Sovereignty, the exchange rate, collective deceit, and the euro crisis

Abstract

This paper presents an interpretation of the European crisis based on balance-of-payments imbalances within the Eurozone, highlighting the role of the “internal” real exchange rates as a primary cause of the crisis. It explores the structural contradictions that turn the euro into a “foreign currency” for each individual Eurozone country. These contradictions imply the inability of national central banks to monetize the public and private debts, which makes the euro crisis a sovereign crisis similar to those typical of emerging countries, but whose solution presents additional obstacles.

Key words:

• exchange rate
• euro crisis
• sovereignty

Notes

¹According to data of the Organization for Economic Cooperation and Development (OECD) Southern countries’ 2009–13 yearly growth rates were all negative: Portugal (−1.4 percent), Spain (−1.4 percent), Greece (−5.2 percent), Italy (−1.5 percent), and Ireland (−1.1 percent).

²Williamson (1983) develops the concept of fundamental equilibrium exchange rate and defines it as the exchange rate level that enables the economy to simultaneously achieve domestic and foreign equilibria, where domestic equilibrium is given by the use of production resources without generating inflationary pressures, and foreign equilibrium is that which enables a sustainable current account. In spite of the controversy surrounding this concept as an indicator of the appropriate exchange rate level, the evolution of rates as calculated by Jeong et al. (2010) is regarded as a relevant indicator of intra-European exchange rate disequilibria.

³Keynes (1924) shows how adjustments to the bank rate establish foreign equilibrium under the gold standard regime.

⁴The euro is more similar to the disastrous gold standard model that was in force between the two world wars, when surplus-posting countries sterilized gold inflows from current transaction surpluses, preventing inflationary adjustment and making it difficult for countries showing deficits to adjust.

⁵According to Hein (2012), France, Italy, and Portugal do not fit either model. Although they do not match the debt-led consumption boom, growth in those countries was driven by domestic demand, accompanied by either a relative increase (Portugal) or a relative decrease in wages (France, Italy) and, in any case, with sizable public deficits.

⁶Miranda (2012, p. 36), for instance, asserts that: “The euro is a unique currency among its international peers. It is a single currency issued and managed by a statutorily federative central bank whose equity capital belongs to a politically nonexistent federation and whose deliberative power is entirely independent from its adopting sovereign states. It is thus a currency that countries share, but that does not, as a monetary policy instrument, have a unified sovereign debt bond to show for itself because budget administration is decentralized, that is, because fiscal federalism does not exist.”

⁷The American case of quantitative easing is illustrative: in spite of the financial crisis and the U.S. fiscal and foreign deficits, economic actors never questioned the Federal Reserve’s ability to ensure the solvency of public bonds.

⁸The other side of the German path is the “internal appreciation” of surplus-posting countries, that is, inflationary price and wage adjustments.

⁹In this and other works, Keynes stands as a critic of the gold standard’s deflationary adjustments. According to him, wages can only be reduced with unemployment and recession, partly because only an unemployed worker would accept returning to work for a smaller wage.

¹⁰Establishment of such a fiscal authority would imply establishing a centralized budget and a market for unified sovereign debt bonds.

¹¹For instance, in a recent survey of Ipsos for Accenture, when asked how they self-identify, 49 percent of the French responded French, and only 14 percent responded European (Le Monde, December 2, 2014).

¹²Quite simply, if €-Fr =x€ and 1€ =y$, then 1 Fr-€ =x.y$.

Additional information

Notes on contributors

Luiz Carlos Bresser-Pereira

Luiz Carlos Bresser-Pereira is Emeritus professor, São Paulo School of Economics, Getulio Vargas Foundation, Sao Paulo.

Pedro Rossi

Pedro Rossi is professor in the Economics Institute at Campinas State University.