Scoop!

Frankly, it was a bag o’ nothing. They should do this, they should do that. I agree, but so what? IMHO, there’ll have to be default by a few countries to put the fear of – well, the Great Depression and Hitler – into the hearts of the N. European bankers.

You’re calling for the European Treaty to be completely renegotiated (more parliament powers, a Senate, etc).

Last time this was tried it started in 2001, became the European Constitution in 2004, required various referenda a couple of which failed to pass it, then it became the Lisbon Treaty and came into force in 2009.

Umm, are we really thinking that the euro is just going to stumble on until 2019? That there won’t be a resolution one way or the other before then?

4 might be a bit pessimistic; I am pretty sure that the euro is going to still be around in three weeks’ time.

Well, you’re not helped by the subhead (“the radical solution that could stave off disaster”), which is presumably nothing to do with you.
But you appear to be looking under the lamppost because the light’s better there. I mean this sincerely and without snark. One obvious point: a highly centralised Europe is one thing, a Europe with a proper democratic mandate is another. Crisis measures that involve grabbing for one will likely leave out the other.
If we’re talking about the faraway longterm, as Wolfgang Schäuble is careful to, then fine. But I doubt that’s what the Daily Beast paid you (or neglected to pay you) for. I’ve no problem with you proposing “an elected European President, who controls a beefed up European Commission with the power to initiate legislation … an invigorated European Parliament with real authority over a larger budget [and] a new European Senate, with veto power”. But does it cut it as commentary on this crisis? No, no, no.

Europe may yet have better luck with this than it has in the past, especially if the only alternative is to sit back and wait for WWI. I agree that if the present leadership can continue to fake things, they probably will — it’s the easier course. Only when it becomes obvious that there truly are no credible alternatives is it conceivable that any of them would seriously consider engaging John and Henry’s modest proposals, let alone put Joschka Fischer’s United States of Europe on the table in Brussels.

So tell me, does anyone here really think that the status quo ante has a future? I mean, honestly, if the latest whiz-bang is leveraged Eurobonds, isn’t it perfectly reasonable to consider that the end might be nigh?

Any help with the Evelyn Waugh reference here? The last 10 minutes spent on google and reading famous quotes from his writings has not helped me figure it out.

Fiscal union would need more than hard Keynesian rules, which in the end boil down to a this-time-we-really-mean-it Stability Pact. It’d need ongoing fiscal transfer. And not as a series of supply side investments on the model of the structural funds, but instead something conceived and justified as a system of continental macroeconomic management.
The obstacles to fixing Europe’s democratic deficit are well known. But even assuming they can be successfully overcome, I’m not convinced people will be prepared to swallow all of the above. What’s more, none of that would prevent a future screwup in private sector lending, which contributed massively to the banking crisis we’re now facing.

I realise that you’re looking for a solution, and I’m sorry to be so sunk in negativity. In mitigation, there’s a lot of it about. If I have a hope, it’s for Steve’s option 2, above. Greece defaults. The worst contagion fears (eurozone collapse, worldwide bank runs) turn out to be Y2K-bug hyperventilation. And the non-Greek PIIGS are slowly nursed back to health. But I admit this seems less likely with every day that passes. If enough people look around to see which banks can’t be trusted, it could all get very bad very quickly.

Just to be clear, hard Keynesianism is the idea that budgets should be in balance over the business cycle. This idea:

* Has no basis in anything Keynes wrote.

* Implies that the debt-GDP ratio goes to zero in the long run, without any explanation of why this is desirable.

* Implies that desired private savings exactly equals desired business investment at full employment, without any explanation why this should be so.

* Does not rest on any analysis of why the magic number of zero is preferable to some other small positive or negative number.

* Is based on the idea that the inadequacy of policies to boost aggregate demand in Europe is due to a lack of fiscal space, when this is only true for Greece. Most of the worst hit countries were in fact following the hard (pseudo-)Keynesian prescription of running surpluses prior to the crisis.

In short, it’s an idea held up by nothing but repeated assertion, that keeps staggering forward regardless. A zombie, if you like.

Yes, the JQ/HF proposal is a fine solution, but alas, the clock is ticking, ticking …

Meanwhile, Greece retained Lee Buchheit of Cleary Gottlieb (NYC) to represent its sovereign (default) interests some months ago. Buchheit was the legal technocrat who oversaw Iceland’s default, and has already (2010) outlined how he envisions a Greek default at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1603304.

The Greek press is estimating a 50%+ haircut when d-day arrives; the smoke-and-mirrors in Brussels/Frankfurt/Athens, it is claimed, is basically intended to afford breathing room for French and German banks exposed to Greek sovereign debt (likely sliced and diced in the form of AAA CDOs) to re-capitalize. The general suspicion is that the announcement is being postponed for (soon) after the G-20 meeting in Cannes Nov. 3-4.

HV @ 8:58pm — I don’t think that would accomplish much. The issue here is with imbalances within the Eurozone. A synchronized move might make the Eurozone more competitive overall, but it wouldn’t help the peripheral countries devalue vs. the core, which is what’s really needed.

And I’m not sure why you’d want to peg to the dollar. That seems like just compounding the original mistake, creating an even-larger effective currency zone without the needed fiscal integration.

Isn’t the obvious paradox that while you can “imagine” how wonderful a more politically integrated Europe would be if only it were truly democratic, I don’t really see the voters agreeing that what they need is a democratically legitimate European president and Senate. I imagine the enthusiasm would be close to American’s enthusiasm for a democratically empowered President of NAFTA. And I also imagine at least Germany’s court would rule such a transfer of sovereignty unconstitutional.

bh, good point! I’d forgotten that this was inflate away the debt and not boosting output.

The issue here is with imbalances within the Eurozone.

I know, there are serious imbalances within the Eurozone, that’s an empirical fact. But I don’t understand how it’s logically possible to have significant imbalances within a relatively homogeneous (wrt infrastructure, levels of taxation, skills, etc) region with common currency, no tariffs, and no borders. It doesn’t seem to make sense; imbalances should self-correct. Something’s missing from the typical analysis.

I also don’t see a non-catastrophic way out of the euro – I’m not sure if other commenters have a different analysis or just more tolerance for catastrophe

Suppose:

1. There is no non-catastrophic way to get out of the euro, and

2. There is no non-catastrophic solution to the current crisis that can be achieved while staying in the euro, and

3. The euro is at least partially responsible for the current situation, and the limited menu of possible policy responses.

Then the best thing to do is to take the catastrophic outcome that gets you out of the euro, because if you take the catastrophic outcome that keeps you in the euro, you’re also setting yourself up for more euro-caused crises later. Catastrophe later may or may not be preferable to catastrophe now, but catastrophes now *and* later is clearly worse than either one alone.

1 is your own premise, and 3 seems pretty clear at this point, so any argument for staying in the euro must refute 2. How?

But in the same article, you say,

Keynesianism demands more, not less, fiscal rectitude in normal times than does the orthodox theory of balanced budgets that underpins the EU. John Maynard Keynes argued that surpluses should be accumulated during good years [no he didn’t, you just made this up] so that they could be spent to stimulate demand during bad ones. … If anything, “hard” Keynesianism suggests that the problem with the macroeconomic rules governing the euro is not that they are too tough and too detailed but that they are not tough or detailed enough. States in the eurozone should not be allowed to run moderate budget deficits in boom years, the Keynesian argument goes; instead, they should be compelled to run budget surpluses.

You are arguing that if European states had run surpluses during the good times, they could have avoided the collapse in demand after 2007. But of course, Iceland, Ireland and Spain were all running substantial budget surpluses in the years leading up to the crisis, so the idea that this offers some protection against crises is evidently false. That’s strike one.

You say that governments should run surpluses during “good times”, without providing any evidence that desired private savings exceeds desired business investment at full employment. There is no a priori reason to assume this will be the case; if it’s not, then full employment will require either a budget deficit to fill the gap, or an export surplus. That’s strike two.

More broadly, there’s no analysis of *why* good-times surpluses are desirable, except for a vague claim that the surpluses can then be “spent” in recessions. This implies that government are unable to borrow, an assumption that you understandably don’t spell out since it’s so obviously silly. In fact, there is no evidence that countercyclical policy needs to be paid for in advance, except in the context of a foreign-exchange constraint. We’ll call that a foul.

You explicitly say that current rules are “not tough enough”, “lack rectitude”, and should be “stricter”. The current limit of 3% average deficit over the cycle, assuming 5% nominal growth, implies a debt-GDP ratio converging to 60%. You evidently think the targets should be lower. How much lower? And how do you know? Since the published piece gives no hint of an answer, that’s strike three.

Maybe it’s time to better address “hard Keynsianism”, i.e. the New Keynesian account of the inter-temporal budget constraint, and how accurate such thinking is. In the first place, it needs to be replaced with the Wynne Godley account of national income accounts, (i.e. GDP, etc.), stressing inter-sectoral balances in any given period, between the private business sector, the private household sector, the government sector, and the foreign sector, (i.e. the trade/CA imbalance), which, as a matter of accounting identity, must always sum to zero, regardless of what happens behaviorally/causally. (If an IMF acolyte such as Martin Wolf gets it, WTF?) The core Euro-zone problem, (as also, more generally, the global crisis problem), is rooted especially in those CA imbalances. Only Greece is especially afflicted by excessive public deficits due to a bloated, inefficient public sector, (and rampant tax-evasion and corruption, primarily, by elementary logic, on behalf of the rich), while AFAICT Portugal is just a matter of a backward, generally inefficient economy in advanced productivity terms. Spain and Ireland were, in fact, poster-children of neo-liberal fiscal restraint, except for the huge burgeoning of private debt-loads and corresponding CA deficits, which then got transferred onto the public fisc, by hook or by crook. IT”S THE OVERALL DEBT PROFILE THAT MATTERS, NOT JUST THE PUBLIC DEBT!

The second point is that, by the same auspices, public debt is providing “savings” to the private and foreign sectors, depending on the exact situation and profile. But public debt is not eo ipso public spending, i.e. consumption, (even if that does good stead in maintaining fairly equitable READ) . A good part of public debt might just as well be accounted public investment spending, it being a mere convention of N.I.P.A. accounting that it amounts to sheer spending, (since the inventors of N.I.P.A. despaired of accounting for the productivity of governmental activities, a gross simplification for “technical” reasons). Public spending is not just necessary to maintaining functions and institutional supports for the operation of “private” markets, and for controlling the distribution of income/wealth and opportunity-structures in ways that don’t diminish READ, but public investment and publicly-guided industrial policy, (as well as regulation of other sectors, of course), is essential to maintaining and developing a viable economic structure under continuing technical and global change.

The “hard public budget constraint” is based on a bias toward the “private” corporate and financial economy, as the source of investment and economic growth and “stabilization”, based on the “crowding out” hypothesis of the effects of public spending, whether debt-financed or monetized. But it fails to consider the “crowding-in” hypothesis, that public investment, regulation, and policy guidance provides opportunities for renewed private investment, especially in the light of the need for increased resource efficiency and the resistance of market-dominant incumbents. I.e. the restructuring of economic production-systems, in a non-IMF, financialized sense. Given the high “hurdle rate” of “private” investment, when faced with high, upfront, fixed capital costs, (which incumbents, kinda by definition, have already incurred and will seek to defend, by hook or by crook). A fine example of this point is the Obama/Geithner administration’s proposal for an “infra-structure development bank”, which is just standard neo-liberal fare, “private-public partnership”, since, by most estimates, the only difference between public borrowing and “PPP”, is that the latter will cost between 200-300 bps. more in interest costs, just a further example of the effects of “financialization”.

Finally, there is the question of on just what basis the path of public debt is projected. Leaving aside the prospect that some debt monetization could induce salutary forms of inflation , which conventional monetary policy apparently can not, thereby burning off some of the excess accumulation of private debt-loads by increasing nominal GDP and thereby also increasing the feasability of direct principal reductions, as well, the projection of future public debt levels is not only frequently , (or, beyond a few years out, continuously), wrong, but some economic pathway, (or “model”), needs to be provided to make the case of “unsustainable” public,- (and private!),- debt burdens going forward. As can be seen, e.g . in disputes over this issues between Krugman and Jamie Galbraith, some special assumptions are being assumed without being provided, (such as maybe the continuance of high CA deficits, or the failure to contain health care costs in line with the OECD average, etc.). Hectoring about public debt levels without any further analysis and differentiation is just more of the same-old. Since it is the debt/GDP ratio and not the deficit that is the issue,- (and not just the public debt!),- which will vary, increase or diminish, for various situational reasons, not least economic cycles and growth rates, why shouldn’t the problem of debt-GDP ratios be resolvable through future “growth” paths, rather than relying on present “prudence”, (which all to frequently, is and has been no such thing)?

But the why should Quiggin, an Aussie, or Farrell, an ex-pat Irishman in the U.S., really care about the euro-zone crisis, except for merely idealistic reasons of normative prescriptivism? Unless, of course, it’s that we’re all bound together by the system of globalized, financialized capitalism, like a knife-fight in a chain-gang.

A minor dishonesty in the hard Keynesianism piece that I didn’t mention is their claim that higher growth and inflation “helped” reduce debt-GDP ratios in the postwar decades. In fact, in most countries higher nominal GDP growth (plus low interest rates) did all or almost all the work

Actually I should withdraw this. I know it is true for the US and for lots of other countries, but I’m not sure how true it is for Europe. I strongly suspect it is, but that’s not enough confidence to justify the term dishonest. So I apologize for that.

“In the long run, the only solution is fiscal union with hard Keynesian rules, and that can only be managed with a democratic union.”

No, that’s one of two possible long term solutions. The other is to break up the euro, possibly even the EU.

Of course, my personal prejudices, being UKIP as I am, are for the second. But stating that the only possible solution is fiscal union is pre-supposing that a continuation of the eurozone/EU is in itself a desirable goal.

And whether that is so or not is actually the discussion that should be taking place.

If the rate of interest is equal to the rate of growth of nominal income (and it’s usually close), then the debt/income ratio is stable if and only if the primary budget balance (excluding debt service) is zero.

That equivalence doesn’t make sense to me; I wish I understood this better. Allow me a couple moments of stupidity to sort this out.

Suppose you run a balanced budget during times when there is a tight labor market, setting whatever target levels of unemployment are deemed appropriate for each sector of the economy.

When unemployment exceeds the target for a particular sector, suppose you pay people to undertake training and/or accept public-sector jobs that would exercise skills relevant to that sector, and you make the cost of hiring cheaper by reducing those employers’ payroll taxes. Make sure that the offered pay rate is between, uh, say, 80% – 90% of what roughly equivalent jobs were paying in the private sector. (Enough of a decrease so that still-employed folks have little incentive to switch, but still high enough to sustain non-leisure expenses for newly unemployed folks.)

To pay for it, don’t borrow, per se, just mint-and-print whatever amount of money is necessary.

I gather that, under this circumstance, banks will want to increase interest rates to compensate for the risk of inflation. Accordingly, we’d need to penalize them for attempting to charge interest in excess of some proportion deemed acceptable, depending on the time horizon. As a result, banks will probably have a hard time turning a consistent profit, because they won’t be allowed to charge rates that far exceed the future value of present money–so banking won’t be a terribly alluring profession to wealth-accumulation-seekers, and probably many banks will have to convert to nonprofit entities, e.g. credit unions. (Shucks. What a shame.)

Even with anti-usury laws firmly in place to ensure inflation is stable, this set of policies will still lead to a higher mean rate of inflation. That’s ok, so long as there’s a strong safety net–we don’t want people saving up money long-term, the value of hoarded money should decrease in a nontrivial way over the course of a generation. I don’t really understand why we want to construct an economy in which it makes any sense for individuals to hoard or save long-term.

In general. Taxes serve to reduce the available money supply, and that’s literally the whole point of taxes; public sector expenditures serve to increase the money supply, an increase which we stabilize via taxation; everything the government does is basically a particular form of manipulating or redistributing the money supply. I don’t really understand why we interpret taxation and expenditure (and public borrowing and etc) in any other context than that.

…I acknowledge this may be incoherent and/or might be ignoring crucial factors, and I’ll be happily receptive to any explanation of how I’m just being dumb.

@46

Both the Maastricht rules and the original “hard Keynesian” piece say nothing about primary deficits. They both refer to overall deficits.

If you want to switch to arguing about primary deficits, fine. But then you should acknowledge that the vast majority of European countries *were* running substantial primary surpluses in the period leading up to the crisis. Over the decade 1998-2007, Austria, Belgium, Estonia, Finland, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Slovenia and Spain all ran primary surpluses on average, mostly quite large. So if you are now redefining “hard Keynesianism” to refer to primary surpluses, that makes nonsense of your claim that it is stricter than the current regime, or that failure to follow it had anything to do with the crisis.

@36 Would a bright young Greek stay in Athens or move to Berlin or Frankfurt where there are industries rewarding skills?

Of course they would, and they are doing it in droves. The 18-30 cohort is departing at the (unofficial, probably low) estimate of 50,000 per year – and nobody plans to return. An entire education section of one of the national newspapers was essentially devoted this past Tuesday to “how to get out for good”.

@38 Depends; is he bright enough to speak German? ISTM that the assertion that there are no borders is somewhat fictional when there are still language barriers.

All Greek students learn at least one major world language (English), in many cases to what is known as “proficiency” level. Many learn a second to “first certificate” level. University students normally have learned two foreign languages (English + French or German) to proficiency level, and know another one-two (Italian/Spanish) sufficiently well to communicate. The language barrier is not an issue here, but it hardly seems a good omen that the country’s best and brightest are flocking to Germany/England (UK)/ Australia (which is announcing a special deal for miners!)/ Canada/ the U.S. and elsewhere when they represent Greece’s best hope for emerging from the euro-debt debacle.

OTOH, on Wednesday the Greek Minister of Finance announced the new payscales for public servants. Grade and high school teachers will start at 660 euros, which puts them well below the poverty level and pretty much on a par with Bulgaria.

@52: I suspect it’s because if they decide to exploit low labor costs, they’ll skip Greece and move straight to China where people are paid 100 euro/month, not to mention much more industry-friendly environmental laws.

Well, not necessarily. The recent abolition of collective bargaining agreements in Greece by the Troika has made German investment in Greece far more attractive. We need to remember here that transportation costs for goods produced in SEE for export to SEE will be vastly lower than moving such goods from China; also, of course, “no tariffs” within the EU trading zone. (Also: we recall here that a substantial % of the Greek workforce for German producers will be university grads fluent in two-three EU languages.)

The Greek PM’s latest meetings with German officials were partly devoted to the topic of “German investment” in Greece. It all seems rather similar to a US manufacturer moving from Massachusetts/ Minnesota /Michigan to South (or North) Carolina/Tennessee, etc., and we certainly have plenty examples of this.

John,

Your original FP piece does not include any reference to the primary balance, nor does the CT comments thread following it. It does, however, explicitly describe hard Keynsianism as a stricter version of the Stability and Growth Pact. Since the SGP is defined in terms of the overall deficit, not the primary deficit, the natural reading of your piece is that you also are talking about overall deficits. But, since I want this debate to continue, I will concede that I’m mistaken and that when you say deficit, you mean primary deficit unless you say otherwise.

That doesn’t help you much.

First of all, as I noted in my previous comment, the vast majority of Euro countries *were* running primary surpluses in the period prior to the crisis. So how is “hard Keynesianism” any change from the status quo?

Second, you explicitly say upthread that in your preferred scenario “standard measures of the budget balance will show a small deficit on average.” Does a good-faith reading require me to take this as referring to primary deficits? In that case, under your preferred assumption of g=i, debt-GDP ratios will still rise without limit in an infinite horizon. (In an infinite horizon, a small deficit is no better than a big one.) That doesn’t bother me — I don’t think infinite horizons are relevant to policy questions — but you’ve previously said such paths are unacceptable. Or does “standard measure” here mean overall deficit? As you know, when the primary balance is zero, the overall deficit will simply be equal to interest payments on the debt. Assuming 5% interest (i=g, where nominal g is generally taken to be 5%), this will imply an overall deficit of 3% when debt-GDP ratios are stable at 60%. This, of course, is what the Maastricht criteria already require. I guess you are proposing a lower target debt-GDP ratio than 60%, then? So what’s your preferred target, and what’s the analysis by which you arrived at it?

Finally, there is the question of the mechanism by which “hard Keynesianism” would have prevented or ameliorated the current crisis. Since most of the crisis countries were on sustainable fiscal paths prior to the crisis, how would “hard Keynesianism” have helped?

On my side, I think governments should set deficits or surpluses equal to the gap between desired saving and desired private investment (plus net exports) at full employment. This is not a radical position, it was the standard view of fiscal policy in the 1960s and 70s. The long-term path of the debt-GDP ratio is not a big concern, first because there is no reason to think the relevant parameters are stable enough for an infinite horizon to be meaningful, and second because, if the ratio does begin imposing costs, there are other tools than the fiscal balance to deal with it, namely holding down interest rates via financial repression or raising nominal growth via higher inflation. In any case, I am not convinced that the historical record gives us any good reason to think debt-GDP ratios are a problem for rich countries borrowing in their own currency.

Latin America? HIPCs?

Currency-sovereign = borrowing in their own currency. Not the case for either of those.

debt/GDP levels in the eurozone were broadly stable and near the Maastricht limit over the decade to 2007 which implies that primary deficits were close to zero.

It would imply that, if it were true that g=i exactly. But it’s not, so it doesn’t. The IMF’s WEO database gives the following average primary surpluses (+)/deficits (-) as percent of GDP for the decade 1998-2007:

Austria: 0.7
Belgium: 4.7
Estonia: n/a
France: -0.1
Germany: 0.4
Greece: 0.8
Iceland: 2.7
Ireland: 2.7
Italy 2.7
[Yes, they’re all the same.]
Luxembourg: 1.6
Netherlands: 1.9
Portugal: -1.1
Slovakia: -2.8
Slovenia: 0.2
Spain: 2.1

It is very difficult to look at those numbers and conclude that Europe’s problem is that countries were fiscally irresponsible in the boom so lacked fiscal space in the slump. What is “hard Keynesianism” telling European countries (except Portugal) to do that they weren’t doing already?

I’m not saying it’s necessarily the optimal policy, but wouldn’t the ‘hard Keynesian’ scenario, even by the least flattering definition, be a tremendous improvement over current practice?

If we were able to direct stimulus at the levels suggested by research, rather than by the White House political team or some dimwitted ‘centrist’ Senator, I’d be willing to put up with a lot in the good times.

As it stands, on both sides of the Atlantic, we’re struggling mightily to pass bills that provide for even a fraction of what’s needed.

It’s appealing how the balanced-over-the-business-cycle rules could potentially be written into legislation.

If it’s ok to discuss a how a policy like that might play out in the US…

The bill would be hard to pass in the first place. And I can’t see how you’d avoid having it perennially re-legislated. It’s a little too close for comfort to a Super Committee style setup; trying to tie the hands of future congresses in a way that isn’t really possible.

Stan Collender wrote an interesting piece about the “automatic” triggers that supposedly drop in if the SC can’t agree. As it turns out, they’re really not binding. He had a number of examples of similar rules that had been either modified or just ignored. It sounds ponderous, but really, it’s the constitution; each Congress has the same powers as the last.

(Not meaning any of this as a criticism of the piece; it’s sort of a different topic. I’m just gloomy about ever getting good policy in the US.)

We seem to have different data sources
http://epp.eurostat.ec.europa.eu/tgm/refreshTableAction.do?tab=table&plugin=1&pcode=tsieb090&language=en

I am using the IMF’s WEO database because it gives net debt (rather than economically less meaningful gross debt) and because it gives primary balances, which Eurostat does not. But even using the Eurostat numbers, it isn’t really true that

Eurozone debt/GDP ratios barely moved over the relevant period.

Not only Ireland but also Belgium, Italy, Spain and several other countries reduced their debt-GDP ratios by 20 points or more.

The IMF numbers are here. If you click on the link, you’ll see that almost all Euro-area countries were running primary surpluses in the decade before 2008. So I ask you again: How would hard Keynesianism have been any different from the fiscal policies that were actually followed?

I’ve never suggested that the problems of these countries (other than Greece) were due to fiscal profligacy

Just so I understand clearly: You are saying that apart from the specific case of Greece, hard Keynesianism would have done nothing to prevent the European crisis. Do you really think that’s what most readers of your FP piece understood you to be saying?

That is, of course, until it can’t borrow as much as it wants in its own currency.

I’m genuinely curious — what are some modern examples of rich countries that found themselves unable to place domestic-currency debt?

>If governments had been pursuing hard Keynesianism, then debt/GDP ratios would have been falling over the expansion phase of the cycle, leaving room for fiscal stimulus in the recession.<

But it did. You really can't look at the aggregate debt/gdp level. That was stable or somewhat rising. But the indivcidual countries had divergent developments.

Group A: Spain, Belgium and Ireland had strongly dropping debt levels.

Group B: Greece, Portugal and Italy had high and stable levels.

Group C: France and Germany had lower but steadily rising levels.

I think Group C is influencing the aggregate to much.

Now your policy prescription- that I share – seems to be right about Belgium who used it and Greece, Portugal and Italy who should have used it.

But what about Ireland and Spain: They don't fit. I think that is a reasonable objection you haven't answered yet.

Note that Belgium, while not currently in as much trouble as the PIIGS, is generally considered to be one of the next most vulnerable countries.

The “hard Keynesian” position also lacks any evidence that it is a lack of fiscal space that is constraining the response to the crisis (Greece excepted).

The problem in Europe was current account imbalances, not fiscal policy.

>The problem in Europe was current account imbalances, not fiscal policy.<

Would still leave Ireland as special case.

Belgium is a special case too, all that no government for one and half year business.

Gross debt isn’t the best measure. But even if you use OECD gross debt numbers, Italy’s debt-GDP ratio fell by 15 points over the decade 1998-2007. I don’t think “barely moved” is a good characterization of that.

Would still leave Ireland as special case.

Not really. Ireland ran a current account deficit from 2001 on. In general, the current account in preceding years is a very strong predictor of whether a Euro-area country would find itself in crisis. The fiscal balance is not.

(This is true for Asian countries as well, incidentally.)

>Fiscal space is a dynamic concept, <

like regulatory uncertainty? or business confidence?

(Snarky, I know)

a current account imbalance financed by private foreign borrowing is just as vulnerable to a sudden stop as one financed by public foreign borrowing.

Sorry, I mean it doesn’t matter if the borrowers are public or private. It definitely does matter which the lenders are — you’re much better off if they are public entities operating on a rules-based system, rather than private lenders subject to sudden shifts in sentiment. That’s the whole point of fiscal union.

there is no mention of inflation, the bug-bear of quasi-monetarist “New Keynesian” macro. Pegging low real interest rates Eccles-style, “financial repression”, is not an option?

I mentioned both of these at 55.

@LP we seem finally to have come pretty close to agreement. A fair bit of confusion there and some hard words, but I want to make it clear that I do find a lot of benefit in discussions with you

And I find a great deal of benefit in discussions with you. This was a very useful one. I appreciate your willingness to engage critical comments — not everyone does. And, I think now that I properly understand your argument, yes, we are mostly in agreement.