Living in Terror of Dead Economists

Kenneth Rogoff has a piece on the Project Syndicate that is revealing of today’s intellectual climate. What does he say?

1. The eurozone problems are structural, and stem from a monetary and economic integration that was not followed (I’d say accompanied) by fiscal integration (a federal budget to be clear). Hard to disagree on that
2. Without massive debt write-downs, no reasonable solution to the current mess seems feasible. Hard to disagree on that as well
3. Some more inflation would be desirable, to bring down the value of debt. Hard to disagree on that as well.

In a sentence, intra eurozone imbalances are the source of the current crisis. Could not agree more…

Unfortunately, Rogoff does not stop here, but feels the irrepressible urge to add that

Temporary Keynesian demand measures may help to sustain short-run internal growth, but they will not solve France’s long-run competitiveness problems [...] To my mind, using Germany’s balance sheet to help its neighbors directly is far more likely to work than is the presumed “trickle-down” effect of a German-led fiscal expansion. This, unfortunately, is what has been lost in the debate about Europe of late: However loud and aggressive the anti-austerity movement becomes, there still will be no simple Keynesian cure for the single currency’s debt and growth woes.

The question then arises. Who ever thought that a more expansionary stance in the eurozone would solve the French structural problems? And at the opposite, why would recognizing that France has structural problems make it less urgent to reverse the pro-cyclical fiscal stance of an eurozone that is desperately lacking domestic demand? Let me try to sort out things here. This is the way I see it:

A Banking Union without a Fiscal Union?

I really enjoyed this piece by Perry Mehrling on the lethal embrace between sovereign debt and banks, and on how to dissolve it.  Alex Barker and George Parker on the Financial Times seem to think that the only way to have a banking union is to have a fiscal union (which makes the proposal impossible to implement). Mehrling disagrees, and explains how this could be done.

I am no expert in finance, but he seems rather convincing. And for once, here is a proposal that does not call for a grand solution (unfortunately, very unlikely), but for a step-by-step process.

Also, i really enjoy reading what happens at INET (yes, this is called advertising).

Go West and Take the Best

Paul Krugman has an interesting piece on federal and local expenditure in the United States, where he shows that the consolidated fiscal stance has been considerably more restrictive with Obama than during the Reagan era. This is not what retained my attention, nevertheless. Krugman does not mention that most of the US states (the exception being Vermont) have some form of balanced budget amendment. Krugman himself had warned a while ago that this made the task of the federal government in fighting the recession particularly hard. But once again, this is not the point I want to make.