Sunday, 1 March 2015

Eurozone fiscal policy - still not getting it

The impact of fiscal austerity on the Eurozone as a whole has been immense. In my recent Vox piece, I did a back of the envelope calculation which said that GDP in 2013 might be around 4% lower as a result of cuts in government consumption and investment alone. This seemed to accord with some model based exercises of the impact of austerity as a whole, but others gave larger numbers.

We now have another estimate, which can be thought of as a rather more thorough attempt to do what I did in the Vox article. This paper by Sebastian Gechert, Andrew Hughes Hallett and Ansgar Rannenberg uses multipliers and applies them to the fiscal changes that have occurred in the Eurozone from 2011. Apart from the later start date, the first difference compared to my back of the envelope calculation is that they include all fiscal changes, and not just government consumption and investment. As a large part of the fiscal consolidation in the Eurozone has involved reducing fiscal transfers, this is important.

The second, and more interesting, difference is that rather than pluck a multiplier out of the air, as I did, they use a meta analysis of empirical studies by Gechert that I have previously linked to. The studies on which this meta analysis is based are not ideal from my personal point of view (more on this later), but what it does show is that fiscal multipliers are larger in depressed economies. Applying these ‘meta multipliers’ to the Eurozone fiscal consolidation implies that GDP was 7.7% lower by 2013 as a result. These numbers are more in the ballpark of the Rannenberg et al paper that I have discussed before.

All these estimates point to huge losses, which monetary policy has neither been willing or able to counteract. Yet the speed at which those in charge of the Eurozone begin to realise the mistake that they have made is painfully slow. Take this recent Vox piece by Marco Buti and Nicolas Carnot. Thankfully they ignore all the Eurozone’s tortuous and sometimes contradictory rules, and just look at two numbers: a measure of ‘economic conditions’ (like the output gap), and a measure of the fiscal gap, which is the difference between the actual primary balance and what it needs to be to get debt falling gradually.

They argue that policy needs to balance the need to reduce both gaps. Looking at these two numbers, they conclude that Germany is overachieving on fiscal adjustment and has a need to increase activity, but although France and Spain also need to increase demand they have a long way to go to eliminate the fiscal gap, so this should dominate. The conclusion is that Germany should go for fiscal stimulus, but “moderate consolidation appears warranted in both France and Spain”. Overall “the Eurozone should conduct a close-to-neutral fiscal stance”.

Let’s deal with that last conclusion first. The mistake there is simple. When monetary policy is stuck at the Zero Lower Bound, it is crazy to balance the output gap with what is your main instrument for correcting that gap, which is fiscal policy. Getting the fiscal gap right is important in the longer term, but in the short term it is the means by which you get the output gap to zero. As the studies mentioned at the beginning of this post show, the current recession is the result of trying to correct the fiscal gap at completely the wrong time. The right policy is to get the output gap to zero, so interest rates can rise above the ZLB, and then you deal with the deficit. Readers of this blog and the blogs of others must be sick and tired of seeing us make this same point over and over again, but the logic has yet to get through to where it matters.

The same principles apply to countries within the Eurozone, except with an additional complication of within Eurozone competitiveness. If a country is too competitive relative to the rest of the Eurozone, it needs to run a positive output gap for a time to generate the inflation that will correct that position, and vice versa. For that reason Germany needs a large positive output gap at the moment (compared to an estimated actual negative gap), and therefore a much more expansionary fiscal policy - not because it is overachieving on debt adjustment. France and Spain now look roughly OK in terms of competitiveness relative to the average (see chart below, and assuming that entry rates in 2000 were appropriate), so there we need fiscal expansion to close the output gap.

So at both the aggregate and individual country level, the inappropriate bias towards fiscal contraction that caused huge losses in the Eurozone in the past continues to operate. Which means, unfortunately, that the needless waste of resources caused by austerity continues to get larger by the day.

Relative Unit Labour Costs, 2010=100, from OECD Economic Outlook

Saturday, 28 February 2015

Tuition fees: a last throw as the election slips away

Mainly for those interested in the forthcoming UK general election

I do not remember much from my university days, but I remember one meeting where the subject was student finance. This was a time of student grants rather than loans, and the proposal being debated was to replace grants with some kind of loan or tax. Speaker after speaker went through how student grants amounted to a payment from those not attending university to those that did, while those that did benefited from the return on the ‘human capital’ a university education gave them. The logic on equity grounds for switching to loans seemed compelling. Then someone stood up, and talked of his background from a mining family in Wales, how he was the first of his family ever to go to university, and how this would never have happened if they had not had access to a grant. Those arguing for loans fell silent, and their proposal was lost.

Can the same logic be applied to Ed Miliband’s proposal to reduce the maximum tuition fee from £9,000 to £6,000? It is a very different starting point, as most UK students now pay this fee from a loan rather than a grant, but the distributional consequences are essentially the same. In the UK graduates only have to start repaying their loans once their income exceeds a threshold, and many will not pay some or all of it back as a result. Reducing the loan therefore mainly benefits those students towards the top of the income distribution. Labour’s proposal has mitigated that effect slightly by increasing the interest rate that high earners pay, but the IFS say that “mid-to-high-income graduates are the primary beneficiaries of this reform, with the very highest earners benefiting the most, despite the rise in interest rates that they would face.” The fact that the policy is being funded by cuts in pension relief which will hit similar groups is not really relevant, because that money could have been used for something else.

So why are Labour proposing to increase inequality in this way? Is it because they hope that lower fees will encourage those from poor backgrounds to go to university? One of the remarkable features of the Coalition’s decision to increase fees is that it does not seem to have reduced the numbers becoming full time students coming from such backgrounds, although the numbers are still very low. Of course we cannot be certain what might have happened to these numbers without the fee increase. It is also important to note that applications for part-time enrolment have fallen back as a result of higher fees.

However I doubt very much if encouraging the poor to go to university is what lies behind this policy announcement. Labour are slowly but steadily losing this election. Every time I look at the predictions for the number of seats, it seems as if Labour has dropped one or two at the expense of the Conservatives. Putting luck to one side, there seem no obvious events between now and May that will change this trend, while George Osborne has a budget that will be sure to include plenty of pre-election bribes to carefully selected groups, to add to the many already announced.

Perhaps Labour’s only hope is that they can galvanise those who traditionally do not vote: the young. The old are much more likely to vote than the young. In 2010 just over 50% of the 18-24 age group voted, but nearly 75% of those 65 or over voted. And the young vote left.

The chart below shows the ‘age gap’ by party, where the age gap is the percentage of the 18-24 age group who voted for a party, less the same percentage for the 65+ age group. The data for ‘now’ is taken from this Populus poll (Table 3). The age gap for the Conservatives has been steadily increasing over time. The LibDems benefited hugely from young voters in 2005 and 2010, but perhaps partly as a result of their change in policy on tuition fees that gap has completely disappeared. The youth vote has gone back to Labour as never before, but it is vulnerable on two counts. First there are the Greens. In this Populus poll 16% of the 18-24 group said they would vote Green (compared to just 2% of the 65+ group), but in this YouGov poll they were on level pegging with Labour. This volatility suggests there is all to play for. (Only 5% of the 18-24 group intended to vote for UKIP, compared to 17% for the over 65s.) Second, there is the question of how much this group will vote. 

UK voting age gap between young and old. Source (actual elections): IPSOS Mori
Labour therefore need to galvanise the youth vote, and to do this it needs a cause. The collapse in the LibDem vote among the young suggests tuition fees could be a potent force, whatever the actual distributional consequences of the policy are. This against a background where young people are finding it more and more difficult to buy a house, and the distribution of income and wealth is moving in favour of the old. This is an election more than ever before about a clash of interests between the old and the young. The Conservatives have already given their fair quota of bribes to the old, so it really was a no brainer that Labour would do the same to the group that could just save this election for them. 

Friday, 27 February 2015

Disaster

William Keegan, while discussing my NIER article on the UK government’s macro record, writes:

After the collapse of output of some 6-7% engendered by the financial crisis, output per capita grew by “just under 2%” from 2010 to 2013, whereas in 1981-84 and 1992-95 growth was over 8%. Wren-Lewis comments: “In short, the performance of the coalition government has been a disaster.” “Disaster” is a strong word from such a rigorous academic as Wren-Lewis, but I fully agree with him.

I like the idea - which is probably true - that rigorous academics generally refrain from calling things a disaster in print. Does that mean I’m not as rigorous as Keegan believes? I thought I’d try and justify my departure from this norm with some more data. It comes from a newly released dataset put together by the Bank of England. I’ve used it to calculate GDP per head over a much longer time horizon than I’ve shown before. Here it is.


It is a story of two trends: one from 1820 to WWI, and another from the end of WWII until the financial crisis. Now whether this really is a good way to describe how the economy evolved over the last two centuries I will leave to others, but it is remarkable how well this simple idea of deviations around a constant trend seems to work for the UK economy. To see this more clearly, here is 1820 to 1913 with the trend drawn in.


 The trend growth rate is just under 0.9% per annum. Here is the equivalent graph since 1950.


The trend growth rate, estimated from 1950 to 2010, is more than double that of the 1800s, at about 2.25%. Quite when and why the growth rate increased so much between the two world wars is a huge question, but my concern here is with deviations from these trends. Apart perhaps from two booms - the 1870s and the 1970s - large deviations from trend are short lived, with correction back towards the trend occurring pretty quickly.

The big exception, of course, is what has happened since the Great Recession. The deviation from trend just kept on getting bigger, and even with a fairly generous estimate for 2014 the best that can be said is that we might have started growing at trend again, so the gap has stopped getting any bigger. Even after the slump of 1919-21, GDP growth for the next four years was well above trend. What has happened since the financial crisis is unprecedented. This below average growth in GDP per head is one reason why real wages have been falling steadily over this period, which is also unprecedented.

It could of course be that what we are seeing is part of an adjustment to a new lower trend growth rate that was going on behind the scenes before 2010. That is what the methods used by the OECD and IMF (but not the OBR) assume. However they imply that 2007 was a huge boom in the UK, whereas all the other evidence says any boom was decidedly modest. It could be that these trends can suddenly shift after traumatic events. What is abundantly clear is that the last few years are no success story, and the constant drum beat in macromedia that the economy is doing well is completely inappropriate. A much better way of describing the last four years is to say it has been a disaster.


Thursday, 26 February 2015

Can helicopter money be democratic?

Helicopter money started as an abstract thought experiment: money would be created and just distributed to individuals by helicopter. If we think of a consolidated government which includes its central bank, then it is clear that in technical terms this is a combination of monetary policy (the creation of money) and fiscal policy (the government giving individuals money). Economists call such combinations a money financed fiscal stimulus. With the advent of Quantitative Easing (QE), it has also been called QE for the people.

Some have tried to suggest that central banks could undertake helicopter money for the first time without the involvement of governments. This is a fantasy that those who dislike the idea of government have concocted. Others who dislike the idea of fiscal policy have suggested that helicopter money is not really a fiscal transfer. That is also nonsense.

Helicopter money is a particular form of money financed fiscal stimulus. It has two key features among the class of all possible money financed fiscal measures. The first is that it involves a particular kind of fiscal policy. A helicopter would distribute this fiscal transfer randomly, but what most people have in mind is an equal distribution to every person (adult?) - a kind of reverse poll tax, or what economists would call a lump sum transfer. The second is that, once the apparatus for helicopter money had been established by the government, its use would be initiated by the central bank, whereas other fiscal transfers are initiated by the government.

I want to suggest that it is this second aspect that is critical. You could imagine the government making a transfer to every person, and you could also imagine the central bank distributing money to only those people who paid income tax the previous year. The fact that helicopter money is initiated by the central bank seems more like a defining characteristic. If helicopter money could be ordered by the government, we would say that the central bank was no longer independent.

This defining feature of helicopter money is also what makes it attractive from the point of view of macroeconomic stabilisation. It removes the Achilles’ heel of the consensus assignment. The consensus assignment allocates demand stabilisation entirely to monetary policy run by independent central banks, while fiscal policy’s role at the aggregate level is to focus on deficits and debt. The Achilles’ heel is that interest rates can no longer be used to control demand when they hit their lower bound. QE tries to fill that gap, but helicopter money would be much more reliable and effective. Of course governments could make the transfers themselves through deficit finance [1], but the evidence of the last few years is overwhelmingly that they become fixated with reducing deficits in a deep recession with the result that we get fiscal contraction rather than stimulus.

This last point raises a potential problem with helicopter money, which is that government may take the opportunity to offset its impact by raising taxes or reducing transfers, and we end up simply monetising part of government debt. One would hope that does not happen for three related reasons: first, governments are rather less agile than central banks, second, good governments should be working with fiscal rules that specify a medium term plan for deficits, and third the monetary stimulus is only temporary, so there would be little long term benefit in terms of deficit reduction if governments tried to play this game. [2]

If initiation by the central bank is the defining feature of helicopter money, and this policy always requires the cooperation of government, might it be possible to imagine a form of helicopter money that was more ‘democratic’? Why could the central bank not give the government the money, on condition that it was used to increase transfers or reduce taxes in some way? A left wing government might decide that, rather than giving money to everyone including the rich, it would be better to increase transfers to the poor. A right wing government might decide it should only go to ‘hard working families’, and turn it into a tax break. We could call this democratic helicopter money.

I can see two problems with democratic helicopter money. Suppose the government decided to use the money for a tax break that went to people with a very low marginal propensity to consume. If the central bank fixes the scale of the monetary stimulus beforehand, it makes that stimulus much less effective. If it increases the size of the stimulus following the government’s decision on how to spend it, this gives perverse incentives to government: think of inefficient ways to stimulate the economy, and we will give you more money.

One way to reduce such problems is for the central bank and government to cooperate over the size and form of any money financed fiscal stimulus. This could have added benefits. Most studies, and theory, suggest that the most effective fiscal stimulus tool is to bring forward public investment projects. With democratic helicopter money, the central bank and government could cooperate on this policy, rather than or as well as implementing a tax cut or transfer. However such cooperation creates a second potential problem, which is that it puts at risk the perception (and perhaps the reality) that the central bank was both independent and non-political.

Given these problems, why even think about democratic helicopter money? One reason may be political. A long time ago I proposed giving the central bank limited powers to make temporary changes to a small set of predefined tax rates, and I found myself defending that idea in front of the UK’s Treasury Select Committee. To say that the MPs were none too keen on my idea would be an understatement. Making helicopter money democratic may be what has to happen to get politicians to support the idea.

[1] Combined with QE, this could become a money financed fiscal stimulus. An alternative way of avoiding this deficit fixation is to get governments to adopt a fiscal rule where, when interest rates were likely to hit the lower bound, the central bank in cooperation with the fiscal council proposes increasing the deficit by adopting a fiscal stimulus package of a particular size. This is the proposal in Portes and Wren-Lewis (2014). If instead the stimulus package was money financed, it becomes helicopter money.

[2] None of these considerations, even collectively, rule out the possibility that governments could negate helicopter money in this way. This point and the previous footnote show that all we are really talking about here is the effectiveness of different institutional mechanisms of persuading governments to allow fiscal stimulus in a recession, and to avoid the adoption of austerity. 

Tuesday, 24 February 2015

Greece and primary surpluses

In my simple guide to the current macroeconomic position of Greece, I said that a major mistake made by the Troika was to insist on a pace of fiscal adjustment that was far too fast. It led to a collapse in the economy. Of course a collapse in the economy itself raises the deficit. So people who just look at the deficit, including many comments on that post, say ‘what adjustment’ and ‘just how many years does Greece need’.

It is easy to avoid this trap. The OECD publishes a series for the underlying primary balance, which is their guess at what the primary balance (taxes less spending excl. interest payments) would be if the output gap was zero. It is the first row in the table below: the estimated output gap is below. I’ve also shown the scale of the decline in GDP, just to show that the output gap numbers are pretty conservative. Unemployment in Greece is over 25%, and over half of all young people are unemployed.


2009
2010
2011
2012
2013
2014
Underlying primary balance
(% of GDP)
-12.1
-6.0
-0.7
2.9
6.7
7.6
Output gap (%)
4.3
0.2
-7.1
-11.6
-14.2
-12.7
GDP growth (%)
-4.4
-5.3
-8.9
-6.6
-4.0
0.8 

2009 was the peak underlying primary deficit, and it was huge, representing the actions of a truly profligate government. However what followed was complete cold turkey: within two years the underlying primary balance was close to zero. A pretty conservative estimate for the impact of fiscal consolidation would reduce GDP by 1% for each 1% of GDP reduction in the primary balance. In those terms, all of the current output gap in Greece can be explained by austerity.

As I have always said, some period involving a negative output gap was inevitable because Greece had to regain the competitiveness it lost as a result of the previous boom fuelled by fiscal profligacy. But slow gradual adjustment is more efficient than cold turkey. Paul Krugman explains one reason for this: resistance to nominal wage cuts. But there is another which is even more conventional. If we have a Phillips curve where inflation expectations are endogenous (either through rational or adaptive expectations) rather than anchored to some inflation target (as Paul implicitly assumes), then competitiveness adjustment can be achieved with a much lower cost in terms of the cumulated output gap if it is done slowly. (I gave an example here, then reacting to the idea that Latvia’s cold turkey adjustment had been a success.)

There are only two serious barriers to this more efficient adjustment path. The first is the willingness of some outside body to provide the loans to fund the gradual reduction in the government’s deficit. The second is getting those outside bodies to recognise this basic macro: austerity hits output, and gradual adjustment is better. I think the second turned out to be the crucial problem with Greece: as has been extensively documented, the Troika were hopelessly optimistic about the impact cold turkey would have.

So it is as clear as it can be that the current dire position of the Greek economy is the result of a huge mistake by the Troika. The size of the collapse in the Greek economy is similar to the fall in Irish output during the Great Irish Famine of 1845-53, and while the suffering in the latter is obviously of a different order, the attitude of some in the Eurozone is as misconceived as most English politicians during the famine. Of that event they say 'God sent the blight but the English made the famine'. In the future the Greeks may justly say ‘our politicians caused the deficit but the Troika made the depression’.  


Sunday, 22 February 2015

Helicopter money and the government of central bank nightmares

If Quantitative Easing (QE), why not helicopter money? We know helicopter money is much more effective at stimulating demand. Helicopter money is a form of what economists call money financed fiscal stimulus (MFFS). In their current formulation independent central banks (ICB) rule out MFFS, because the institution that can do the stimulus (the government) is not allowed to cooperate on this with the institution that creates money (the ICB). In a world where governments - through ignorance or design - obsess about deficits when they should not, it turns out that MFFS or helicopter money is all we have left to prevent large negative demand shocks leading to deep and prolonged recessions. So why is it taboo? 

One reason why it is taboo among central banks is that they want an asset that they can later sell when the economy recovers. QE gives them that asset, but helicopter money does not. The nightmare (as ever with ICBs) is not the current position of deficient demand, but a potential future of excess inflation that they are unable to control.

Here it is perhaps easiest to talk about monetary policy as putting money into the system when inflation is too low or taking it out when inflation is too high. QE creates money when interest rates are at their Zero Lower Bound (ZLB), but that money can be taken out of the system later if need be by selling the assets that QE buys. Helicopter money also puts money into the system at the ZLB, in a much more effective way than QE, but it cannot be put into reverse by central banks alone. The central bank cannot demand we pay helicopter money back. [4] 

If the government cooperates, this is no problem. The government just ‘recapitalises’ the central bank, by either raising taxes or selling more of its own debt. Economists call this ‘fiscal backing’ for the central bank. In either case, the government is taking money out of the system on the central bank’s behalf. So the nightmare that makes helicopter money taboo is that the government refuses to do this. [1]

What kind of government would this be? Inflation is rising, and the institution tasked with bringing it back under control makes a request that can be satisfied fairly painlessly by the government issuing some more debt. A government that refuses to do this is saying very publicly that it no longer cares about high inflation: it prefers an environment of low interest rates and high inflation and it is prepared to cripple its central bank to achieve this.

Now imagine a government with these preferences, and now put it in a world where the ICB does not need recapitalising and is selling assets and raising interest rates to do its job. Are we really meant to believe that such a government would ignore its preferences and let the central bank get on with it? Of course it would not - it would take away the central bank’s independence by forcing it to stop raising interest rates.

In other words, a government that would refuse to recapitalise an ICB is also a government that would have no hesitation in ending central bank independence. Holding assets is no protection for an ICB against this government of its nightmares. [2] 

The reason we have independent central banks is not to stop us becoming like Zimbabwe. It is to stop governments taking small risks with inflation for short term political gain. Like the occasion I was told that the Chancellor (at the time) knew full well that interest rates needed to rise now to reduce inflation, but there was no way that would happen until after the party conference. But this kind of government is not the kind that would deliberately sabotage its own central bank by refusing a request for recapitalisation.

Tony Yates writes of helicopter money: “Once government gets a taste for it, how could it resist not helping itself to more?” This is a statement about a government of nightmares that goes on a spending spree using money created by the central bank, and not about real governments in advanced economies. The idea that a perfectly sober government becomes a drunkard the moment it sees its central bank undertaking helicopter money is absurd. If ever we are unlucky enough to have a government that is a drunkard, an ICB with some assets to sell will not be enough to stop it raising inflation.

So this nightmare that makes helicopter money taboo is as unrealistic as most nightmares. The really strange thing is that ICBs have already had to confront this nightmare. It is more than possible that when central banks sell back their QE assets, they will make a loss, and so will be faced with exactly the same problem as with helicopter money. [3] A central banker knows better than not to worry about something because it might not happen. So the nightmare has already been faced down. It therefore seems doubly strange that the taboo about helicopter money remains.

[1] It is sometimes suggested that if the central bank runs out of assets, it can create its own, by issuing central bank debt. This would be effective if the nightmare government was unlikely to last, and a new government would later emerge that would recapitalise the bank. However it seems problematic as a solution for a permanently uncooperative government where inflation is too high, because the only way the central bank can pay the interest of the assets it issues is by creating more money. Corsetti and Dedola treat reserves as an alternative to debt issued by governments, but here the idea seems to be to rule out default as an option.

[2] An independent judiciary could protect an ICB. However it would be equally possible to write into law the duty of a government to ensure an ICB can do its job.


[3] The Bank of England obtained an almost complete indemnity from the government for QE losses, but other central banks have not (see Willem Buiter here).

[4] The central bank could just loan the helicopter money. But in practice this amounts to the same thing: a government that will not back its central bank will tell people not to repay the loan.  

Saturday, 21 February 2015

Greece: a simple macroeconomic guide

In reading this, which I will come back to, I thought something short and simple was required

In 2010 periphery Eurozone countries, including Greece, faced two problems: government deficits were too high, and as a result their economies had become uncompetitive. (Excessive deficits - public or subsequently socialised private - had allowed the economy to run too hot which pushed up inflation leading to a loss of competitiveness.)

The deficits needed to be reduced. Under flexible exchange rates this could have been done with relatively little cost in terms of unemployment because competitiveness could have adjusted to its appropriate level immediately via a nominal depreciation. The demand lost from lower public spending could be compensated for by more competitive exports. In a monetary union, this cannot happen, so a period of unemployment is inevitable to restore competitiveness.

The key macroeconomic question is how quick adjustment should be. Should competitiveness be restored quickly or slowly. Macroeconomics has a pretty clear answer which comes from the Phillips curve (of whatever variety) - slow is much more efficient. So it makes sense for some institution like the IMF to provide loans to the government to allow it to eliminate deficits gradually. There are lots of political and social reasons to make adjustment gradual as well, but this is just about the macro.

Those are general principles. When it came to Greece, the Eurozone made three key mistakes.

1)    Too much austerity too quickly, violating the logic of the previous paragraph. Sharp austerity can almost appear self-defeating in deficit reduction terms, as it plunges the economy into severe depression, making adjustment of any kind more difficult. The Troika has to take direct responsibility for this mistake.

2)    There was only partial (and delayed) default on Greek government debt (see below). This was clearly not in Greece’s interest, but it had benefits to other Eurozone countries.

3)    Adjustment was required in an environment of Eurozone recession and deflation, caused by needless fiscal austerity in the non-periphery countries. Restoring competitiveness is much more difficult if the countries you are adjusting with respect to have very low/zero inflation (because people resist nominal wage cuts).

That is the past, but it has direct implications for today. (2) means that the Troika were demanding Greece ran large primary surpluses in the coming years to pay back the remaining debt and adjustment loans. This makes correcting the error in (1) much more difficult, because it implies yet more austerity. In terms of macroeconomics it is a clear mistake. (If Greece could eliminate its negative output gap, it would be running a primary surplus of over 7% according to the OECD, which would be enough for everyone.)    

Now back to this Vox piece. It displays so much that is wrong with macro arguments coming out of the Eurozone at the moment. Examples:

a.    “For an economy in the dismal Greek situation, it essentially made no difference that it remained a member of the Eurozone ..” This ignores the basic macro in the second paragraph above. This denial of the importance of wage and price rigidities, which leads to the key cost of being part of a monetary union, has typified the Eurozone project from the start.

b.    “Since in all these cases painful adjustment was inevitable and costly, one should take the combination of the rescue packages and adjustment programmes as what they really are – a device helping to avoid a sudden fiscal and current account adjustment with even larger immediate pain.” It is of course true that with access to markets cut off, adjustment without any support from the IMF or elsewhere would in macro terms have been much more immediate and painful. But the implication is that the speed of adjustment matters, and in particular that it can still be too fast. The article makes no attempt to address this central issue. The message that comes across to Greece is that you should be lucky you got something.

c.    “During the past five years Greece indeed underwent serious reforms and fiscal consolidation. Progress has been remarkable …” What is remarkable is the extent of the collapse in the Greek economy. Some kind of recession was inevitable, but not a complete collapse in GDP, where over half of young people are unemployed. The article tries to suggest that this is just par for the course, rather than a function of the amount of austerity imposed.

d.    “A debt relief of public creditors could not substantially improve the comfortable state of the Greek government, let alone be justified easily vis-à-vis its lenders.” This is disingenuous. It is true that the effective interest rate on Greek debt is relatively low compared to other Eurozone countries, but nevertheless the lenders are demanding Greece run significant primary surpluses now, and they need not make this demand

I could go on and on, but this is meant to be short. To sum up, the problems displayed by this article amount to a neglect of the importance of wage and price rigidities, and the impact that fiscal austerity can have on demand leading to a needless waste of resources. In other words, a denial of basic Keynesian ideas.