Monday, 12 December 2011

Euro lacks a government banker, not a lender of last resort

This article by Thomas Palley, of the New America Foundation's Economic Growth Programme, was published in the FT Economists' Forum on December 9th

Sinéad Pentony: It crunch time (again) for the Eurozone, so this article by Thomas Palley is timely, as he articulates the causes of the Eurozone debt crisis and the solutions that are needed, differently from many of the other voices in the debate.

Palley argues that the euro has a lender of last resort – the ECB – but what’s lacking is a government banker, like the Federal Reserve or Bank of England, which helps finance budget deficits and keeps rates low on government debt. Thus explaining why the US and UK can borrow at lower rates than countries such as Spain, which has a similar deficit and debt profile, but its under speculative attack.

Palley points the finger at the “euro’s neoliberal birthmark”, which laid the foundation for a diminished role of the state and enhanced power of the market. He goes on to argue that previously, national banking systems were masters of the bond market, but the euro’s architecture makes bond markets masters of national governments – and this is the problem that must be solved through the creation of a government banker.

1 comment:

Paul Hunt said...

The answer of these ideologues seems to be loads and loads of 'other people's money' - either by grabbing it directly or indirectly by increasing inflation. The 'financial repression' that under-pinned the post-war social democratic settlement led to the inevitable and vicious Neocon reaction that went through a phase of fiscal and credit incontinence (that masked 'wage repression' in many advanced economies) to full-blown wage and fiscal repression.

The difficult and painful solution is to minimise reliance on bond market participants by pursuing fiscal adjustments combined with meaningful structural reforms. But everyone conveniently forgets the latter - or believes that these should apply only to other sectional economic interests.

The most effective way of exercising governance over bond markets if for participants to be pleading with governments, banks and large businneses to provide them with a home for their 'good money'. The game is up when governments and banks are pleading with bond market participants and fiscal and strcutural refroms are unavoidable.

There is no going back to the financial repression of the post-war era.