Exiting AusterityWithout Exiting the euro

Robert W. Parenteau, CFA12th International Post Keynesian Conference

UMKCSeptember 27, 2014

Many Design Flaws of the Eurozone

Not an Optimal Currency Area: Different Sized National Responses to Shocks

Yet Imposes One Size Fits All Monetary Policy

Economic Union Without True Political Union

Competitive Depreciations Replaced by Competitive Deflations?

Weak (Contradictory?) Mechanism to Adjust Trade Imbalances

Constrained Fiscal Policy: Nations are Users (Not Issuers) of Currency

The Ultimate Design Flaw of the Eurozone

The Fatal Conceit of Neoliberal Economics: Changes in Relative Prices Will Always Tend to Guide Economies Back Toward Full Employment Growth Paths

Hence, Best to Restrict Available Policy Tools – No FX Control, Diluted Monetary Policy Influence, Restrict Fiscal Stimulus for Each Country – to Minimize Relative Price Distortions

The Ultimate Design Flaw of the Eurozone

Irving Fisher, JM Keynes, Hy Minsky Demonstrated Theoretically Why Price Adjustments Can Lead Economies AWAY From Full Employment

The Price Signals Leading Economies to Full Employment Growth are Weak, Unreliable, and Bounded (Keynes’ Uncertainty, Ch. 12 GT Asset Pricing Critique, Zero Nominal Yield Bound & Liquidity Preference Bound)

Worse Yet, Downward Price Adjustments in Economies with High Private Debt Loads Can Lead to a Self Reinforcing Debt Deflation (Falling Asset Prices and Incomes), Thereby Threatening Social Disintegration

History (Painfully, and Repeatedly) Concurs with Keynes/Fisher/Minsky

Private Sector not Public Sector DebtMisdiagnosis of the eurozone crisis

What were design flaws leading to private debt build up?

One size fits all monetary policy allows private credit booms in some nations

No mechanism to encourage recycling of current account surpluses into investment in tradable goods sector in chronic CU deficit nations

Focus on fiscal balances left private sector imbalances largely ignored

The Austerity Trap & a Coherent Macroeconomics

Neoliberals do not have a coherent stock/flow coherent macroeconomics: Godley, Minsky, & Keynes do; and many SFC models in development

Instead, Neoliberals are obsessed primarily with containing the government financial balance, and ignoring how that influences other sectoral balances

In other words, conventional macro is ignoring double entry book keeping

Government cannot reduce its deficit unless other sectors are willing and able to reduce their net saving position

An indebted private sector, and export led trade partners, may not “comply”, especially after a financial crisis

8

The EMU Triangle:Nations with Chronic CUD,No FX Policy Influence

Fiscal Surplus

Current Account

Surplus

Fiscal Deficit

Current Account

Deficit

Domestic Private Sector

Financial Balance = 0Fiscal Deficit Boundary = -3% of GDP

Very little room to also achieve

DPS Surplus

-3%

EU Private Sector Still Trying to Deleverage:Adjustment Forced Through Imports

Is Fiscal Austerity Working?

Create Alternative Financing Instrument: Tax Anticipation Notes Create a government liability (TAN) that has the following properties:

Zero interest coupon

Perpetual

Transferable

Denominated in euros

Available in 50 and 100 euro denominations in paper form, and as secured/encrypted electronic credits to bank accounts of recipients

Use TANs to Pay Government Employees, Domestic Suppliers to Government, and Beneficiaries of Transfer Payments

Government Accepts TANs at Par (1 TAN = 1 euro) as Payment for Taxes (Thereby Creating Demand for TANs)

Similar to Complementary Currencies Already Operating in Eurozone & Elsewhere

Bernard Lietaer has catalogued these in his recent books

WIR: Switzerland (since 1934, = 1 CHF)

Torekes: Belgium

Chiemgauer: Bavaria (= 1 euro)

Regiogeld: Germany, Austria Switzerland

Bristol Pound: UK (acceptable for some local taxes)

Ecuador central bank will issue electronic currency (convertible and equivalent to 1 US dollar) starting in December

The TAN Proposal Breaks the Austerity Trap Without Requiring Euro Exit TANs Allows EU Governments to Contest Fiscal Austerity Policies

Full Employment Fiscal Policy Can be Pursued, Allowing Private Sector Deleveraging to Proceed Without Income & Price Deflation

Preferably through ELR & Trade Related Infrastructure Investments

Euros are Freed Up to Pay for Imports, Service External Held Public Debt

TANs Likely Become Acceptable as a Means of Payment/Settlement in Private Sector Transactions (Since Households and Firms Have Tax Liabilities to Pay)

Can be Pursued at National Level as Austerity Fatigue Sets In