November 21st, 2013
in Op Ed
by Dirk Ehnts, Econoblog101
The German newspaper taz.de reported last week that the working group concerned with the euro crisis has led to no new results. "We will do everything to let Europe leave the crisis strengthened", the joint paper says. There is a little bit more:
"Damit Europa dauerhaft einen Weg aus der Krise findet, ist ein umfassender politischer Ansatz erforderlich, der Strukturreformen für mehr Wettbewerbsfähigkeit und eine strikte, nachhaltige Haushaltskonsolidierung mit Zukunftsinvestitionen in Wachstum und Beschäftigung in sozial ausgewogener Weise verbindet."
Structural reforms and more competitiveness and a strict, sustainable consolidation of public debt with investments in growth and employment in a socially equitable way. Since the social democrats and christian democrats already acted united in the euro crisis, an end to austerity is not be expected. There is still talk of sustainability of public debt, which is denominated in foreign currency. I would say that the sustainability of public debt in foreign currency is reached when public debt is zero. After all, borrowing in foreign currency is called 'original sin', as by Eichengreen et al. (2003):
1. Introduction If a country is unable to borrow abroad in its own currency - if it suffers from the problem that we refer to as 'original sin' - then when it accumulates a net debt, as developing countries are expected to do, it will have an aggregate currency mismatch on its balance sheet. Of course, such a country can take various steps to eliminate that mismatch or prevent it from arising in the first place. Most obviously, it can decide not to borrow. A financially autarchic country will have no currency mismatch because it has no external debt, even though it still suffers from original sin as we define it.
So, all that talk about public sector financial sustainability in the context of the euro is based on 'crank economics'. The alternatives are eurobonds, a fiscal or economic union, where the central bank directly finances sovereign debt like in every other advanced monetary economy. If a democratically elected government decides to spend, why give a veto to financial markets? These are able to drive yields up by not buying, and this will trigger adjustment of the ratings given by the ratings agencies which then means that the ECB will at some point not accept sovereign bonds as collateral. When that happens, the banks holding these sovereign bonds are stuck with illiquid assets that they cannot offload. This is what happened in Cyprus.
Some people pin their hope on Martin Schulz, president of the European parliament. However, in a recent SPIEGEL interview he said that socialdemocrats and socialists in Europe agree on three issues:
- higher taxes for the relatively wealthy
- fight youth unemployment
- refocussing the EU on European problems
That is not a progressive economic agenda. Unemployment in the euro zone, Spain or Greece are not mentioned at all. The outcome of mass unemployment is accepted as a result of the market and no cures are proposed. This is completely within the neo-classical (or neoliberal) framework. Those that expected a change in policy in Germany because now the social democrats would be part of the government should think twice.