Publications on Euro
Globalization, Nationalism, and Clearing Systems
Public Policy Brief No. 147, 2019 | March 2019As global market integration collides with growing demands for national political sovereignty, Senior Scholar Jan Kregel contrasts two diametrically opposed approaches to managing the tensions between international financial coordination and national autonomy. The first, a road not taken, is John Maynard Keynes’s proposal to reform the postwar international financial system. The second is the approach taken in the establishment of the eurozone and the development of its settlement and payment system. Analysis of Keynes’s clearing union proposal and its underlying theoretical approach highlights the flaws of the current eurozone setup.Download:Associated Programs:Author(s):Jan Kregel
Twenty Years of the German Euro Are More than Enough
Working Paper No. 911 | August 2018This paper reviews the performance of the euro area since the euro’s launch 20 years ago. It argues that the euro crisis has exposed existential flaws in the euro regime. Intra-area divergences and the corresponding buildup of imbalances had remained unchecked prior to the crisis. As those imbalances eventually imploded, member states were found to be extremely vulnerable to systemic banking problems and abruptly deteriorating public finances. Debt legacies and high unemployment continue to plague euro crisis countries. Its huge current account surplus highlights that the euro currency union, toiling under the German euro and trying to emulate the German model, has become very vulnerable to global developments. The euro regime is flawed and dysfunctional. Europe has to overcome the German euro. Three reforms are essential to turn the euro into a viable European currency. First, divergences in competitiveness positions must be prevented in future. Second, market integration must go hand in hand with policy integration. Third, the euro is lacking a safe footing for as long as the ECB is missing a federal treasury partner. Therefore, establishing the vital treasury–central bank axis that stands at the center of power in sovereign states is essential.Download:Associated Programs:Author(s):
A Two-Tier Eurozone or a Euro of Regions?
Public Policy Brief No. 144, 2017 | September 2017
A Radical Proposal Based on Keynes’s Clearing UnionIn light of the problems besetting the eurozone, this policy brief examines the contributions of John Maynard Keynes and Richard Kahn to early debates over the design of the postwar international financial system. Their critical engagement with the early policy challenges associated with managing international settlements offers a perspective from which to analyze the flaws in the current euro-based financial system, and Keynes’s clearing union proposal offers a template for a better approach. A system of regional federations employing a clearing system in which members either retained their own currency or used a common currency as a unit of account in registering debits and credits for settlement purposes would preserve domestic policy independence and retain regional diversity.
Download:Associated Programs:Author(s):Jan Kregel
Greece: Getting Out of the Recession
Strategic Analysis, September 2016 | October 2016
The Greek government has agreed to a new round of fiscal austerity measures consisting of a sharp increase in taxes on income and property and further reductions in pension and other welfare-related expenditures. Based on our model of the Greek economy, policies aimed at reducing the government deficit will cause a recession, unless other components of aggregate demand increase enough to more than offset the negative impact of fiscal austerity on output and employment.
In this report we argue that the troika strategy of increasing net exports to restart the economy has failed, partly because of the low impact of falling wages on prices, partly because of the low trade elasticities with respect to prices, and partly because of other events that caused a sharp reduction in transport services, which used to be Greece’s largest export sector.
A policy initiative to boost aggregate demand is urgently needed, now more than ever. We propose a fiscal policy alternative based on innovative financing mechanisms, which could trigger a boost in confidence that would encourage renewed private investment.Download:Associated Program:Author(s):
Going Forward from B to A?
Working Paper No. 866 | May 2016
Proposals for the Eurozone Crisis
After reviewing the main determinants of the current eurozone crisis, this paper discusses the feasibility of introducing fiscal currencies as a way to restore fiscal space in peripheral countries, like Greece, that have so far adopted austerity measures in order to abide by their commitments to eurozone institutions and the International Monetary Fund. We show that the introduction of fiscal currencies would speed up the recovery, without violating the rules of eurozone treaties. At the same time, these processes could help transition the euro from its current status as the single currency to the status of “common clearing currency,” along the lines proposed by John Maynard Keynes at Bretton Woods as a system of international monetary payments. Eurozone countries could therefore move from “Plan B,” aimed at addressing member-state domestic problems, to a “Plan A” for a better European monetary system.Download:Associated Programs:Author(s):Massimo Amato Luca Fantacci Dimitri B. Papadimitriou Gennaro Zezza
A Complementary Currency and Direct Job Creation Hold the Key to Greek Recovery
One-Pager No. 52 | January 2016
Even under optimistic assumptions, the policy status quo being enforced in Greece cannot be relied upon to help recover lost incomes and employment within any reasonable time frame. And while a widely discussed public investment program funded by European institutions would help, a more innovative, better-targeted solution is required to address Greece’s protracted unemployment crisis: an “employer of last resort” (ELR) plan offering paid work in public projects, financed by issuing a nonconvertible “fiscal currency”—the Geuro.Download:Associated Program:Author(s):
How Long Before Growth and Employment Are Restored in Greece?
Strategic Analysis, January 2016 | January 2016The Greek economy has not succeeded in restoring growth, nor has it managed to restore a climate of reduced uncertainty, which is crucial for stabilizing the business climate and promoting investment. On the contrary, the new round of austerity measures that has been agreed upon implies another year of recession in 2016.
After reviewing some recent indicators for the Greek economy, we project the trajectory of key macroeconomic indicators over the next three years. Our model shows that a slow recovery can be expected beginning in 2017, at a pace that is well below what is needed to alleviate poverty and reduce unemployment. We then analyze the impact of a public investment program financed by European institutions, of a size that is feasible given the current political and economic conditions, and find that, while such a plan would help stimulate the economy, it would not be sufficient to speed up the recovery. Finally, we revise our earlier proposal for a fiscal stimulus financed through the emission of a complementary currency targeted to job creation. Our model shows that such a plan, calibrated in a way that avoids inflationary pressures, would be more effective—without disrupting the targets the government has agreed upon in terms of its primary surplus, and without reversing the improvement in the current account.Download:Associated Program:Author(s):
Integration, Spurious Convergence, and Financial Fragility
Working Paper No. 847 | October 2015
A Post-Keynesian Interpretation of the Spanish Crisis
The Spanish crisis is generally portrayed as resulting from excessive spending by households, associated with a housing bubble and/or excessive welfare spending beyond the economic possibilities of the country. We put forward a different hypothesis. We argue that the Spanish crisis resulted, in the main, from a widening deficit position in the nonfinancial corporate sector—the most important explanatory factor behind the country’s rising external imbalance—and a declining trend in profitability under a regime of financial liberalization and loose and unregulated lending practices. This paper argues that the central cause of the crisis is related to the nonfinancial corporate sector’s increasingly fragile financial position, which originated from the financial convergence that followed adoption of the euro.Download:Associated Programs:Author(s):Esteban Pérez Caldentey Matías Vernengo
The Euro’s Savior?
Working Paper No. 845 | September 2015
Assessing the ECB’s Crisis Management Performance and Potential for Crisis ResolutionThis study assesses the European Central Bank’s (ECB) crisis management performance and potential for crisis resolution. The study investigates the institutional and functional constraints that delineate the ECB’s scope for policy action under crisis conditions, and how the bank has actually used its leeway since 2007—or might do so in the future. The study finds that the ECB may well stand out positively when compared to other important euro-area or national authorities involved in managing the euro crisis, but that in general the bank did “too little, too late” to prevent the euro area from slipping into recession and protracted stagnation. The study also finds that expectations regarding the ECB’s latest policy initiatives may be excessively optimistic, and that proposals featuring the central bank as the euro’s savior through even more radical employment of its balance sheet are misplaced hopes. Ultimately, the euro’s travails can only be ended and the euro crisis resolved by shifting the emphasis toward fiscal policy; specifically, by partnering the ECB with a “Euro Treasury” that would serve as a vehicle for the central funding of public investment through the issuance of common Euro Treasury debt securities.Download:Associated Programs:Author(s):
Greece: Conditions and Strategies for Economic Recovery
Strategic Analysis, May 2015 | May 2015
The Greek economy has the potential to recover, and in this report we argue that access to alternative financing sources such as zero-coupon bonds (“Geuros”) and fiscal credit certificates could provide the impetus and liquidity needed to grow the economy and create jobs. But there are preconditions: the existing government debt must be rolled over and austerity policies put aside, restoring trust in the country’s economic future and setting the stage for sustainable income growth, which will eventually enable Greece to repay its debt.Download:Associated Program:Author(s):
Europe at the Crossroads
Policy Note 2015/1 | February 2015
Financial Fragility and the Survival of the Single CurrencyGiven the continuing divergence between progress in the monetary field and political integration in the euro area, the German interest in imposing austerity may be seen as representing an attempt to achieve, de facto, accelerated progress toward political union; progress that has long been regarded by Germany as a precondition for the success of monetary unification in the form of the common currency. Yet no matter how necessary these austerity policies may appear in the context of the slow and incomplete political integration in Europe, they are ultimately unsustainable. In the absence of further progress in political unification, writes Senior Scholar Jan Kregel, the survival and stability of the euro paradoxically require either sustained economic stagnation or the maintenance of what Hyman Minsky would have recognized as a Ponzi scheme. Neither of these alternatives is economically or politically sustainable.Download:Associated Program:Author(s):Jan Kregel
The ECB and the Single European Financial Market
Public Policy Brief No. 137, 2014 | September 2014
A Proposal to Repair Half of a Flawed DesignThe flaws of the Maastrict Treaty are a frequent object of commentary but, as yet, Europe remains unable—or, perhaps more accurately, unwilling—to address these flaws. The European project will remain unfinished and the ability of the European Central Bank to implement effective monetary policies will continue to be hobbled. As Mario Tonveronachi observes in this public policy brief, Europe has a currency union, but this does not mean that Europe has achieved a single financial market, an essential element for a functioning union. He reminds us that a single European market requires pricing in relation to common risk-free assets rather than in relation to a collection of individual idiosyncratic sovereign rates. And financial operators must have access to the same risk-free assets for trading and liquidity operations. The euro provides neither of these functions, and thus, while there has been a measure of convergence, a single financial market, and the financial integration it represents, remains unachieved.Download:Associated Program:Author(s):Mario Tonveronachi
When Good Intentions Pave the Road to Hell
Working Paper No. 810 | June 2014
Monetization Fears and Europe’s Narrowing Options
With the creation of the Economic and Monetary Union and the euro, the national government debt of eurozone member-states became credit sensitive. While the potentially destabilizing impact of adverse cyclical conditions on credit-sensitive debt was seriously underestimated, the design was intentional, framed within a Friedman-Fischer-Buchanan view that “no monetization” rules provide a powerful means to discipline government behavior. While most countries follow some kind of “no monetization” rule, the one embraced by the eurozone was special, as it also prevented monetization on the secondary market for debt. This made all eurozone public debt defaultable—at least until the European Central Bank (ECB) announced the Outright Monetary Transactionsprogram, which can be seen as an enhanced rule-based approach that makes governments solvent on the condition that they balance their budgets. This has further narrowed Europe’s options for policy solutions that are conducive to job creation. An approach that would require no immediate changes in the European Union’s (EU) political structure would be for the EU to fund “net government spending in the interest of Europe” through the issue of a eurobond backed by the ECB.Download:Associated Program:Author(s):
On the Franco-German Euro Contradiction and Ultimate Euro Battleground
Working Paper No. 762 | April 2013
Highlighting that France and Germany held largely contradicting hopes and aspirations for Europe’s common currency, this paper analyzes how the resulting euro contradiction conditioned the ongoing euro crisis as well as current strategies to resolve it. While Germany generally prevailed in hammering out the design of the euro policy regime, the German authorities have failed to see the inconsistency in their policy endeavors: the creation of a model whose workability presupposes that others behave differently cannot be made to work by forcing everyone to behave like Germany. This fundamental misunderstanding has made Germany the main culprit in the euro crisis, but it has yet to face the full consequences of its actions. Germany had sought every protection against the much-dreaded euro “transfer union,” but its own conduct has made that very outcome inevitable. Conversely, having been disappointed in its own hopes for the euro, France is now facing the prospect of a lost generation—a prospect, shared with other debtor nations in the union, that has undermined the Franco-German alliance and may soon turn it into the ultimate euro battleground.Download:Associated Program:Author(s):
At the Crossroads: The Euro and Its Central Bank Guardian (and Savior?)
Working Paper No. 738 | November 2012
Research Associate Jörg Bibow investigates the role of the European Central Bank (ECB) in the (mal)functioning of Europe’s Economic and Monetary Union (EMU), focusing on the German intellectual and historical traditions behind the euro policy regime and its central bank guardian. His analysis contrasts Keynes’s chartalist conception of money and central banking with the postwar traditions nourished by the Bundesbank and based on a fear of fiscal dominance. Keynes viewed the central bank as an instrument of the state, controlling the financial system and wider economy but ultimately an integral part of, and controlled by, the state. By contrast, the “Maastricht (EMU) regime” (of German design) positions the central bank as controlling the state. Essentially, Bibow observes, the national success of the Bundesbank model in pre-EMU times has left Europe stuck with a policy regime that is wholly unsuitable for the area as a whole. But regime reform is complicated by severely unbalanced competitiveness positions and debt overhang legacies. Refocusing the ECB on growth and price stability would have to be a part of any solution, as would refocusing area-wide fiscal policy on growth and investment.Download:Associated Program:Author(s):
Toward a Workable Solution for the Eurozone
Policy Note 2011/6 | November 2011Although it didn't originate with an economist, the malaprop “It’s déjà vu all over again” is invariably what springs to mind in the aftermath of virtually any euro summit of the past few years, all of which seem to end with the requisite promise of a so-called “final solution” to the problems posed by the increasingly problematic currency union. But it’s hard to get excited about any of the “solutions” on offer, since they steadfastly refuse to acknowledge that the eurozone’s problem is fundamentally one of flawed financial architecture. Today’s crisis has arisen because the creation of the euro has robbed nations of their sovereign ability to engage in a fiscal counterresponse against sudden external demand shocks of the kind we experienced in 2008. And it is being exacerbated by the ongoing reluctance of the European Union, European Central Bank, and International Monetary Fund—the “troika”—to abandon fiscal austerity as a quid pro quo for backstopping these nations’ bonds.
Resolving the Eurozone Crisis—without Debt Buyouts, National Guarantees, Mutual Insurance, or Fiscal Transfers
Policy Note 2011/5 | November 2011
One of the reasons for the failure of Europe’s governing bodies to resolve the eurozone crisis is resistance to debt buyouts, national guarantees, mutual insurance, and fiscal transfers between member-states. Stuart Holland argues that none of these are necessary to convert a share of national bonds to Union bonds or for net issues of eurobonds—two alternative approaches to the debt crisis that would offset default risk and, by securing the euro as a reserve currency, contribute to more balanced global growth.Download:Associated Program:Author(s):Stuart Holland
Twin Strategies to Resolve the Eurozone Crisis—without Debt Buyouts, Sovereign Guarantees, Insurance Schemes, or Fiscal Transfers
One-Pager No. 18 | November 2011
The cancellation of the October 26 meeting of the European Union’s council of finance ministers, or Ecofin, has further eroded confidence in its ability to solve the burgeoning sovereign debt crisis in the eurozone. A viable strategy is needed now—and as Stuart Holland illustrates, two viable strategies are even better than one.Download:Associated Program:Author(s):Stuart Holland
Dawn of a New Day for Europe?
One-Pager No. 15 | October 2011
The Merkel-Sarkozy Promise to End the Eurozone Crisis
Failure on the part of EU leaders to address the eurozone crisis is in large part due to the fact that Germany and France are at opposite poles—politically, economically, and culturally. In this context, the announcement by Germany’s Angela Merkel and French President Nicolas Sarkozy that they’ve agreed to a comprehensive package of proposals to solve the eurozone debt crisis is definitely a positive development. It indicates that they have set aside their disagreements—surely no small feat, since domestic political concerns have been pulling the two in completely opposite directions—in order to provide the leadership necessary for euro stability.Download:Associated Program:Author(s):C. J. Polychroniou
An Unblinking Glance at a National Catastrophe and the Potential Dissolution of the Eurozone
Working Paper No. 688 | September 2011
Greece’s Debt Crisis in Context
According to author and journalist C. J. Polychroniou, Greece was unfit to join the euro: its entry was orchestrated by fabricating the true state of the country’s fiscal condition, and its subsequent “growth performance” rested upon heavy state borrowing and European Union (EU) transfers. Moreover, the Greek economic crisis is also a political and moral crisis, as financial scandals and corruption have been major sources of wealth creation.
The EU and International Monetary Fund bailout plan (May 2010), which includes a structural adjustment program with harsh austerity measures, has been a social and economic catastrophe. Such policy ensures that Greece will default and be forced to exit the euro, says Polychroniou, but compelling Greek citizens to take charge of their own economic problems and national faults may be the best scenario. Extreme EU neoliberal policies also increase the risk of the eurozone’s dissolution.Download:Associated Program:Author(s):C. J. Polychroniou
Hegemonic Currencies during the Crisis
Working Paper No. 666 | April 2011
The Dollar versus the Euro in a Cartalist Perspective
This paper suggests that the dollar is not threatened as the hegemonic international currency, and that most analysts are incapable of understanding the resilience of the dollar, not only because they ignore the theories of monetary hegemonic stability or what, more recently, has been termed the geography of money; but also as a result of an incomplete understanding of what a monetary hegemon does. The hegemon is not required to maintain credible macroeconomic policies (i.e., fiscally contractionary policies to maintain the value of the currency), but rather to provide an asset free of the risk of default. It is argued that the current crisis in Europe illustrates why the euro is not a real contender for hegemony in the near future.Download:Associated Program:Author(s):David Fields Matías Vernengo
The Euro and Its Guardian of Stability
Working Paper No. 583 | November 2009
The Fiction and Reality of the 10th Anniversary Blast
This paper investigates why Europe fared particularly poorly in the global economic crisis that began in August 2007. It questions the self-portrait of Europe as the victim of external shocks, pushed off track by reckless policies pursued elsewhere. It argues instead that Europe had not only contributed handsomely to the buildup of global imbalances since the 1990s and experienced their implosive unwinding as an internal crisis from the beginning, but that it had also nourished its own homemade intra-Euroland and intra-EU imbalances, the simultaneous implosion of which has further aggravated Europe's predicament. To keep its own house in order in the future, Euroland must shun the outdated “stability oriented” policy wisdom inherited from Germany’s mercantilist past and Bundesbank mythology. Steps toward a fiscal union to back the euro are also warranted.Download:Associated Program:Author(s):