More on the euro disaster and current account imbalances [creditwritedowns]
July 18, 2012 Leave a comment
This post first appeared at “Great Leap Forward”, my EconoMonitor blog.
Last week we looked at the claim that MMT has ignored current account imbalances among EMU members. That turned out to be fallacious. We went on to examine the claim that the Euro crisis is a simple balance of payments problem. That, too, is fallacious. If the EMU had been designed properly, it would not matter whether some member nations ran current account deficits—much as many US states run current account deficits. Instead, the problem is that the EMU separated the currency from fiscal policy—all the members adopted the Euro, but each was separately responsible for its own fiscal policy. Further, and this is the point to be explored in detail here, each was responsible for dealing with its own banks should a financial crisis hit.
Warren Mosler had long argued that a very likely path to a Euro crisis would come from a bank failure. With no equivalent to Washington to come to the rescue, each individual nation would have to bail out its own banks. That would add to government debt, cause interest rates to spike, and lead to a run out of banks that could not be stopped. Except by the center—the ECB—which was not supposed to do anything of the sort.
Think about that. When US banks start falling like dominoes, who do you call? Not the Secretary of the Treasury of the State of North Carolina! Nay, you call Uncle Sam and Uncle Timmy and Uncle Ben. Please, Uncles, can you spare, say, $29 trillion dollars to bail us out? (http://www.economonitor.com/lrwray/2011/12/14/the-29-trillion-bail-out-a-resolution-and-conclusion/.)
When Irish banks started failing, who did they call? Well, not Fritz in Frankfurt. Let’s see. Total Irish debt was right about ten times Irish GDP (give or take a Euro or two) thanks to the most profligate bankers the world has ever seen. (The US only managed five times GDP—pikers!) Irish bankers had never seen a bad loan they didn’t like. So they politely asked the nice guys in the Irish Treasury to please, please, take over all our bad debts or the economy will crash. And recalling the potato famine, the government took them all. That busted the budget and the government delivered the famine, anyway.
Sergio (Remember him? This is a response to his argument that MMT’s predictive success is “spurious”—see last week’s blog.) sees all this as a current account imbalance. Those Irish and Icelander consumers just bought too many imports. Living the high life up north.
OK, here’s Ireland’s sectoral balances:
Before the GFC hit, we observe that the Irish government is following the neoliberal advice, running budget surpluses. It also has some very small current account deficits (shown as positive because the graph plots the mirror image capital account surplus). Both of these are “leakages” from the circular flow of income that has to be offset by an injection in the form of a private sector deficit. Now, you can, I suppose, blame profligate Irish consumers for their deficits or you could just as easily blame the government for its surpluses.