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That is possible. But it is a political nightmare: the moral hazard involved would be enormous. Greece would lose almost all sovereignty indefinitely and resentments would reach boiling point on both sides. Non-European members would also prevent the IMF from offering such indefinite largesse. The burden would then fall on the Europeans. It seems unlikely that needed agreement would be sustained.
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Overindebted countries with their own currencies inflate. But countries that borrow in foreign currencies default. By joining the eurozone, members have moved from the former state to the latter. If restructuring is ruled out, members must both finance and police one another. More precisely, the bigger and the stronger will finance and police the smaller and the weaker. Worse, they will have to go on doing so until all these horses can talk. Is that the future they want?
When one looks at GDP/WAP (defined as population aged 20-60), one gets a surprising result: Japan has actually done better than the US or most European countries over the last decade. The reason is simple: Japan’s overall growth rates have been quite low, but growth was achieved despite a rapidly shrinking working-age population.
The difference between Japan and the US is instructive here: in terms of overall GDP growth, it was about one percentage point, but larger in terms of the annual WAP growth rates – more than 1.5 percentage points, given that the US working-age population grew by 0.8%, whereas Japan’s has been shrinking at about the same rate.
The markets, which for a long time had no effective way of undermining the monetary union, now recognise that it can be done. And so far the response of European policy makers to this new threat has been inadequate. No one wants to accept fiscal transfers, and no-one wants to see the monetary union breaking up. Something, somewhere has to give.
Such accounts would be highly imperfect. But if we did make the effort, the absurdity of slashing public investment or almost all state support for university teaching, as the UK government has done, would be evident, not least when the Treasury can borrow at a real annual interest rate of about 1 per cent. Never can there have been a better time to build up public assets. For some reason, Mr Helm does not seem to see that this is what sensible people would recommend today. I find it hard to understand why he rejects such Keynesianism.
Ireland’s gross external debt stood at $2,131bn at the end of the second quarter, roughly 1,000 per cent of gross domestic product. As of the end of 2009, the net external debt position was 75.1 per cent of GDP, according to the economist Ricardo Cabral; better than Portugal’s, but still high.
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To maintain solvency, Ireland and the other peripheral eurozone countries require a return to solid growth very soon. Kevin O’Rourke, professor of economics at Trinity College Dublin, raised an important point of principle last week. If you believe structural reforms are the key for higher growth then surely you cannot apply this argument to Ireland, a textbook example of a country that has implemented reforms. At a time of extreme fiscal tightening, moderate monetary tightening and weak global demand, I fail to see where Ireland will grow. Does Dublin really think foreign corporations would be lured by low corporate tax rates, and choose this moment to invest, given the current uncertainties? And can Ireland really produce a devaluation of sufficient size with sufficient speed to create an export boom at a time like this?
The search for the solid sovereign ...
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Ireland has little time to lose. Overall deposits are shrinking. Europe must prepare for a run on the Irish banks spreading, with deposits fleeing not to financial institutions with solid assets but to those with solid sovereigns: Berlin may soon face calls for support.
But (at least in respect of the state-owned banks) in practice the British Government’s commitments to the banking sector are so deep that banking sector default would be little distinguishable from sovereign default. That was the key reason the UK needed to cut spending: we needed to get enough growth that our households’ salaries would rise fast enough that they would be able to repay their debts rather than defaulting and imposing losses on the banking sector that would drag down the UK sovereign in the same way the Irish sovereign has suffered.
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no - the reason the budget had to be cut was so that the bond markets might wait before punishing the UK with higher interest rates. It was a political calculation - cuts are an expensive wing and prayer job
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The cuts have to be big in order to confirm the Conservative explanation of what happened. That they saved the country from the brink, from disaster, from national bankruptcy – in other words from Labour’s incompetence and profligacy – is a line the Conservatives use well and often. And it is an explanation which historically the electorate has found acceptable. The notion that the state should conduct its own finances in the manner of a prudent household has always been thought plain common sense by many voters (though no one in the Treasury would agree), even if in the last 20 years the electorate has conducted its affairs anything but prudently. Thus from the point of view of a rather rudderless Tory Party the very hugeness of the cuts is an advantage: they magnify the crisis and Labour’s recklessness in causing it. Further, they restore a sense of authority to the Conservative Party and to its interpretation of British politics and society, something it has lacked for a long time. That the cuts are promoted by a coalition government including the soft-hearted Lib Dems is an added advantage. It shrouds the Thatcherism of the exercise in a cloak of fairness.
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Quantitative easing is simply the expression of the monetarist view that, if you increase liquidity, money GDP will rise proportionately after a short lag. However, it is not the printing of money that causes GDP to rise but the spending of money, and the spending of money depends not on the quantity of bank reserves but on the willingness of the private sector to borrow and the willingness of banks to lend at rates of interest at which they can borrow. However many trillions of dollars or pounds governments pump into the economy, this will not stimulate borrowing or lending if consumer demand is not there.
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The government should set up a national investment bank, which they would capitalise and mandate to spend £X billion a year on investment projects at interest rates low enough to fulfil the investment mandate. We are already promised a tiny prototype of this in the proposed green investment bank. Candidates for such investment would be infrastructure projects such as the high-speed rail link mentioned by the noble Lord, road building and repairs, house construction by local authorities, or projects to do with carbon emissions-insulating houses, solar panels and so forth. Lending by the investment bank would not affect the deficit and so would not spoil Mr Osborne’s austerity story. True enough, subsidised interest rates imply a lower expected return on equity than from current lending, but a lower return is still better than no return, which is what idle capital now earns.
There may be better ways but the goal is clear: to unblock the channel of spending when orthodox fiscal and monetary policy is, for one reason or another, disabled. Unless we succeed in doing that, we will be doomed to years of interminable recession.
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The lotteries or bets that are the essence of contingent claims/derivatives markets could increase allocative efficiency if they permitted the given, exogenous risk in the economy to be born by those most able to bear it. Instead that risk has ended up with those most willing but not, judging by results, most able to bear it.
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