“Austerity vs. Growth – A False Dilemma?”, OECD FORUM, 28th May

A debate on whether the world in general and Europe in particular needs more or less austerity was held yesterday in the context of the 2013 OECD Forum. Below, you can find my answer to the moderator’s question regarding what alternatives there are for the Eurozone to more or less austerity. (For a list of participants, scroll to the end.) But first, a brief comment of the PEW survey’s main finding, presented by Bruce Stokes (of Global Economic Attitudes), that a large majority of Europeans favoured paying down debt to more stimulus:

A brief comment on the Pew survey findings:

 Had a poll been taken in the midst of Europe’s Black Death pandemic, a majority of Europeans would have blamed the plague on prior sinful living and would have, most likely, accepted the established view that deliverance from the disease demanded self-flagellation and collective punishment. While we should always be keenly interested in public perceptions, we should not allow polls to cloud our judgment.

Turning now to the Eurozone’s alternatives to austerity-vs-stimulus, here was my main point:

  • If after the Fall 2008 the State of Nevada had to
    • salvage its own banks,
    • refinance its primary deficit caused by the downturn of the real estate market, and
    • provide unemployment benefits to its unemployed,

no matter how much stimulus Mr Obama put into the economy, and regardless of Mr Bernanke’s QE, Nevada would have become a failed state!

  • Soon, most American states and their banking sectors would sequentially fall off the cliff of competitive austerity. Just as it happened in the EZ.
  • So, Europe’s fixation with competitive austerity is not so much an ideologically driven policy choice.
  • It is rather the result of a badly designed Eurozone and of the denial that we have a systemic crisis in our hands.
  • Now, to those of you who think that the solution is to federate, to create a United States of Europe, my message is: Think again! Federation is neither politically feasible nor desirable as a crisis-fixing device.
  • So, what is the alternative? The alternative is to use existing institutions to rejig the Eurozone in a manner that stops its disintegration without New Treaties, and without a single euro transferred from the German to the Periphery’s taxpayers.
  • Is this feasible? It sure is!
  • First, without a banking union, the ESM in collaboration with the ECB could take over failing banks, recapitalise some, resolve others, and sell off immediately the cleansed banking assets – at a profit for the European taxpayer.
  • Secondly, the ECB could act as a go between member-states and money markets, helping them to service the Maastricht Compliant portion of their debt at low interest rates. It can do this without printing one euro or buying a single bond. It just acts as a go between.
  • Thirdly, the EIB should be given the green light to embark upon an investment-led recovery program in collaboration with the ECB. A European New Deal could then be financed 50% by the EIB’s own bond issues, and 50% by ECB backed bonds to be redeemed from the projects themselves on purely banking principles.
  • With investment, bank reform and public debt largely Europeanised, balanced budgets can be imposed on all member-states while the Eurozone as a whole receives a major growth stimulus and debt falls everywhere.
  • I call this rather modest alternative Decentralised Europeanisation. Without fiscal transfers, without jointly and severally guaranteed euro-bonds, without a Federal Treasury, without Debt Buybacks, without Treaty Changes – it would liberate Europe from the ridiculous dilemma between bone-crushing, self-defeating austerity and inefficient stimuli effected at the national level.

Session details: “Austerity vs. Growth – A False Dilemma?”, Tuesday 28 May (15h15-16h45), OECD Forum, Paris

Moderator: Paul Taylor, European Affairs Editor, Thomson Reuters

Pew survey presentationBruce Stokes, Director, Global Economic Attitudes, Pew Research Center


  •  Robert Johnson, Executive Director, Institute for New Economic Thinking (INET)
  • Felipe Larraín, Minister of Finance, Chile
  • Adam S. Posen, President, Peterson Institute for International Economic
  • Philip Stephens, Associate Editor, Financial Times
  • Richard Trumka, President, AFL-CIO; Trade Union Advisory Committee to the OECD (TUAC)
  • Yanis Varoufakis, Professor of Political Economy, University of Texas at Austin, United States

Closing Remarks – Pier Carlo Padoan, Deputy Secretary-General and Chief Economist, OECD

14 thoughts on ““Austerity vs. Growth – A False Dilemma?”, OECD FORUM, 28th May

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  2. Whether you call it Federalization or doing things as if under federal rule which will have the similar effect is only a rethorical problem. Fiscal transfers were going on under a different name: deficit growth. Your proposal would only erase record of such transfers enabling further fiscal transfers trough credits which will cause another crisis in the future.

    The proposal is federalization of past “fiscal transfers” under the name of credits from surplus to deficit areas and erasure of such records in order to continue them without road block such as deficit size presents in creditor/surplus nations.

    Whether you give credit to poor and then forgive it or outright fiscal tranfer to poor, it has the same effect of transfering money to poor/ deficient in money.

    Forgive debt or print money to pay off such debts has the same effect in short term. Forgiving debts is temporary solution while federalization is a permanent solution but it is a same process.

    It is only a rethorical problem in short term.

    • A rhetorical problem…

      …which destroys economies, and people. In Greece both are being destroyed beyond recognition.

    • @waves
      I am talking about difference of Yannis’ proposal and federealizing the EU which is only rhetorical question.
      Whar are you talking about?

  3. “without a single euro transferred from the German to the Periphery’s taxpayers.”

    .. but risk via guarantees (without getting market rate compensation for it) and Devaluation via inflationary policies.

  4. Hi Yannis

    Thanks for this summary of your EU crisis work untill now.

    ”So, Europe’s fixation with competitive austerity is not so much an ideologically driven policy choice.
    It is rather the result of a badly designed Eurozone and of the denial that we have a systemic crisis in our hands.”

    By this I guess you are saying that Eurozone crisis does not really stems from a stubborn ideological adherence to the basic doctrine of efficient market hypothesis but from a denial, on behalf of Eurozone leaders and architects, of various market deficiencies that could arise inevitably by an excessive deregulation process as well as from Euro leaders’ and architects’ incapacity to impose some kind of institutional framework for confronting with this issue.

    But, both the denial of acknowledging that we have to deal with a systemic crisis and the past bad architecture of Eurozone that excluded any possibility of a crisis, seems to me as ideology-driven stances, unless if you imply that vested interests this time prevailed over ideology as the latter has only been used as a vehicle for distracting public discourse, creating endless private and public conversation and repetitive loops of fuzzy ways of thinking where emergency-driven distraught political action has became a rigorous and somehow valid EU and national policy-making regime.

    Whoever needs some time to think, evaluate, critically assess befor acting nowadays is considered as inefficient and irresponsible where the one who acts immediately irrespectively of the rationale behind this action and even if this action is nothing more than a perpetual procrastination dead-end policy is being conceived as adequate and in the right track…Things are distorted and this way of thinking is extremely pervasive, condaminating not only our behaviour as professionals but our personal life and intellectual thinking. A narrow minded audacious ego-maniac is constantly gaining moral acception from our society where moral and political philosophical values are being constantly distorted.

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  6. The euro is based on the false premise that nations do not need sovereign currencies.

    When any government — national or local — is not Monetarily Sovereign, its survival depends on an inflow of money from outside its borders. In short: A monetarily non-sovereign government does not have the ability to create the currency it uses, so must have a positive current account to survive.

    Since all euro nations will not have positive current accounts, there always will be a time when some have difficulty surviving. Because the euro nations voluntarily surrendered their single most valuable asset — their Monetary Sovereignty — there are two, and only two, solutions to their financial problems:

    1. Leave the euro, re-adopt their own currencies, and once again become Monetarily Sovereign or
    2. Become a United States of Europe.

    The first nation to leave the euro, will be first to recover. Even sick Greece, if it leaves the euro, soon will be the wealthiest nation in Europe.

    Those who do not understand Monetary Sovereignty are doomed to economic ignorance and the resultant disaster.

  7. Frankly, I have the feeling that a lay reader will be hard pressed to understand the contents of the measures that you are proposing.

    What do you mean exactly by the ECB acting as a “go-between”? If it’s not buying up any periphery bonds or promising to guarantee their yields what would it be doing, then?

    Also, it’s not clear that public investment is the way out for this austerity-induced crisis. The periphery countries already have too many underutilized motorways, for example – financed by public monies. Surely, you’re not proposing that even more of these mega projects be built. A massive payroll tax cut, for instance, would be much more desirable, I think.

    And the idea of imposing balanced budgets on all member states seems weird. I thought the budget position was an endogenous variable,that cannot be imposed by decree any more than the private sector surplus or the current account deficit can. That’s one reason the Troika programmes fail to reach their deficit cutting objectives. If instead of 3% deficits we start demanding full budget balance aren’t we just following the old impossible to achieve and also very destructive path?

    Again, I’m not criticizing your proposals; I’m simply asking for further clarification on their contents.

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  9. I do totally agree with your insight about “United States of Europe”, I said the same for several years.

    As for the ESM in collaboration with the EZB taking over zombie banks, I doubt that the treaties allow this.

    And even if it would be legal, how come you believe that whole excercise would come ‘at a profit for the European taxpayer’ – mind to provide the data on which you base this assumption?

    Unless I missed something, you seem to advocate monetary things only. No mentioning of the many, many necessary restructurings in the GIPISFs, without which there is a sustainable path simple non existent.

    • The ESM direct recap operation is bound to be profitable as the banks will be taken over for next to nothing and their recapitalisation/shrinkage will create valuable banking assets – as TARP did in the US or the equivalent operation in Sweden in 1992. As for the restructuring of the Periphery, you are right. I do not say anything about it for a simple reason: My proposal is all about creating the circumstances for arresting the Eurozone’s disintegration. For while the process of disintegration is continuing, there will be no meaningful restructuring. All that happens in our countries is that wages fall fast, prices follow much more slowly and debts rise. Under such desperate conditions, there is never going to be any serious investment. And without investment in productive processes there will be no meaningful restructuring.

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