Eurozone Watch ? Goodhart warns of political miscalculations in the Euro exit debate
リンク: Eurozone Watch ? Goodhart warns of political miscalculations in the Euro exit debate.
by Sebastian DullienA few weeks ago, Eurozone Watch had a little curtain raiser on a conference from the Institut für Makroökonomie und Konjunkturforschung on “European integration in crisis”. Though it has been two weeks since that conference, I would still like to give a short account of that conference.
It was really interesting to see that one of the hottest topics on the conference was the question of divergences in the eurozone and how they could be dealt with (even though the actual title of the conference was much broader). Hardly any of the sessions failed to mention this problem.
Charles Goodhart gave a very interesting presentation on divergences and the possibility of an EMU break-up (I later conducted an interview with him for the Financial Times Deutschland in which he became even more specific). He argued that the costs for leaving EMU might well be underestimated. While he agreed that a country such as Italy could in principle de-lirafy debt contracts and then devalue, he reminded us that the case would be much complicated by the fact that Italy is not only member of the EU, but also home for a number of multinational companies.
Costs of leaving EMU might be higher than thought
Being member of the EU, he argued, would mean that any law changing the denomination of Italian debt contracts in which one of the parties would come from another EU country would most likely be challenged in the Europan Court of Justice. He concluded that the only viable alternative would be leaving EMU and EU together.
As for the multinational companies from Italy, he argued that they would become targets for court action from creditors in all countries where they have subsidiaries, with the possible consequence that assets may be seized and business activity badly disrupted.
However expensive leaving EMU in real terms might be, Goodhart however warned that single government might well underestimate these costs. According to him, therefore there might be a real possibility that a country might leave EMU in the coming decade. Specifically, he warned that even playing publicly with the idea of leaving EMU might lead to capital flows which in the end force a country out of monetary union.
Using seignorage profits for stabilisation
Goodhart again called for a more centralised fiscal policy (and I learned that he had already called for both a transnational stabilisation fund and a European corporate tax in the early 1990s - an idea Daniela and I took up lately without knowing Goodhart’s earlier work). He also made the interesting proposal that money made from seignorage (basically the euro system’s profits) could be used for a eurozone-wide stabilisation fund.
The idea of European fiscal policy was repeatedly mentioned, which might not be too much of a surprise, given the Keynesian provenance of most of the participants, while it was criticised by one ECB economist who also took part in the conference. According to him, the single member states could do much more against divergence than they are doing now. It was a little sad to see that the two camps (more centralised fiscal policy vs. national policy action) did not really come closer together. To me it seems evident that we need a two-handed approach with countries like Spain fighting their housing bubble with national instruments, countries like Portugal reforming their labour market so that unit labour costs do not continue to rise excessively and a second pillar which creates a fiscal stabilisation mechanism which deals with those divergences which cannot be dealt with nationally.
Apart from Goodhart’s presentation, there was a lot of discussion about how bad the situation of single EMU countries really has become. While most participants agreed that the situation for poor little Portugal is really dire, there was more disagreement for the other problem cases: Some economists argued that the situation in Spain is not as bad as often thought since fixed capital formation is high (though I might carefully add that it has been to a large extent investment in housing). Italy’s case was also careful examined, with some economists providing further evidence for Ulrich Fritsche’s and my finding that the situation might be overly dramatized (by the way, Eric Chaney from Morgan Stanley has published a note with a similar direction), while others defended the view that Italy’s competitiveness situation is indeed very problematic.
What was really positive about the conference is to know that the most pressing problems of EMU governance now seem to be widely discussed. Maybe this puts us a step into the right direction of - at some time in the future - acutally changing institutions to make EMU work.
