PROBLEMS WITH THE DESIGN OF THE EURO: Responses MMP Blog #16

Sorry, got to be brief—for an explanation go here:

I’ll have to punt a bit on some of the techie details onoperations within the Euroland. Maybe we can come back to them later.

Q1 Anon: Weren’t the design flaws of the euro intentional,that is, what neolibs wanted?

A: Yes, probably true. I’m not an expert on Europeanpolitics. But let me say that there is no evidence that they thought it wouldcome to this—with a likely default by Greece that will escalate into a possibledestruction of the whole project. By contrast, MMTers did!

Q2 Roberta: We’re all artists.

A: ??? I guess so!

Q3 Philip: How do governments borrow from the ECB?

A: Well, technically that is prohibited—the ECB was not tobuy government debt. That was the beauty of the system—governments had to sellto markets, therefore they would be subject to market discipline and would notrun up excessive deficits.

Hey, how’s that working for them so far? Not so good. Youall know the stories. Goldman helped them hide the debts. Markets did notunderstand that these are not sovereign nations—until it was too late. AndFrench and German banks loaded up on high risk Greek debt. The rest is history;or at least will soon be. Market discipline does not work. Ever. Never.

Q4 James: Aren’t euro nations much like US states?

A: First prize! By Jove he’s got it. That’s the problem.They are like US states with no Washington backing them.

Q5: Rvaucbns: What is the endgame for the euro?

A: I urge you to read Dimitri Papadimitriou’s piece over atHuffPost:

I’m planning to write something up soon.

Q6: Neil: what about lender of last resort in the EMU?

A: By design there was not supposed to be one. Marketdiscipline was supposed to work. Each individual country was supposed to beresponsible for its own banks—but since they were not sovereign they could notdo a Timmy-Benny $29 trillion bail-out. The ECB lends to individual CBs againstcollateral; they’ve had to widen what was acceptable. But it won’t be enough.

Q7: What is SGP

A: Yes it is stability and growth pact

Q8 Joe and Hugo: Are there net financial assets in Euroland?

A: Yes; first there are dollars. In Euros, yes individualnational governments create them but as discussed in the blog they’ve got toworry about clearing across borders since ultimately those are convertible ondemand to ECB euro reserves and the ECB is not supposed to buy government debt.

Q9 Dario: why do markets only “partially” recognize thatdowngrades of sovereign debt do not matter?

A: They do not fully understand, so there is usually a bitof uncertainty surrounding a downgrade. Then they realize the sky did not fall,markets for sovereign debt recover, and rates go back where they were. Unlike adowngrade of Greek debt.

NEXT WEEK: We might take a bit of a diversion because we gota long and interesting comment on the differences between real and financial. Ithink it will be worthwhile to get all that clear.