Greece needs to leave the euro: Part IV

This is my response to a great article by Wolfgang Munchau in the FT on 21st June, 2015 which you can access here.
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As usual, a great article from Wolfgang Munchau.

In one sense Munchau is over-reacting to the prospect of Grexit, and in another sense I think his reaction is perhaps understated.  So let me explain.

First, Munchau states that "The pretence of irreversibility is what distinguishes a monetary union from a fixed exchange rate system with a shared currency."  This is not accurate, as irreversibility was completely absent from the Latin Monetary Union of 1865, which Greece actually joined in 1867, and then was ejected from in 1908 (as were the Papal States at an earlier date). While the intent of a monetary union is not reversibility, there is nothing to stop some reverse actions occurring while maintaining the rest of the monetary union. Grexit need not threaten the rest of the euro area.

Second, economists have always claimed that the euro area requires a fiscal union if it is to become more sustainable and less susceptible to asymmetric shocks or the development of non-synchronous growth in a particular member state.  That is clearly stated in the optimal currency area theory which should be the economic foundation which forms the basis for any monetary union.

What Munchau does not state, but I think will be the result of this week's events is the realization among EU policymakers that they now have to deal with the reality of a "two (or even three) speed" EU.  There has always been the hope among European federalists that one day the EU will have the euro as it's currency, but this is now unlikely to be the reality unless further action (such as fiscal union) is taken.

To me, as an economist, the lesson is that although monetary union in the EU has been conceived in a political space and embodies the political ambitions of the EU elite, it will not succeed unless its economic foundations are solid.  As economists such as Willem Buiter stated years ago, there was both "sense and nonsense" in the Maastricht Treaty, and now we are about to pay the price for ignoring international economics in favor of establishing grand European political projects.

Greece needs to leave the euro: Part III

The is my comment in the FT to an article by Larry Summers on Greece which you can read here published on June 20th, 2015.

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Interesting article, but in my humble opinion pure hyperbole from Larry Summers.

Greece needs to leave the euro, and for reasons I have elucidated elsewhere ( - see my article here - http://www.patrickmcrowley.com/A_Note_on_How_To_Resolve_the_Euro_Area_Crisis_12-13.pdf - from the Europe Institute Journal of University of Auckland, NZ). But this needn't have the serious financial fallout that Summers refers to if handled properly, and for the following reasons:

i) We are not in the situation that we were in in 2010 - the other PIIGS member states are in much better shape, and although there will be concurrent rise in perceived default risk, the actual risks are all well contained, for the simple reason that the other economies are all now in expansion mode (or in the case of Italy, at least not in contraction mode). 

ii) This is not a situation that wasn't predicted by some pundits (including me), so plenty of preparations have been made for the fallout once Greece imposes capital controls, does an Argentianian freezing of all bank accounts, converts to a new (or legacy) currency and then sees a precipitous depreciation in the new currency.

iii) The Syriza government originally ran for election to government on getting out of the euro if austerity continued, so they will have fulfilled their mandate to the people of Greece, and although the pain will be sharp and incisive once the new currency depreciates, then the stage is set with a much more competitive economy, for economic growth.

Summers seems to wallow in some idealistic "coming together" of the two sides to avert crisis, but marriages do not necessarily always dissolve in crisis and likewise, this needs to be resolved in the best way possible for all parties concerned.  The Greeks need to leave the euro, the IMF needs to re-denominate the debt in SDRs and modify the conditions for repayment, and the Europeans need to take a haircut to give the Greeks the best chances of recovery, preferably with a payback trigger that is conditional on economic growth.

What Summers fails to mention as the downside is that the consequences for the impetus for European integration are much more serious.  The euro was meant to be a further step forward in the "ever-deepening" economic and political integration of the European Union.  It was never envisaged that a member of the single currency should leave, so Greece's departure portends a complete re-think on the role of the euro in the framework for European integration.  It points to the embedding of a two or even three speed Europe, which makes it much harder for political enthusiasts of integration to cook up (even in the longer term) further grand integration initiatives. 

I think that that European politicians and civil servants need to understand that just because something is labeled "European" doesn't mean that it is necessarily going to be the best option for all European Union member states. 

Greece needs to leave the euro: Part II

My response to a great article by Martin Wolf in the FT on 6/16/2015 which you can read here.

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Excellent article by Martin Wolf, but not really too revealing on what the options might be. 

Governments are responsible to their voters, not to the holders of the country's national debt.  When you look at that chart of real domestic demand at around 68 percent of where it was in 2008, you also understand that the Greek government needs to stick to it's guns this time. 

The sad thing is that these negotiations have not allowed any latitude for new measures, such as perhaps the conversion of some of the existing debt to consols, or the future sale of some Greek assets (Mykonos?) - they have almost exclusively focused on extracting further austerity measures from the Greek negotiators.

Given the lack of any imaginative initiatives on the part of the negoatiators, the unsuitability of Greece for belonging to the euro area (due to it not satisfying the optimal currency area critieria), as well as it not properly fulfilling the Maastricht criteria for joining the euro in the first place, the Greek government now needs to plan it's exit from the euro.

Despite Mr. Wolf's concerns about Grexit, I really don't think these specific circumstances apply to any other euro area member states, so the prospect of any contagion is minimal..

The really sad thing is that this whole Grexit thng has been kicked so far down the road as far as it has. The can is looking pretty crushed and deformed now, having been kicked so much - so now is the time to take the can off the road and put it in the garbage, or recycle it! 

Comments in the FT's Austerity vs Stimulus Debate

First, I want to thank the FT for allowing this online "debate" to happen.

I believe though that this can no longer be a "debate" - it is the abject failure of a discipline, and a fundamental crisis for the subject area, with little "credibility" now being given to those in the elite economist "mafioso", as they really don't seem to be providing any intellectual guidance. The Queen's reasonable question of economists ('it's awful - why did nobody see it coming?') points the finger at the "closed shop" that academic macroeconomics has become, and suggests to me that external pressure needs to be applied so that the subject should no longer continue to be highjacked by a narrow group of academics, given their clear failure to predict or provide guidance in the face of a downturn. We hear the same tired voices from the Ivy League schools in the same dialectic debates with no new philosophical approaches. They hire the types of Ph.D.s who follow their thinking and we get stuck in an intellectual quagmire. So in this light the comments of Niall Ferguson are rather interesting - why should Behavioural Finance be the biggest winner so far from this intellectual meltdown in macroeconomics? I don't disagree with him, but shouldn't some new ideas in macro emerge and then save the day? After all that's how Keynesianism first came about, and most schools of thought in economics since that time ( - with the obvious exception of the Austrian school and the Post-Keynesians). My fear is that the way the economics discipline is now so institutionally structured, that is unlikely to occur this time around.

One new direction might be to think about the business cycle more seriously. The business cycle was basically downplayed and dismissed in some quarters during the 80s and 90s ( - the "great moderation"), and now looking back, this was clearly a mistake. Business cycles appear to be "hard-wired" into macroeconomic behaviour, and yet they don't appear explicitly in any of our models, let alone in our academic thinking - they are just treated as a "stylized fact". To date this phenomenon has been explained as the result of "shocks", and although "shocks" can cause recessions (think of the 70s oil price shocks), if we don't have exogenous shocks we now know (after our current downturn) that we can still get recessions. If you take this approach then obviously studying these cycles ( - as I am using frequency domain techniques) might give us a different perspective on these downturns. OK, this is only one approach, but at least it might offer some new direction to the subject, and I'm sure there are others with new and interesting ideas.

The main point here is that academic macroeconomics needs to be more open to ideas that come from both inside and outside the discipline. Most outsiders would be shocked to see how parochial the discipline has become. Hopefully if outside pressure is brought to bear on the discipline this will change, and academics long held back by the "mafioso" will get a chance to present their ideas and make an impact!