In this article, Antonia Fatas argues that exchange rate regimes (like the euro) have limited power to explain differences of economic outcomes. It is based on an article by Andrew K. Rose, which looks at the currency regimes of smaller (mainly developing) economies during the global financial crisis.Bond Economics
Paul Krugman responded here, noting that bond yields only rose due debt concerns in the euro countries. From the point of view of the bond markets, that is a crucial point: a country that does not control the currency of its debt emissions is just another credit market borrower, and can end up facing prohibitive default risk premia.
Since his article illustrates that point well, I will discuss here the non-interest rate aspects of this debate. The currency regime is a critical component of Modern Monetary Theory (MMT), and so this debate is very important for understanding MMT.
Currency Regimes Matter If Policymakers Understand Them
Brian Romanchuk
One could argue that the ECB could have allowed policymakers to avoid austerity policies; however, the ECB argued that it was following European law. I have no idea whether there was a legal way to avoid austerity policies, but it was clear there was no political will to do so
ReplyDeleteEuropean law only prohibits intervention by the central bank on primary markets; there is no law or stipulation against the ECB buying up debt on secondary markets, altough this has always been frowned upon, philosophically.
The proof that secondary market intervention is perfectly legal is to be found in the (August 2012) decision to admit the possibility of OMTs to support peripheral debt (though with attached conditions that will impose austerity on eventual takers) as well as in the previous SMP program.
In other words, there is no legal obstacle against the ECB applying , say, massive doses of QE that would automatically support the prices of periphery bonds and thus avoid and/or overcome the present peripheral debt crisis.
Of course, the ECB's - and more generally the EU's - neoliberal conceptions would block that possibility in practice. Austerity is a key part of the recipe to impoverish the periphery; but de jure no, it would not be impossible to have the ECB "allowing" states to induce in massive deficit spending.