Fate of the Eurozone session at 12th International Conference

1. Exiting Austerity
Without Exiting the euro
Robert W. Parenteau, CFA
12th International Post Keynesian Conference
UMKC
September 27, 2014

2. Many Design Flaws of the Eurozone
 Not an Optimal Currency Area: Different Sized National Responses to Shocks
 Yet Imposes One Size Fits All Monetary Policy
 Economic Union Without True Political Union
 Competitive Depreciations Replaced by Competitive Deflations?
 Weak (Contradictory?) Mechanism to Adjust Trade Imbalances
 Constrained Fiscal Policy: Nations are Users (Not Issuers) of Currency

3. The Ultimate Design Flaw of the Eurozone
 The Fatal Conceit of Neoliberal Economics: Changes in Relative
Prices Will Always Tend to Guide Economies Back Toward Full
Employment Growth Paths
 Hence, Best to Restrict Available Policy Tools – No FX Control,
Diluted Monetary Policy Influence, Restrict Fiscal Stimulus for
Each Country – to Minimize Relative Price Distortions

4. The Ultimate Design Flaw of the Eurozone
 Irving Fisher, JM Keynes, Hy Minsky Demonstrated Theoretically Why Price
Adjustments Can Lead Economies AWAY From Full Employment
 The Price Signals Leading Economies to Full Employment Growth are Weak,
Unreliable, and Bounded (Keynes’ Uncertainty, Ch. 12 GT Asset Pricing
Critique, Zero Nominal Yield Bound & Liquidity Preference Bound)
 Worse Yet, Downward Price Adjustments in Economies with High Private
Debt Loads Can Lead to a Self Reinforcing Debt Deflation (Falling Asset
Prices and Incomes), Thereby Threatening Social Disintegration
 History (Painfully, and Repeatedly) Concurs with Keynes/Fisher/Minsky

5. Private Sector not Public Sector Debt
Misdiagnosis of the eurozone crisis

6. What were design flaws leading to private
debt build up?
 One size fits all monetary policy allows private credit booms in some nations
 No mechanism to encourage recycling of current account surpluses into
investment in tradable goods sector in chronic CU deficit nations
 Focus on fiscal balances left private sector imbalances largely ignored

7. The Austerity Trap & a Coherent
Macroeconomics
 Neoliberals do not have a coherent stock/flow coherent macroeconomics:
Godley, Minsky, & Keynes do; and many SFC models in development
 Instead, Neoliberals are obsessed primarily with containing the government
financial balance, and ignoring how that influences other sectoral balances
 In other words, conventional macro is ignoring double entry book keeping
 Government cannot reduce its deficit unless other sectors are willing and able to
reduce their net saving position
 An indebted private sector, and export led trade partners, may not “comply”,
especially after a financial crisis

8. 8
The EMU Triangle:
Nations with Chronic CUD,
No FX Policy Influence
Fiscal Surplus
Current Account
Surplus
Very little room to also achieve
DPS Surplus
Fiscal Deficit
Current Account
Deficit
Domestic Private Sector
Financial Balance = 0
Fiscal Deficit Boundary = -3% of GDP
-3%

9. EU Private Sector Still Trying to Deleverage:
Adjustment Forced Through Imports

10. Is Fiscal Austerity Working?

11. Create Alternative Financing Instrument:
Tax Anticipation Notes
 Create a government liability (TAN) that has the following properties:
 Zero interest coupon
 Perpetual
 Transferable
 Denominated in euros
 Available in 50 and 100 euro denominations in paper form, and as secured/encrypted
electronic credits to bank accounts of recipients
 Use TANs to Pay Government Employees, Domestic Suppliers to Government,
and Beneficiaries of Transfer Payments
 Government Accepts TANs at Par (1 TAN = 1 euro) as Payment for Taxes (Thereby
Creating Demand for TANs)

12. Similar to Complementary Currencies
Already Operating in Eurozone & Elsewhere
 Bernard Lietaer has catalogued these in his recent books
 WIR: Switzerland (since 1934, = 1 CHF)
 Torekes: Belgium
 Chiemgauer: Bavaria (= 1 euro)
 Regiogeld: Germany, Austria Switzerland
 Bristol Pound: UK (acceptable for some local taxes)
 Ecuador central bank will issue electronic currency (convertible and
equivalent to 1 US dollar) starting in December

13. The TAN Proposal Breaks the Austerity Trap
Without Requiring Euro Exit
 TANs Allows EU Governments to Contest Fiscal Austerity Policies
 Full Employment Fiscal Policy Can be Pursued, Allowing Private Sector
Deleveraging to Proceed Without Income & Price Deflation
 Preferably through ELR & Trade Related Infrastructure Investments
 Euros are Freed Up to Pay for Imports, Service External Held Public Debt
 TANs Likely Become Acceptable as a Means of Payment/Settlement in Private
Sector Transactions (Since Households and Firms Have Tax Liabilities to Pay)
 Can be Pursued at National Level as Austerity Fatigue Sets In