Ken Rogoff: For Europe, Debt Relief for the Periphery, Not Fiscal Expansion at the Core
There are two ways to think about why North Atlantic economies are depressed. The first is that would-be spenders (including people and businesses that buy durable capital goods) want to spend less than income earners would earn if there were full employment. The second is that would-be lenders want to lend more than would-be borrowers would want to borrow and than financial intermediaries would be willing to let them borrow if there were full employment. These two ways of thinking about it are, in the math, identical. But they highlight different aspects of the situation.
Now comes the very smart Ken Rogoff to say:
Europe’s Lost Keynesians: There is no magic Keynesian bullet for the eurozone’s woes. But the spectacularly muddle-headed argument nowadays that too much austerity is killing Europe is not surprising. Commentators are consumed by politics, flailing away at any available target, while the “anti-austerity” masses apparently believe that there are easy cyclical solutions to tough structural problems.
The eurozone’s difficulties… stem from European financial and monetary integration having gotten too far ahead of actual political, fiscal, and banking union. This is not a problem with which Keynes was familiar, much less one that he sought to address… any realistic strategy for dealing with the eurozone crisis must involve massive write-downs (forgiveness) of peripheral countries’ debt. These countries’ massive combined bank and government debt… makes rapid sustained growth a dream…. Northern eurozone countries (including France) will see hundreds of billions of euros go up in smoke. Northern taxpayers will be forced to inject massive amounts of capital into banks, even if the authorities impose significant losses on banks’ large and wholesale creditors, as well they should. These hundreds of billions of euros are already lost, and the game of pretending otherwise cannot continue indefinitely.
A gentler way to achieve some modest reduction in public and private debt burdens would be to commit to a period of sustained but moderate inflation.… It would have been a great idea four and a half years ago. It remains a good idea today.
What else needs to happen? The other steps involve economic restructuring at the national level and political integration of the eurozone….
Temporary Keynesian demand measures may help to sustain short-run internal growth, but they will not solve France’s long-run competitiveness problems. At the same time, France and Germany must both come to terms with an approach that leads to far greater political union within a couple of decades. Otherwise, the coming banking union and fiscal transfers will lack the necessary political legitimacy…. If the eurozone is to survive, the northern countries will have to continue to help the periphery with new loans until access to private markets is restored. So, given that Germany will be picking up many more bills (regardless of whether the eurozone survives), how can it best use the strength of its balance sheet to alleviate Europe’s growth problems?
Certainly, Germany must continue to acquiesce in an ever-larger role for the European Central Bank, despite the obvious implicit fiscal risks…. Debt write-downs and guarantees will inevitably bloat Germany’s government debt, as the authorities are forced to bail out German banks (and probably some neighboring countries’ banks). But the sooner the underlying reality is made transparent and becomes widely recognized, the lower the long-run cost will be. To my mind, using Germany’s balance sheet to help its neighbors directly is far more likely to work than is the presumed “trickle-down” effect of a German-led fiscal expansion. This, unfortunately, is what has been lost in the debate about Europe of late: However loud and aggressive the anti-austerity movement becomes, there still will be no simple Keynesian cure for the single currency’s debt and growth woes.
Ken tends to naturally think in the debtors-creditors framework. I tend to think in the spending-income framework. Although the math of each is consistent with the math of the other--in fact, you can turn one into the other via algebra--this does, I think, drive a difference in our orientations.
From my perspective, if the German government spends on Germans, it produces a boom and inflation in Germany. If the boom continues long enough and is strong enough, German internal prices and costs rise--and southern Europe's and France's competitiveness problems melt away as the burden of the outstanding debt is reduced as well. Yes, it would be very nice if France and southern Europe as well were to undertake thorough-going pro-productivity pro-competitiveness social reforms, and Germany should demand them as the price of its raising its debt and borrowing to spend on Germans and so create a moderate-inflationary boom. But those reforms are not of the essence of the current short-term problem, which is too much debt in the periphery and too-high wage levels in the periphery and in France relative to Germany.
By contrast, if the German government borrows to spend making Spanish creditors of Spanish banks whole--well, that does not generate the inflation in Germany that is the easiest path to eliminate Europe's internal structural wage imbalances, and it does generate a massive defeat for the government that adopts it in the next elections in the Bundesrepublik.
As I see it, fiscal expansion in Germany is a stone that kills four birds: the boost-general-European-demand bird through directly boosting spending so that it matches full-employment incomes, the eliminate-structural-wage-level-imbalances bird through inflation, the through-inflation-impose-haircuts-on-creditors bird, and the make-the-German-electorate-happy bird. By contrast, as I see it at least, Ken's stone is a much more efficient stone, but it only hits two birds: the impose-haircuts-on-creditors bird, and the boost-general-European-demand bird as reductions in debt burdens diminish the desire of those on whom haircuts have been imposed to lend in the future and also increase the desire of those who were underwater to resume normal borrowing patterns. To hit four birds with one stone is, I think, better than to hit two.
But I may be wrong: Ken is one of those people whose judgment is significantly more likely than not to be better than my own.
