Why would any nation want to join the Eurozone?

The Wall Street Journal carried an article on Wednesday (September 12, 2012) – Latvia Remains Keen on Euro – which reported that the queue to enter the Eurozone remains healthy. I immediately asked why? There is a queue of nations (east and Baltic) who desire to join the Eurozone. The public debate in those countries must be so distorted by the elites for the public to go along with that. The very small gains that a nation might enjoy by joining the common currency (for example, lower transaction costs) will be dwarfed by the economic damage that membership will bring. Nations that join the Eurozone in its present structure are effectively signing a death warrant. The speed of the death will be a direct function of how competitive they are in relation to Germany. There is no case to be made for Latvia or any other nation to enter a monetary system that is incapable of effective functioning. Major changes would need to be made to the basic design of the system for it to be viable. I sense that there is no will in Europe to make the necessary changes and the zone will continue its slide down into further malaise. Why would any nation want to join the Eurozone?

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When central bankers debunk mainstream monetary theory

Somehow research gets published which contradicts the basic propositions of mainstream monetary theory yet it just gets buried and the commentariat continue on as before sprouting the myths that now occupy us on a daily basis. In February 2010, the Bank of International Settlements (BIS) published a working paper (No. 297)- The Bank Lending Channel Revisited – which falls into this category. It argues categorically that the mainstream propositions about money and banking are incorrect and uninformative. Its essential insights confirm the fundamental propositions of Modern Monetary Theory (MMT) – which when translated into the policy space – would suggest that monetary policy is not the ideal tool to resolve a major collapse in private aggregate spending and that fiscal policy will not drive up interest rates and crowd out private spending. Why these papers are suppressed in the public domain by the commentators makes for interesting speculation – all of which impugns the motives of those who hold themselves out as experts but, in fact, just peddle lies. The problem for all of us – but more so the unemployed and poor – is that they are influential lies.

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The ECB plan will fail because it fails to address the problem

Last Thursday (September 6, 2012), the ECB released details of its new program the Outright Monetary Transactions (OMT) which will replace the Securities Markets Programme (SMP). The latter saw the ECB buying Eurozone government debt in the secondary markets. In the OMT Announcement – the ECB declared it would set “No ex ante quantitative limits are set on the size of Outright Monetary Transactions”. The ECB decision to purchase unlimited volumes of government debt means that any private bond trader that tries to take a counter-position against any Eurozone government will lose. It means that the central bank can set yields at wherever it wants including zero. It means that all the mainstream economists are wrong if they claim that deficits drive up interest rates to the point that governments become insolvent because the private bond markets will refuse to purchase their debt. But once you understand the significance of that you also soon realise that the ECB rescue plan will fail. Why? Because it doesn’t address the core problem – that southern Europe is in depression and the only way out is for budget deficits to expand. The ECB will buy unlimited government bonds – but only if they have succumbed to a fiscal austerity package that ensures their growth prospects deteriorate even further.

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The myth of compassionate deficit reduction

I was going to write about last week’s ECB decision to purchase unlimited volumes of government debt which means that any private bond trader that tries to take a counter-position against any Eurozone government will lose. It means that the central bank can set yields at wherever it wants including zero. It means that all the mainstream economists are wrong if they claim that deficits drive up interest rates to the point that governments become insolvent because the private bond markets will refuse to purchase their debt. I will write about that tomorrow as I have some number crunching to do. But today – a related story – the myth that there is such a thing as a “good” budget deficit reduction when private spending is insufficient to maintain full employment. That should occupy us for a few thousand words.

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Saturday Quiz – September 8, 2012 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you understand the reasoning behind the answers. If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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European Commission – Jobs for Europe Conference

I have been in Brussels this week as an invited speaker at the – Jobs for Europe: The Employment Policy Conference – being staged by the European Commission (September 6-7, 2012). One of the five main topics is “Pathways to full employment: job guarantee, social economy, welfare to work”. I gave a presentation yesterday on the Job Guarantee. The video of the presentation is available below.

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Aggregate Demand Part 3

I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to complete the text by the end of this year. Comments are always welcome. Remember this is a textbook aimed at undergraduate students and so the writing will be different from my usual blog free-for-all. Note also that the text I post is just the work I am doing by way of the first draft so the material posted will not represent the complete text. Further it will change once the two of us have edited it.

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Australia – a deteriorating labour market with all the indicators in decline

Today’s release by the Australian Bureau of Statistics (ABS) of the Labour Force data for August 2012 reveals a deteriorating labour market with all the indicators of merit in decline. Total employment fell, labour force participation fell and hours worked fell. Unemployment fell but only because the decline in the labour force outstripped the decline in employment – which means that the decline in unemployment was due to an increase in hidden unemployment. A decline in unemployment driven by a rise in hidden unemployment is not virtuous. Certainly this data is not consistent with any notions that the Australian labour market is booming or close to full employment. The most continuing feature that should warrant immediate policy concern is the appalling state of the youth labour market. My assessment of today’s results – worrying with further weakness to come. The government has no case to make for its pursuit of a budget surplus in the next fiscal year.

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Australian real GDP growth weakens and there is worse to come

When the March-quarter National Accounts data came out it showed very strong growth which seemed to run counter to the other indicators that were available at the relevant time. My blog – Australian national accounts – strong growth creates a puzzle – focused on the conflict between the poor employment growth and the strong GDP growth. Today – the Australian Bureau of Statistics released the – Australian National Accounts – for the June 2012 quarter and the results make much more sense. The Australian economy slowed in the June quarter and the growth performance was more consistent with the other indicators that we have at our disposable. The latest data available suggests that the slowdown in June has accelerated into the third-quarter but we will have to wait until December to verify that claim. Today’s data release also continues to demonstrate the growth impact of on-going budget deficits even if the Federal Government is doing what it can to undermine that contribution. Without the public sector contribution to real GDP growth, the overall outlook would look very weak.

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