Saturday, October 3, 2015

Ramanan — Sergio Cesaratto On TARGET2 Balances [v. Marc Lavoie]


Ramanan agrees with Cesaratto over Lavoie on the Eurocrisis being a balance of payments crisis.
The ECB alone cannot resolve the crisis. Attempts to boost domestic demand with fiscal policy will bring higher imbalances within the Euro Area. The Euro Area needs a central government with high powers to tax and spend. Regional imbalances will be kept in check via fiscal transfers and regional policies of the government. And the powers of the government won’t be limited with this. There are many other things such as wages which need to be coordinated at the federal level, for example. Euro Area balance-of-payments cannot be neglected.
The Case of Concerted Action
Sergio Cesaratto On TARGET2 Balances
Ramanan

2 comments:

Brian Romanchuk said...

If the ECB had not deliberately sabotaged the Greek banking system by inducing a run on Greek bonds and banks, the financing problems of Greece would have been largely fixed. The ECB did not behave on such a fashion with respect to the other countries, and they had no problems. I do not see this as being a balance-of-payments issue.

Jose Guilherme said...

Right - the ECB fully supported a massive bank run (in the order of hundreds of billions of euros) in Spain and Italy in 2012, when depositors, in fear of the possible end of the currency union, decided to transfer their money to the safe havens of Germany and Luxemburg.

The TARGET2 debt balances of Spain and Italy duly increased as they're supposed to do in such situations. The system worked very well and the Spanish and Italian banking systems kept functioning smoothly throughout 2012. This story had nothing to do with a BoP (current account) problem: the massive deposit transfers all go under the financial account of the BoP and do not affect the current account at all.

Contrast this 2012 episode with the recent turmmoil in Greece. The ECB simply decided to crush the Greek banking system. If (as it should) the central had behaved the same way it did in 2012 the Greek banks would have stayed open for business - and Greece would have been able to withstand the ultimatums of the Eurogroup.