On the World
Greek Love or Greek Hate and the Eurozone
NEVATHIR
May 11, 2017
Predictably, 2008 financial crisis saw the return of Keynesian economics. Politics within economics departments often downgrades Keynesian economics to junk status in favor of market self-regulation or vice versa. Here we do no such thing.
A trivial explanation why academic economics often doesn't work is that these models often employ very restrictive conditions like rationality and thus are of limited applicability to real world. Markets for electronics suit these models well but not securities or currencies. The reason why Keynesian models were junked is that they don't explain all macroeconomic phenomena, like clearly derived unemployment under stagflation. Now we can say almost all sorts of macroeconomic models suffer the same more or less, but not completely junk them.
It's noticeable that Keynesian economics may succeed or fail at the objective of its own conception. Government may not rank full employment as top priority. The adequate amount of fiscal expansion is not popularly favorable for politicians or the public, and comes too late or not at all. People don't behave as model parameter described, like marginal propensity to consume (Taiwan), and not maintaining nearly zero rates as liquidity trap dictates (ECB rate hike and bond/bank rates).
Although government monetary and fiscal expansion has been taken to combat recession, its success and failure along with the soundness of Keynesian economics are very much debatable.
Eurozone puzzles Keynesians. Why not run deficits as FDR did and reduce unemployment quickly? Is it simply political unwillingness that prolonged unemployment and delayed market recovery? Capitalism eventually recovers, but is the unnecessary suffering entirely due to political will?
Several economists noticed how Euro could affect GDP aside from usual monetary/fiscal policies, banks, trade, wage, private investments, interest rates, etc. Cross-border fiscal expansion is hardly adequate, Marshall plan no exception. Cross-border private investments are less than enthusiastic compared with pre-crisis levels.
Greece is worse than Spain and Spain is understood as a liquidity crisis, quintessential for Keynesians. Krugman forgot to save banks, but proposed inflation to save Euro, not unemployed people.
Nothing for Greece.
Modern Monetary Theory, with its flaws, did recognize the issue government as a currency user, not issuer. Yet Eurozone national governments, aside from the fact that EU authority is much smaller than USA government, look quite worse than Detroit, which MMT applies. A issue most economists overlook is whose order ECB will follow, beyond the present following. If Greece is uncertain whether ECB will do whatever it can to aid Greece, or worse expects a significant chance of harm, is its government in a position to run large deficits without proper regard to future central bank financing?
If we imagine Greek government as USA government and ECB as Federal Reserve, it's as though USA government is at Germany's mercy for its central bank operation. If it's World War II, you see the consequence. For Keynesian economics to work, government must be able to pursue it without restrictions employed by a central bank with different priority.
It's not the Eurozone and ECB.