpoliciesintermsofmonetarypolicyandfinancial
ormonetarystability.Thisprovideswithmaximumfreedomtheprivatesectorand
the market forces to operate freely in a stable environment of economic policy.
What then went wrong?
1 Bagus (2010) provides the first coherent theory of the eurozone based on political
considerations,seeinparticularchapterV,especiallypp.56–58.