Tag Archives: Paul Krugman

Why The Monetary Union Is A Failure

Over the last months it’s become quite clear that Europe‘s monetary union (EMU) is – more or less – a failure. So, what happened? And what do we do now? In this article professor Kevin O’Rourke provide a comprehensive explanation of the why’s and how’s, and put forward some suggestions for possible solutions of the greatest crisis in modern European history.

“Whether EMU can survive in the long run if the status quo persists is an open question.”

Kevin O’Rourke

“In order to understand why EMU happened, we often turn to the familiar Mundell-Fleming monetary policy trilemma. Given intra-European capital mobility, the decision by a subset of EC members to move to EMU was a logical, if radical response to the challenges posed by this trilemma. However, the institutional framework of EMU is seriously flawed,” Kevin O’Rourke writes.

Kevin O’Rourke is Professor of Economics at Trinity College Dublin, a co-organiser of the CEPR’s Economic History Initative, a Research Fellow of the National Bureau of Economic Research, and a Member of the Royal Irish Academy.

He received his PhD from Harvard in 1989, and has taught at Columbia University, UCD, Harvard, and Sciences Po (Paris).

He is currently serving as President of the European Historical Economics Society, and an Editorial Board member of World Politics.

Here is professor O’Rourke’s recent article, syndicated by www.eurointelligence.

A Tale of Two Trilemmas

For decades economists have argued that fiscal union was a desirable, and perhaps indispensable, complement to EMU.

What we now know is that a common euro zone framework for regulating financial institutions, and dealing with the consequences of their failure, is equally important.

We have a monetary union with neither of these complementary institutions, and it is clear that this architecture is not fit for purpose.

How did we end up here, and what happens now?

To answer these questions it is helpful to turn to what Dani Rodrik has labelled the “fundamental political trilemma of the world economy”. Rodrik argues that “we cannot simultaneously pursue democracy, national determination, and economic globalization.

“If we want to push globalization further, we have to give up the nation-state or democratic politics. If we want to maintain and deepen democracy, we have to choose between the nation-state and international economic integration.”

And if we want to keep the nation-state and self-determination, we have to choose between deepening democracy and deepening globalization” (Rodrik 2011, pp. xviii-xix).

The argument is that “deep globalization” involves a commitment to not just open commodity and capital markets, with the constraints that these imply, but also to a competition for mobile factors of production that makes it difficult for national governments to adopt regulatory standards or other interventionist policies, even when their populations want this.

The solutions are either to allow popular opinion to manifest itself through supra-national mechanisms, or to ignore it.

EMU solves the political trilemma by abandoning national monetary policy-making, and delegating it to a technocratic Central Bank.

The fact that this has occurred without fiscal union, or common banking policies, can be well understood within the trilemma framework.

Regarding fiscal policy, the combination of the nation-state and democracy has prevented deeper political union: German voters (among others) do not want a transfer union, while Irish voters (among others) do not want a common tax system.

When it comes to banking regulation, on the other hand, the combination of deep economic integration and national policy-making has made it very difficult to respond to the clear demands from citizens for far stricter banking regulation.

It seems that EMU is stuck between two trilemmas, one economic and the other political. Where do we go from here?

There are several features of EU politics which are relevant in thinking about this issue.

The first is the question of governance: how decisions should be made at a supranational level is a contentious issue, which can again be illustrated by means of the trilemma. For most people, ‘democracy’ involves direct elections to parliaments which legislate.

One could leave European decision-making to the European parliament, but the nation-state remains the basic focus of political identity and authority, and national governments remain centrally involved in the process.

One solution would be to prioritize national parliaments and the nation-state: one could then have intergovernmental cooperation, but this would involve national vetoes, and it is hard to see a particularly proactive EU emerging in such a scenario.

The other solution is what we have: an essentially intergovernmental mode of decision-making that gives rise to accusations of a ‘democratic deficit’. This has created a constituency in Europe that is hostile to further integration.

The second relevant feature of EU politics is the international cleavages that exist regarding EMU. In particular, German citizens were opposed to it at the time, and this has political implications today.

The third feature is the existence of sharp intra-national cleavages in opinion regarding the EU in general, and EMU in particular.

The unskilled and the poor tend to be opposed to both, while the skilled and the rich tend to be in favour. The potency of these divisions was illustrated in the 2005 and 2008 referenda in France and Ireland, where voters divided largely along class lines.

Superimposed upon these long-run political cleavages are the effects of the global crisis of 2008-9, and the present banking crisis.

In principle, the global financial crisis could have led people to view the EU as a port in the storm, and there is an element of this in the Irish referendum approving the Lisbon Treaty in 2009. On balance, however, Eurobarometer surveys indicate that attitudes towards the EU have become more negative during the crisis, while there has been a fairly dramatic deterioration in trust in the institutions of the Union.

The interaction between a sharp economic crisis in several countries, and underlying class-based or national hostility to EMU, could turn out to be a potent one.

Even more serious could be the mishandling of the banking cum debt crisis. The decision of the ECB to veto the new Irish government’s desire to impose burden sharing on private bank bondholders is extraordinary, and provides Irish eurosceptics with an extreme example of the democratic deficit in action.

Meanwhile, taxpayers in Finland and elsewhere are revolting against the notion that they should bail out their profligate partners – recognising that this is a European banking crisis that needs a European solution might help change perceptions.

So would recognise that an end to regulatory competition in the financial sector would be a more logical concession to be sought from the Irish, in return for cutting interest rates, than an increase in their corporate tax rate.

Whether EMU can survive in the long run if the status quo persists is an open question.

Governments have tended to muddle between the stark trade-offs implied by the political trilemmas, but this crisis may force them to confront those trade-offs head-on.

What happens then is anyone’s guess.

By Kevin O’Rourke

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Filed under International Econnomic Politics, Laws and Regulations, National Economic Politics

Spanish CDS Spreads Surpass Iceland

This was unthinkable only a year ago: Iceland‘s sovereign CDS spread being closer to the German benchmark than the Spanish. This means that the credit market believes that it’s safer to lend money to a bankrupt little community out in the North Sea rather than to the ninth largest economy in the world.

“The problem is that Greece, Ireland and Iceland all said the same thing shortly before they were forced to receive help.”

Gavan Nolan

This is an apple!

The Markit iTraxx SovX Western Europe hit 190 basis points for the first time, Friday. Spain and Portugal hit record wide of 325 and 515 bp’s respectively. Ireland’s bailout last weekend has caused the credit markets to hone in on the other likely candidates for financial distress; Portugal and Spain.

“Ireland and Iceland have been compared often in the last two years. The two island nations in the North Atlantic are emblematic of the excessive financial debt that precipitated the global recession,” credit analyst Gavan Nolan points out in Markit Credit Wrap.

A recent blog post by Paul Krugman highlights Iceland’s strong performance relative to Ireland since 2009, which he attributed to the Nordic country’s “heterodox” economic policies: capital controls, a large devaluation and considerable debt restructuring.

“The CDS market reflects this view – Iceland’s spreads are trading at half Ireland’s level. Even Spain is now wider than Iceland, a scenario that would have seemed far-fetched at the beginning of this year,” Nolan writes.

Adding: “The dire fiscal state of the eurozone’s peripheral economies is well-established. But the last week has seen the situation deteriorate, with sovereign spreads reaching unprecedented levels today.”

Both Portugal and Spain were forced to issue denials that they needed external support today.

Portuguese government spokesman says that reports of fellow EU members pressurizing Portugal into accepting a bailout are “totally false”, Financial Times report, The passing of the government’s austerity budget – a major point of contention with the opposition parties – did little to relieve the pressure on the sovereign’s spreads.

Meanwhile, Spain did also issuing robust denials of bailout rumours. The country’s prime minister Jose Zapatero says  there is “absolutely” no need for a rescue.

“The problem for both countries is that Greece, Ireland and Iceland all said the same thing shortly before they were forced to receive help. Investors are all too aware of the credibility issue, and this is reflected in sovereign spreads,” Gavan Nolan writes.

More details of a bailout that is definitely happening, that of Ireland, are expected over the weekend.

A report in the Irish Times today that revealed the timetable caused bank spreads to widen sharply.

The report indicated that the EU-IMF mission in Dublin is looking at ways of making senior debt holders share the burden of the bailout, i.e. taking haircuts.

“A fear of such a measure has been bubbling under in the markets for some time now, particularly after the Anglo-Irish Bank debt exchange “offer” was first announced. If does come to fruition then it will be a significant moment in the recent history of financial market,” Nolan notes.

“Senior bondholders will no longer be considered untouchable, and this will inevitably have an effect on bank borrowing costs. On the other hand, if there is no mention of such a measure then it could cause spreads to snap back,” he concludes.


In other words – it’s gonna be another interesting Monday…


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Is Quantitative Easing An Attack On Your Freedom?

“In light of the US Central Bank‘s – I refuse to use their deceitful self-anointed Federal Reserve moniker – most recent grandstanding policy decision that has been referred to as QE light that precedes the inevitable QE2 launch sometime in the not so distant future, I present an open challenge to Paul Krugman and all like minded economists that support the monetary policy of dollar debasement,” J.S. Kim writes in a recent newsletter.  “The one question I want to see Mr. Krugman and his supporters answer is this:”

“If monetary debasement can truly create economic recovery, why did our Founding Fathers establish, in the US Coinage Act of 1792, that any persons discovered to be deliberately debasing US money shall be guilty of felony and shall be punished by death?”

J.S. Kim

“In light of the US Central Bank’s  – I refuse to use their deceitful self-anointed Federal Reserve moniker – most recent grandstanding policy decision that has been referred to as QE light that precedes the inevitable QE2 launch sometime in the not so distant future, I present an open challenge to Paul Krugman and all like minded economists, Nobel prize winning or not, that support the monetary policy of dollar debasement,” independent financial adviser J.S. Kim writes in a recent newsletter.

Here’s some more from the newsletter, published yesterday:

This will be a straightforward challenge issued by our Founding Fathers, in particular the first US Treasury Secretary, Alexander Hamilton, who scripted the US Coinage Act of 1792.

The one question I want to see Mr. Krugman and his supporters answer is this:

“If monetary debasement can truly create economic recovery, why did our Founding Fathers establish, in the US Coinage Act of 1792, that any persons discovered to be deliberately debasing US money ‘shall be guilty of felony and shall be punished by death’?”

Note that the punishment was not imprisonment, not even hard labor, but death. Why did our Founding Fathers, who had just gained freedom from the draconian monetary policies of the British monarch King George through the American Revolution and the Treaty of Paris in 1783 deem that monetary stability could not be separated from the conditions of freedom?

Why did they deem the act of monetary debasement so insidious that anyone found guilty of deliberately debasing US money would not be imprisoned but should be punished by death?

And why is monetary debasement today accepted as the “right thing to do” and “normalized” by prominent economists like Paul Krugman?

So this is all I ask of you Mr. Krugman – to repudiate Alexander Hamilton and explain why he was wrong. I don’t want the employment of “block and bridge” techniques that politicians are so deft at that fail to answer the question, and responses that entail long-winded dissertations on the relationships between monetary base, monetary supply and monetary velocity.

Merely answer the one question that Alexander Hamilton has posed to you above and explain your position.

J.S. Kim

On August 3, 2010, I posted a 3-part video series in regard to the Central Banks’ use of ideological subversion to mislead the masses. Step two of the process of ideological subversion requires the participation of academics to disseminate deceit if the deceit is to not only be widespread but successful in taking root in the consciousness of society.

The role of academics in shaping the discourse about the rationality of monetary debasement is critical to the belief system embraced by young impressionable minds for decades into the future as once a false belief takes root it is spread from one generation to the next.

In other words, the widespread adoption of the erroneous belief that monetary debasement is beneficial to the economic health of nations would be impossible without you, Mr. Krugman.


The Bank of Japan is another Central Bank guilty of executing the act of monetary debasement for decades.

And again, academics that reside both within and outside of Japan ensure that the Japanese do not understand how monetary stability is inextricably linked to their most sacrosanct right of freedom.

Read the rest of this article at SmartKnowledgeU here.

J.S. Kim

Managing Director & Chief Investment Strategist


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A Report To Make You Go “Hmmm…”

Will Basel III Crush the Global Economy?


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