On 31 May 2016 Progressive economy Scientific Board awarded Thomas Fazi (eunews.it/oneuro) and Guido Iodice (Keynesblog.com) for the paper “Why Further integration is the wrong answer to the EMU’s problems: the case for a fiscal Decentralised stimulus “. What follows is the speech given by Guido Iodice at the awards ceremony.
[Per i lettori italiani: qui un articolo che illustra il paper di cui parla questo post]
Why further integration is the wrong answer to the EMU’s problems: the case for a decentralised fiscal stimulus
Thank you Professor Bofinger, thank you members of the Progressive Economy Scientific Board.
Thomas Fazi and I are honoured to receive this award.
We also want to thank Mr Pittella for his commitment to a better Europe during the Greek crisis.
In our opinion the euro has two original sins:
1) constraining the fiscal autonomy of members states without transferring their spending power to a European authority;
2) depriving member states of a true lender of last resort.
This left member states defenceless in the face of the 2008 economic crisis.
The political response made things even worse. We got:
– further restrictions on the fiscal autonomy of member states
– no increase in the fiscal capacity at the “federal” level
The result has been a deeper and more prolonged crisis than the Great Depression. And even a humanitarian crisis in some member states.
There are now a number of “federalist” proposals on the table that want to address the Euro’s structural flaws by creating a fiscal and political union. Lets’ call it: ‘The United States of Eurozone’
Since we are European, Socialists and too idealistic to give up the Altiero Spinelli’s dream, we would welcome this development, if only it were a true federalist outcome.
But the ‘United States of Eurozone’ envisioned by the European authorities is not the fiscal and political union advocated by progressive federalists, and raises a number of worrying issues from both political and economic standpoints.
Politically, it raises serious problems of accountability and democratic scrutiny and participation.
Economically, it doesn’t foresee any real spending powers for this new supranational authority.
The danger is to create a European budget “lord” with the power to reject national budgets:
It’s not hard to see why such a development would exacerbate the union’s centrifugal tendencies.
Yet, we have to acknowledge that the political conditions are not ripe for a move towards a fully-fledged fiscal and political union, along the lines advocated by progressive federalists.
So – excluding a eurozone break-up scenario – what options do we have within the context of the Eurozone?
The solution we propose is that of a decentralised fiscal stimulus.
This would address both of the euro’s original sins: the fiscal one and the monetary one.
Greece would be a remarkable test for the ideas expressed in our paper.
This is how it would work:
1) The Eurogroup would grant Greece sufficient fiscal space to offset the lack of effective demand in that country (this would mean allowing it to run a substantial fiscal deficit).
2) The Greek government would then issue bonds on the Greek market – enough to accommodate the desire for safe assets by national economic agents.
3) The European Central Bank would declare that Greek government debt is equivalent to German public debt. Why? Because this is the way to ensure that a deposit in a Greek bank is equivalent to a deposit in a German bank.
In other words, it is a way of ensuring that a “Greek euro” is equivalent to a “German euro”.
In practical terms, the ECB would simply have to pledge to do ‘whatever it takes’ to keep the interest rate differential between member states below, say, 30 basis points.
What would happen?
1. On the financial side, the Greek bonds crisis would come to an immediate end, because the ECB would do “whatever it takes to preserve the euro”, and “whatever it takes to preserve the eurozone”.
2. On the real economy side, if the Greek government exploited the fiscal space for high-quality public investment and for the deleveraging of the private sector, the unemployment crisis would be on the way to recovery.
Such a solution would have a number of economic and political benefits: not only it would have an immediate macroeconomic impact, it would also engender a more positive attitude towards European institutions, thus slowly re-creating the conditions – in the longer run – for moving towards a true solidarity-based and democratic fiscal and political union.
Thank you very much.