Free Lunch: Words of wisdom

Δημοσιεύθηκε: 16 Απριλίου 2015 - 10:51

The truth-seeking IMF

The International Monetary Fund is worth listening to. In a fascinating blog post entitled "The Blanchard touch", Francesco Saraceno (who first spotted the IMF's doubts about labour market reforms that Free Lunch mentioned yesterday) documents how the fund has often questioned, and corrected, its own beliefs about which policies work. This includes, of course, the cost of fiscal austerity but also the effects of inequality, investment and capital controls. Saraceno concludes pithily: "The Washington consensus does not exist any more, at least in Washington." That the IMF isn't afraid to challenge its own views makes what it has to say more deserving of attention. Including, one hopes, eventually in Europe.

So while waiting for the eurozone to catch up with the fund's self-betterment, take a look at its latest policy analysis, the Global Financial Stability Review. If you thought things were going better, think again: financial risks are on the rise and virtually every country needs better policies. Europe must (still) fix its banks so that monetary stimulus can reach businesses; everyone must handle the risks that come with extraordinarily low interest rates. A difficulty is that while low rates can lead to instability, so can raising them. In an interview with the FT, the IMF's director of monetary and capital markets warns of a "super taper tantrum" when the Fed finally raises rates.

Talking sense

As regular readers will have noticed, Free Lunch doesn't miss an opportunity to challenge the lazy thinking that equates a Greek sovereign default with Greece leaving the eurozone. So it's welcome to see others do the same. John Cochrane, on his Grumpy Economist blog, asks: "Please can we stop passing along this canard?... Greece no more needs to leave the eurozone than it needs to leave the meter zone and recalibrate all its rulers, or than it needs to leave the UTC+2 zone and reset all its clocks to Athens time." As Cochrane rightly remarks, this misperception is dangerous because flirting with redenomination is the surest way to make capital flee. Politicians' willingness to countenance a eurozone break-up was the main factor behind the sovereign debt crisis in 2011-12: the strictest fiscal discipline in the world will not help a country that markets think is going to devalue.

Making clear that debt restructuring need not mean currency redenomination makes it easier to discuss which debt should be restructured and how. A new CEPR report makes an important contribution to such a discussion with a detailed proposal for a large-scale debt operation to remove the debt overhang across the eurozone. Those who resist a Greek payment delay should read it closely.