Bill Mitchell — The EMU reform ruse – Part 2

This blog continues the discussion from yesterday’s blog – The EMU reform ruse – Part 1 – where I consider the reform proposals put forward by German academic Fritz Sharpf, which have been held out by Europhile Leftists as the progressive way out of the disaster that the Eurozone has become. Yesterday, I considered his first proposal – to continue with the enforced structural convergence to the Northern model – the current orthodoxy in Brussels. Like Sharpf I agree that the agenda outlined in the 2015 The Five President’s Report: Completing Europe’s Economic and Monetary Union would just continue the disaster and would intensify the political and social instability that will eventually force a breakup of the monetary union. Sharpf’s second proposal is that the EMU dichotomise into a Northern hard currency bloc while the Southern states (and others less inclined to follow the German export-led, domestic-demand suppression growth model) reestablish their own currencies and peg them to the euro with ECB support. While it is an interesting proposal and certainly more adventurous than the plethora of proposals that just tinker at the edges (for example, European unemployment insurance schemes, Blue Bond proposals and the like), it remains deeply flawed. While it is assumed that the Northern bloc would comprise core European nations such as Germany and France, it is not clear that either would prosper under the new arrangement. France and Germany were never been able to maintain stable currencies prior to the EMU. Further, the ‘exit’ proposal ties the poorer nations into a vexed fixed exchange rate arrangement, which would always compromise their domestic policy freedom, just as it did under the earlier versions of the Snake or the European Exchange Rate Mechanism (ERM). Far better to just break the whole show up and let the nations go free with floating exchange rates....

Bill Mitchell – billy blog
The EMU reform ruse – Part 2
Bill Mitchell | Professor in Economics, University of Newcastle, New South Wales, and Director of the Centre of Full Employment and Equity (CofFEE)

Houses and Holes — BIS warns of emerging markets contagion

The Bank of International Settlements has warned that contrary to the reassuring words of “analysts” everywhere, emerging markets are vulnerable to a liquidity squeeze and it has identified the mechanism of why:

Tighter global integration of markets increase risk of contagion.

MacroBusiness
BIS warns of emerging markets contagion
Houses and Holes

Andrea Terzi on understanding the EZ dynamic in terms of Germany and France

Under the EMS, French fiscal policy was constrained by the policy of fixing the value of the French franc to the German mark. To make this problem particularly acute, France was pegging its currency to the anchor of a trade surplus country. Pegging your own currency is always a constraint on your fiscal policy. Pegging your currency to an important trading partner, whose growth model is export-driven, can make things particularly bad. Your partner is redirecting demand from your citizens to its firms by taking advantage of a fixed exchange rate, and you need to create demand through net government spending, but this is prevented by the exchange rate peg. It’s a catch-22.

So went the France-Germany asymmetry during the EMS.

France and Germany must have genuinely thought that a common currency would address the asymmetry. Germany, on its turn, was facing the problem of periodic realignment (revaluations) of the peg that made its export industry losing profits. And indeed a solution to the asymmetry could have been an EMU with federal net government spending. This would have spared France the need of creating demand internally, as demand would have been created instead at the ‘federal’ level.
Nothing like this, however, was ever seriously designed. And the bottom line is that France got trapped into the same situation: pegging its money, this time ‘hard’ pegging its money, with an export-led trading partner.

 Mecpoc
A narrow path ahead for Europe: And it’s France and Germany, again
Andrea Terzi