Mon Dec 9th, 2013 at 11:16:36 AM EST
How to Exit Austerity, Without Exiting the Euro Rob Parenteau New Economic Perspecitves
First of all, if a government stops having its own currency, it doesn't just give up `control over monetary policy'...If a government does not have its own central bank on which it can draw cheques freely, its expenditures can be financed only by borrowing in the open market, in competition with businesses, and this may prove excessively expensive or even impossible, particularly under `conditions of extreme urgency'...The danger then is that the budgetary restraint to which governments are individually committed will impart a disinflationary bias that locks Europe as a whole into a depression it is powerless to lift.
So wrote the late Wynne Godley in his August 1997 Observer article, "Curried Emu". The design flaws in the euro were, in fact, that evident even before the launch - at least to those economists willing to take the career risk of employing heterodox economic analysis. Wynne's early and prescient diagnosis may have come closest to identifying the ultimate flaw in the design of the eurozone - a near theological conviction that relative price adjustments in unfettered markets are a sufficiently strong force to drive economies back onto full employment growth paths.
Rob Parenteau notes that countries caught in the deflationary vise brought about by the EMU and the associated policies would face a high cost for exiting the Euro and proposes an alternative.
(Corrected name for Syriza leader)
If we can agree with the late Wynne Godley that the separation of central bank monetary policy from fiscal policy is one of the core design flaws of the eurozone, and we can acknowledge that the expansionary fiscal consolidations promised five years ago have proven anything but expansionary, then it is clear that effective demand must be revived by other measures. If private sector investment demand is going to continue to prove to weak (especially relative to private saving preferences), and if the increase in trade balance is going to continue to be made largely through import contraction (on the back of weak final domestic demand), then economic growth can only return if countries abandon austerity measures. Simply put, peripheral nations in the eurozone must regain control of their fiscal policy, and must actively pursue full employment growth policies.
To accomplish this, the following alternative public financing instrument may need to be unilaterally adopted in each peripheral nation in the eurozone. Federal governments will henceforth issue revenue anticipation notes to government employees, government suppliers, and beneficiaries of government transfers. These tax anticipation notes, which are a well known instrument of public finance by many state governments across the US, will have the following characteristics: zero coupon (no interest payment), perpetual (meaning no repayment of principal, no redemption, and hence no increase in public debt outstanding), transferable (can be sold onto third parties in open markets), and denominated in euros. In addition, and most importantly, these revenue anticipation notes would be accepted at par value by the federal government in settlement of private sector tax liabilities. The revenue anticipation notes could be distributed electronically to bank accounts of firms and households through some sort of encrypted and secure system, or they could be sent as certificates, preferably in denominations of 50 and 100 euros, to facilitate their possible ease of use in other transactions, should private agents elect to do so. Essentially, the government is securitizing the future tax liabilities of its citizens, and creating what amounts to a tax credit that will not be counted as a liability on its balance sheet, and will not require a stream of future interest payments in fiscal budgets.
One advantage of this alternative financing approach is that day one, the government issuing these tax anticipation notes (we could call them G Notes for Greece, I Notes for Italy, S Notes for Spain, etc.) can pursue the fiscal deficits that are required to return their economy to a full employment growth path. Fiscal austerity can be abandoned without abandoning the euro.
There are many caveats. I can see how this might work, especially if the member's national central bank can substitute anticipation notes for euros, accumulate euros and reserve them for reserves and 'foreign exchange', thereby keeping the national notes within their borders. Euros could be used to purchase goods not available within their own borders, fuel, food and pharmaceuticals for instance. Parenteau notes that current 'austerity' policies are contracting bank balance sheets in EMU countries, making Euros less available for purchase by selling assets or trade goods. (This seems unlikely to be mere coincidence.)
Of course, to make this alternative financing mechanism, enforcement of tax collection will need to be improved in some nations. A more equally distribution of the tax burden across citizens would also help in the issuance of these notes. To accomplish this, citizens will also need to take back their democracies from what Jamie Galbraith has termed the predator state. Otherwise, there is a risk that programs facilitated by the issuance of tax anticipation notes will just become another vehicle for political patronage.
Well, should Alexis Tsipras and Syriza gain control in Greece and should a left government come to power in Italy such changes are, at a minimum, conceivable.
second criticism of this alternative financing mechanism is that it would offer a quick route to accelerating inflation, if not hyperinflation, as some of the constraints on government budgets would be reduced or removed. To address this, it might be helpful for the central bank of each country to be held responsible for not only monitoring inflation conditions, but also for creating early warning systems for the possible acceleration of inflation. Both exercises could be overseen and validated by an independent third party - say IMF or ECB staff.
Hard rules could then be set in place along the following lines: should inflation accelerate through say a 4% YoY ceiling for more than six months in any nation, the Treasury of that nation would have to implement an across the board sequestration on government spending of 5%. This sequestration would remain in effect until the inflation rate dropped below 4% for at least six months. A schedule for ratcheting such measures if inflation continues to accelerate above the ceiling could surely be devised. Alternatively, taxes could be increased on households to create a deferred savings pool, much as Singapore currently employs, and much as Keynes proposed for WWII England.
I would only count on the ECB for vigorous attempts to sabotage any such efforts in a member state. The deferred savings pool, on the other hand, sounds like a great plan. It could be sold as a national effort to regain sovereignty - the 'moral equivalent of war' - and the savings could also finance expansion when inflation is controlled.
But the real accomplishment would have to be one of re-educating the population on the basics of economics and governance and this would require the government to regain control of at least one or two of the major media outlets, such as the public television system in Greece. What has gone wrong, who benefited and what must be done to prevent a recurrence. I have a sense that most have a bit of a clue by now as to the answers to the above.