ENA 2011 workshop on Eurozone crisis
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Transcript of ENA 2011 workshop on Eurozone crisis
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ENA 2011 workshop on Eurozone crisis
Franco Carminati
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Why the existing euro?
• Miguel : « China has proposed to create a managed floating exchange rate regime”, why not for the euro.
• Miguel : “US demands flexible yuan, independent central bank and opening of capital account (China will not accept)”, why has “EU” accepted?
• ECB : Cancelled capacity to create money. CB interest rate and of FX rate “independent” from politicians, but dependant from whom?
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A/ « Exit » scenario
• One or several countries decide to reintroduce domestic currencies and leave the eurozone
• What will follow is very uncertain and depends crucially on :
- The splitting country’s ability to tame the adverse effects of the exit decision discussion point
- The behavior of other countries of the eurozone : * Will other countries leave the eurozone ? * Will other countries & markets retaliate ? Political will and EU project
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« Exit » scenario
• Copy paste here the Dominique’s chart in blue color
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« Exit » scenario – Dominique’s chart
Comments on Dominique’s chart:• Some consequences are based on « market laws» such as: * Higher interest rates * Bank runs, capital flows, crisis of national banking system
• Debt in exterior currency would increase: this is actually part of the debt negociation process.
• Higher (impoted) inflation derived from devaluation does not mean reduced competitiveness.
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« Exit » scenario• Benefits to be expected : – Recovery of domestic monetary sovereignty – Ability of the country to devaluate its currency• Costs of exit strategy : – A high risk of monetary & financial crisis see comments – High economic and social costs to be clarified and compared with
prevailing situation - € less to loose some importance on International level? - Risk of non coopertaive policies (competitive devaluations,…)• The balance between costs & benefits will depend crucially
on the country’s ability to implement radical changes in its policies :
– Capital control, price control, control of banks, … – Long term investment in the productive sector …
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B/ « Common currency » scenario
• Countries of the eurozone agree : – to abandon the euro as a single currency – to adopt a common currency going along with domestic
currencies
• This new monetary regime would require : – to go beyond the previous system of the ECU – to draw on Keynes’ model of the « bancor » by : * Creating new institutions, i.e. a regional Clearing Union * Adopting new rules for monetary cooperation, fiscal discipline
why?, limits on current account disequilibria, …
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« Common currency » scenario• The new ECU would be a regional equivalent of SDRs
and have three functions : – Unit of account – Complementary means of payment – Intrument of credit among States• The new ECU would be equivalent to the Latin
American SUCRE• These new regional monetary systems would lead
to a transformation of the international monetary system – based on regionalisation – with new rules & institutions (regional monetary fund)
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« Common currency » scenario• Benefits from a common currency : – Domestic monetary sovereignty => more flexibility for economic policies – Regional cooperation based on symmetrical relationships among
country members• Costs & risks : – High transition risks when going from the single currency
system to the common currency system see discussion on leaving the € – Important reforms needed : will Germany accept ? Democracy problem – Risks of currency war & speculation if the cooperation is not working is
cooperation working now?: what rules for fixing exchange rates between the new ECU and the domestic currencies ? There are ways
– The new ECU is not a full fledged money : only a basket of domestic ‐currencies; will circulate mainly among governments and central banks better than actual situation. And why not using it with, for instance, electronic tools?
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C/ « New monetary union » scenario
• The euro remains the single currency of the eurozone• Radical reforms are implemented : – Political union is reinforced to foster : * cooperation among country members * democratic control on EU policies by elected bodies and civil society – European fiscal policies are developed with a large European
budget (10% of EU GDP) & European taxation & financial transfers within the eurozone, targeting trade balances?
– A drastic change in monetary policy and in the role of the ECB : * Democratic control instead of independence of ECB * Coordination of monetary policy & fiscal policiy instead of separation * priority to employment, social and ecological targets => financing
of public long term investment by money creation
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« New monetary union » scenario• Benefits – The euro will become a powerful factor of integration and cooperation
if the reforms are implemented => the risk of segmentation of Europe is reduced
– No risk of monetary instability among country members (no currency war, no speculation)
– The euro as a means to counter balance the power of ‐the dollar & yuan in the world economy
• Costs & risks – High political cost for national governments (nationalist political parties) – The euro can benefit to all country members only if neoliberal policies
are given up - what chances does this scenarion really have within reasonnable delay?
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Points of agreementsConditions for a single currency:• Mundell conditions, hence the following• Same currency would mean similar inflation and similar interest rates.
(Different inflation in the US, but more mobility).Conditions of area government in each currency level + Internatioanl:• Lending for productive investment, own housing, etc… but not for
speculation purposes.• Democratic institutions to control all aspects of monetary policies :
exchange rates, capital flows, money creation, central bank rates.• Democratic institutions to coordinate tax and social issues, trade balance.• Convergence criteria 3%/60% should not be imperative• Capital flow controls between zones with different currencies• SDR instead of $ as international currency• Actual governance not to be confused with government• Debt auditing to possibly cancel illegitimate parts
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Discussion points• What would be today IMZ in Europe?• MU first to trigger economic convergence, or economic
convergence first? Is there a political will?• Single €, common €, national currencies? Define the EU project!• What room for local currencies?• Is 2% inflation target adequate?• Which strategy? (Menacing) to withdraw?• Conditions for leaving the EZ: reimburse same figures but in
devaluated money (which one way to restructure debt)?• Is European bonds a sufficient target?
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Aknowledgements
• Miguel and Dominique• Lapavitsas, Lordon, and others….