December 17, 2014
Dimitri B. Papadimitriou is a leading scholar and policy-maker, President of the Levy Economics Institute of Bard College in New York. Himself as well as the Levy Institute have invested during the last couple of years in the explanation of sovereign debt crisis in Eurozone and Greece, endeavoring to enrich the debate with policy proposals that could efficiently address austerity and put Europe back on track of development and growth. In the context of Bridging Dialogue Initiative, Dimitris Rapidis discussed with Dimitri B. Papadimitriou on ECB interest rates policy, deflation, Junkers’s fiscal stimulus plan, debt management and the Stability Pact, US economy, and the economic crisis in Greece.
1. Will ECB’s long-term financing operation (LTRO) and the policy for low interest rates help businesses have access to cheap credit?
This new form of quantitative easing, the LTRO, by the ECB along with the low or even negative interest rates aims at providing the stimulus to the banking sector, in most countries of the Eurozone, to increase and intensify lending. Given the very low inflation and even deflation is some countries including Greece, monetary stimulus is thought to be a prescription of economic stimulus. As it has been shown, however, with the experience of the US Fed’s quantitative easing, stimulating the real economy comes mostly with fiscal policy easing and not monetary policy. The benefits of monetary easing in the case of the US have been the run up of the stock market which has not led to increased in effective demand.
2. Why ECB plans to fight deflation?
Deflation is one of the worst economic phenomena that an economy can endure. It is more preferable to have inflation than deflation. The example of Japan’s lost decade with deflation and even low inflation proves the detrimental economic effects of such economic landscape. From this perspective, the ECB’s LTRO is a step in the right direction, if and only if, borrowing can occur. Profit expectations in the Eurozone, however, are low and thus the reluctance to increase investment and production. Furthermore, the private sector (both households and businesses) is still deleveraging from their high level of debt and thus limit consumption and investment expenditures. Fighting deflation by engineering inflation is the correct central bank strategy.
3. Is Junker’s plan for 300 billion euro in investments and job growth realistic?
Junker’s fiscal stimulus plan is too small, even, if it is to be approved which is doubtful. To deal with the Eurozone’s unemployed and first entrants in the labor force including the youth requires a larger stimulus. Furthermore, it is not only the employment deficit that is crucial. There is an infrastructure deficit that even in Germany alone, a country that strongly opposes any such stimulus programs, is over a trillion euros. So Junker’s plan is unrealistic on many fronts. Too small and untargeted to have a significant effect on job growth.
4. There is a growing number of member-states in the EU that face serious burdens in effectively dealing with sovereign debt management. How could global and national economic policies accommodate with this crucial issue?
The problem of member states sovereign debt can only be solved cooperatively which is unlikely to happen in the near future. The ECB has the capacity to buy a significant or even the entire debt of the eurozone and park it in its balance sheet. Government officials especially those in Germany have no idea how central banks’ balance sheets work. Germany’s economic rules are rules more appropriate to theology and rather than economics. With the exception of Nicolae Ceaușescu’s craziness to pay Romania’s debt by creating an economic disaster, no other sane government focused on this issue as much as Germany has. Since the ECB is unlikely to do the right thing, the important issue is how to grow GDP which in its turn will reduce the debt to GDP ratio that financial markets and their participants worry about. There are some countries in the Eurozone with unsustainable debt levels, as is the case of Greece which because they do not have their own sovereign currency have very limited options and will sooner or later need to have a significant write-down of debt. It will be the only way to engender a growth-directed path that can put them on the road to recovery.
5. The goals of the Stability Pact can be hardly reached. Considering that France and Italy, two of the major economies in Eurozone, face serious macroeconomic struggles, do you foresee any major revision in EU’s austerity policy?
The rules regarding deficit and debt limits of the stability and Growth Pact are arbitrary and as far as the debt limit of 60% percent of GDP is concerned only one or two member states have achieved and they do not include Germany. The deficit limit, even Germany in some years was not able to achieved and instead surpassed it. Given the stagnation that has gripped the Eurozone I doubt that the rule will be adhered to. The headwinds point to the direction of relaxation of austerity, Germany’s protestations notwithstanding. The strong unions in France, Italy and Spain will eventually force the respective governments to alter course. A formal revision of the Maastricht Treaty may not come anytime soon, but we will see many exceptions to the deficit rule especially if healthy growth continues to be an elusive goal while deflation becomes not a temporary phenomenon.
6. US economy ran with around 4% of growth in the third quarter of 2014. Is this a sign of recovery or there are still concerns over a slowdown?
The US is on the road to recovery, but problems still remain in the horizon. There are still too many unemployed individuals despite the lowering of the unemployment rate. But the most significant and crucial problem in the US is the very high inequality of income and wealth. Unless this issue is dealt with soon, the US economy will face serious challenges in the not too distant future including a renewed economic slowdown. Government policy to deal with this issue effectively, given the results of the mid-term elections and the Republican controlled Congress in both Houses, is unlikely. We will need to wait for a possible change in the tax system in 2016 with the Presidential elections. Another significant issue relating to unequal economic fortunes is the stagnation of real wages which urgently needs a policy of an expanded Earned income Tax Credit and higher minimum wage legislation.
7. What is your opinion on Greece’s economic crisis, the decisions of the Greek government and the role of troika?
Greece’s economic crisis has graduated to a catastrophe. The reduction in output, employment and incomes experienced by the Greek economy since the start of the recession is comparable to the impact of a major war, and worse in relative terms than the impact of the 1929 Great Depression of the US economy. Real GDP has fallen with a record of 23 consecutive quarters of negative growth which brought it back to 2001, wiping out all of the gains achieved in the 2000s. Obviously the troika imposed austerity and the compliant three governments since 2009 have followed inappropriate, and I would even daresay foolish policy of fiscal consolidation and internal devaluation that have proved to be ineffective. The irony is however that the government believes that this is the only road to follow. The recent turn of positive real GDP growth is cosmetic and more due to the continuing deflation than the “turning of the corner” that government celebrates, while the achievement of primary budget surplus with its unprecedented human costs will be short-lived.