Originally published September 21, 2011 on the New Economic Perspectives blog.
Sorry, got to be brief—for an explanation go here: http://www.economonitor.com/lrwray/2011/09/21/fear-of-flying/
I’ll have to punt a bit on some of the techie details on operations within the Euroland. Maybe we can come back to them later.
Q1 Anon: Weren’t the design flaws of the euro intentional, that is, what neolibs wanted?
A: Yes, probably true. I’m not an expert on European politics. But let me say that there is no evidence that they thought it would come to this—with a likely default by Greece that will escalate into a possible destruction of the whole project. By contrast, MMTers did!
Q2 Roberta: We’re all artists.
A: ??? I guess so!
Q3 Philip: How do governments borrow from the ECB?
A: Well, technically that is prohibited—the ECB was not to buy government debt. That was the beauty of the system—governments had to sell to markets, therefore they would be subject to market discipline and would notrun up excessive deficits. Hey, how’s that working for them so far? Not so good. You all know the stories. Goldman helped them hide the debts. Markets did not understand that these are not sovereign nations—until it was too late. And French and German banks loaded up on high risk Greek debt. The rest is history; or at least will soon be. Market discipline does not work. Ever. Never.
Q4 James: Aren’t euro nations much like US states?
A: First prize! By Jove he’s got it. That’s the problem. They are like US states with no Washington backing them.
Q5: Rvaucbns: What is the endgame for the euro?
A: I urge you to read Dimitri Papadimitriou’s piece over atHuffPost:http://www.huffingtonpost.com/dimitri-b-papadimitriou/endgame-for-the-euro_b_968623.html I’m planning to write something up soon.
Q6: Neil: what about lender of last resort in the EMU?
A: By design there was not supposed to be one. Market discipline was supposed to work. Each individual country was supposed to be responsible for its own banks—but since they were not sovereign they could not do a Timmy-Benny $29 trillion bail-out. The ECB lends to individual CBs against collateral; they’ve had to widen what was acceptable. But it won’t be enough.
Q7: What is SGPA: Yes it is stability and growth pactQ8 Joe and Hugo: Are there net financial assets in Euroland?
A: Yes; first there are dollars. In Euros, yes individual national governments create them but as discussed in the blog they’ve got to worry about clearing across borders since ultimately those are convertible on demand to ECB euro reserves and the ECB is not supposed to buy government debt.
Q9 Dario: why do markets only “partially” recognize that downgrades of sovereign debt do not matter?
A: They do not fully understand, so there is usually a bit of uncertainty surrounding a downgrade. Then they realize the sky did not fall, markets for sovereign debt recover, and rates go back where they were. Unlike a downgrade of Greek debt.
NEXT WEEK: We might take a bit of a diversion because we got a long and interesting comment on the differences between real and financial. I think it will be worthwhile to get all that clear.