Monday, June 11, 2012

Niall Ferguson is On a Roll

Niall Ferguson has jut published some great articles on the Eurozone crisis. They are a great place to  get up to speed on this important issue.  His first one with Nouriel Roubini starts as follows:
We fear that the German government’s policy of doing “too little too late” risks a repeat of precisely the crisis of the mid-20th century that European integration was designed to avoid. 
We find it extraordinary that it should be Germany, of all countries, that is failing to learn from history. Fixated on the non-threat of inflation, today’s Germans appear to attach more importance to 1923 (the year of hyperinflation) than to 1933 (the year democracy died). They would do well to remember how a European banking crisis two years before 1933 contributed directly to the breakdown of democracy not just in their own country but right across the European continent.
Ferguson and Roubini go on to list both macropolicies and structural policies that would help the Eurozone.  Structural reforms are important since the Eurozone is a flawed currency union.  However, in order to make those structural changes the ECB needs to restore aggregate nominal spending to a more robust levels so that there can be enough time for such reforms.  

Ferguson's next piece is even better.  It chock full of good points including this one right off the bat:
Could Europe cost Barack Obama the presidency? At first sight, that seems like a crazy question. Isn’t November’s election supposed to be decided in key swing states like Florida and Ohio, not foreign countries like Greece and Spain? And don’t left-leaning Europeans love Obama and loathe Republicans? 
Sure. But the possibility is now very real that a double-dip recession in Europe could kill off hopes of a sustained recovery in the United States. As the president showed in his anxious press conference last Friday, he well understands the danger emanating from across the pond. Slower growth and higher unemployment can only hurt his chances in an already very tight race with Mitt Romney.
If Obama does lose, it will be in part his own fault.  For as Ezra Klein notes, the economic shock created by a collapsing Eurozone could be offset by shock absorbers.  The most obvious one is to have the Fed pre-commit to stabilizing aggregate nominal spending no matter what happens in Europe. Thus, if the Eurozone does start to break down, the increased demand for money it would create here could be offset by the Fed proportionally easing.  In fact, if the Fed were to announce a credible target path for the level of nominal GDP it is unlikely markets would panic in the first place since they would know of the Fed's commitment. Obama could have devoted more effort over the past few years to get Fed appointments that would have supported a nominal GDP level target.  And he still could create platinum coins that could support a nominal GDP level target.    

Ferguson also does a good job illustrating the nature of the Eurozone problem:
Imagine that the United States had never ratified the Constitution and was still working with the 1781 Articles of Confederation. Imagine a tiny federal government with almost no revenue. Only the states get to tax and borrow. Now imagine that Nevada has a debt in excess of 150 percent of the state’s gross domestic product. Imagine, too, the beginning of a massive bank run in California. And imagine that unemployment in these states is above 20 percent, with youth unemployment twice as high. Picture riots in Las Vegas and a general strike in Los Angeles. 
Now imagine that the only way to deal with these problems is for Nevada and California to go cap in hand to Virginia or Texas—where unemployment today really is half what it is in Nevada. Imagine negotiations between the governors of all 50 states about the terms and conditions of the bailout. Imagine the International Monetary Fund arriving in Sacramento to negotiate an austerity program. 
This is pretty much where Europe finds itself today. Whereas the United States, with its federal system, has—almost without discussion—shared the burden of the financial crisis between the states of the Union, Europe has almost none of the institutions that would make that possible. 
The revenues of the European central institutions are trivially small: less than 1 percent of EU GDP. There is no central European Treasury. There is no federal European debt. All the Europeans have is a European Central Bank. And today they are discovering the hard way what some of us pointed out more than 13 years ago, when the single European currency came into existence: that’s not enough.
Good stuff.  Read the rest.

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