Monetary Systems, Government Deficits, and Policy Space Pavlina R. Tcherneva, Ph.D. Associate Professor, Bard College Research Scholar, Levy Economics Institute Chair, Departments of Economics and Economics & Finance The Eurozone in Crisis

Greece after the 2008 Crisis Debt at 112% in 2009 IMF program (2010) Debt at 177% in 2015 IMF/EU program (2015)

The Players in the Greek Drama Greece Goldman Sachs Global finance (2008 meltdown) The IMF (mea culpa)mea culpa Germany The Euro

Did Greece Adjust? Adjustment relative to other countries

GDP comparisons

Versus the U.S. Great Depression

Vs. Europe

Where did IMF bailout money go? 10% Economic Restructuring 90% Banks the-greek-bailout-money-go the-greek-bailout-money-go

IMF Predictions

Economic Depression Unemployment 25% Youth unemployment 60% (peak), now 50% Poverty: 40% among children, 42% among elderly Suicides: up 35% For every 1 successful suicide, 30 attempts Hospitals lack basic medicine to administer (e.g. vaccines for children) 60% of all Greek families experience food insecurity

The Modern Money Approach 1. Currency Issuer vs. Currency User Debts are fundamentally different from one another Japan, Canada, US, Norway, most of the world Currency boards, Exchange rate pegs, Dollarized nations 2. The Sector Financial Balances One sector’s deficit is another sector’s surplus Why the US or any nation with its own currency cannot end up like Greece involuntarily Why the problem of Greece is the problem of EVERY country in the EZ Why the EZ is a deflationary institutional framework

Hierarchy of money Governments Source of currency or reserves Private banks create bank money but use currency or reserves or clear payments Firms, households, foreigners, states Users of currency Governments ISSUERS Private banks USERS Firms, households, foreigners, states USERS

Sovereign & non-sovereign monetary regimes $,¥ £,peso Governments Control the currency Governments Do not control the currency Exception 1 currency = 19 nations USERS The rule 1 currency = 1 nation ISSUERS € United States vs. the Eurozone comparison

Sector Financial Balances ACCOUNTING ITENDITY AGGREGATE SPENDNG = AGGREGATE INCOME AE= C+ I + G + X –M Y= C + S + T Injections = Leakages C + I + G + (X – M) = C + S + T (G – T) = (S - I) + (M – X) Government deficit = Private sector saving + Foreign sector saving Government sector deficit = Non-government sector surplus

Sector Financial Balances (% of GDP): Germany

Sector Financial Balances (% of GDP): Greece

Government deficit = nongovernment surplus

Sector Financial Balances: US

Only the government sector can act counter-cyclically CURRENCY REGIMES Free floatLeast restrictive Managed floatMost policy space Exchange rate targets Pegged but adjustable Crawling peg Hard peg Currency board Dollarization Most restrictive Monetary Union Least policy space

The EZ: a deflationary environment

Rules, Solutions, Lesson Counties do not have countercyclical mechanism Race to the bottom for trade competitiveness Beggar thy neighbor If government debt is to be reduced, we MUST offset with private debt for growth Public debt haircut is impossible, not allowed under current rules No backstop to public debt ELECTIONS do not matter Why the problem of Greece is the problem of EVERY country in the EZ Deflationary environment CURRENT SOLUTION: Net export. Fallacy of composition NEEDED: Countercyclical Fiscal Mechanism and 2) Ez-wide safetynet The US or any nation with its own currency cannot end up like Greece

A Eurozone convergence?

Imbalances

Deflation