Regulation of the financial markets,monetary union and the end of paper money. Joint Review

Regulation of the financial markets

The group of researchers brought together by Mayntz present in great detail which political actors have steered the regulation of global financial markets. All the authors, most particularly Lora Anna Viola, put the G20 group at the centre of the reform process. This body, according to the authors, is characterised by ‘multilevel governance, ranging across sub-national, national, regional, and international jurisdictions’ (p. 19). In other words, what emerged was far from being a regulatory authority with a global remit, of the kind recommended by, for example, Barry Eichengreen in the form of a World Financial Organisation, but rather a ‘more pluralistic and fragmented institutional environment’ (p. 18). In this ‘network governance’ Mayntz and her group of authors see a form of organisation that is appropriate to the problem, given the ‘increasing importance of transnational and transgovernmental actors, issue complexity, and interest heterogeneity’. The G20 has taken on the role of a ‘hub’, a ‘nodal actor’ or a ‘governance actor’, whose hallmark is orchestrated coordination. Mayntz emphasises the close interlinking with the Financial Stability Board (FSB). The latter is the ‘core actor’ and ‘prime coordinator’ because it governs the transfer of G20 resolutions to the IMF, but in particular to the national level and the transnational EU region. This transposition is gone over in some detail in the contributions on regulation in the United States, the United Kingdom, Germany and the EU. Lucia Quaglia shows how the EU, on the one hand, adopts G20 resolutions, but on the other hand modifies them to reflect European interests. On the example of the EU banking union she explains how the eurozone has tried to respond to the debt crisis and the asymmetric design of the monetary union, namely the common currency without fiscal union. Her essential point is that the EU has its own regulatory capacities, which have made it an ‘an important player in global financial governance’. In the volume’s closing contribution the results are summarised to the effect that the ‘loosely coupled multilevel action system’ is largely politically governed and has brought into being a higher level of regulation.

Keynesian critique of the euro

The book by Stiglitz is really an oversized pamphlet with a political message. It presents a substantively narrow traditional Keynesian worldview. According to Stiglitz it is a simple matter to explain the economic world and to rectify the evil: suppressed demand due to the economic obstinacy of politicians can be transformed into an ocean of demand by enlightened Keynesian actors to ensure growth and employment.

For long stretches one gets the impression that Stiglitz has composed the world in just the way he requires for his message. Whatever does not fit is ignored. The frustration that this reviewer cannot suppress concerning a book that contains many repetitions and concerning an author who refers constantly to his, to be sure, impressive career in academia and as a policy advisor, is that Stiglitz represents a noble cause and brings stimulating ideas and proposals to the political debate.

His criticism of the euro is fairly basic: the design is bad because a common currency cannot function without fiscal policy governance. Equally fatal, in his view, is the restriction of the European Central Bank to price stability with the consequence that growth and employment are side-lined. Stiglitz regards it as a serious shortcoming that the ECB has to pursue a uniform monetary policy for a heterogeneous economic area and thus flexible adaptation to nationally diverging situations is not possible. He repeatedly finds fault with the fact that devaluation is no longer available as a means of boosting price competitiveness, thus depriving weaker countries of a key adaptation mechanism. With this criticism Stiglitz not only finds himself in good company in the ‘Keynesian fraternity’, but also beyond it. Piketty, for example, believes that the monetary union is poorly constructed. The basic error, in his view, is that it is not possible to have a functioning currency without a state and a central bank without a government. According to Keynesians such as Robert Skidelsky, but also Michel Aglietta – founder of the regulation school – the euro needs a political anchor: ‘A public good par excellence, a currency cannot function without an organic link to political power: it requires a sovereign’ (Aglietta and Leron, The Eurozone: Looking for the Sovereign, www.socialeurope.eu/2015/09/).

The eurozone is conducting urgent structural reforms, but not its member states, as Stiglitz keeps repeating. In that respect many commentaries by Piketty read like a contraindication. Piketty reproaches the problem countries with many failures. Ireland’s economic policy, for example, is based on tax dumping, which he describes as daylight robbery. He also takes France to task for its failure to instigate structural reforms: the social safety net should be revised from the ground up, as should the archaic tax system. And Greece suffers from clientelism, corruption, incompetent administration and governments that constantly put off innovations and thus have locked in the country’s premodern character.

The institutional defects of the eurozone are widely known and have instigated a reform process: fiscal policy supervision has been intensified, an anti-growth debt brake has been introduced, but also the European Stability Mechanism (ESM) as a lifebelt for overindebted countries, the banking union for oversight of the financial sector and a monetary policy of quantitative easing. The ECB’s measures resulted in a sharp depreciation of the euro. It also lowered the interest rate, even bringing about negative interest rates. This reduced the interest payment burden on state debts and, finally, prevented the debtor states from going bankrupt. The ECB is moving in the direction of US monetary policy. Piketty has repeatedly characterised this new orientation as desirable and it also fits into Stiglitz’s monetary policy outlook, although the latter has characterised the reforms – which certainly are not the last word – as ‘temporary palliatives’.

According to Stiglitz, the manner in which Europeans have dealt with the debt crisis of problem countries – for example, ‘austerity’ policy and the rejection of debt relief for Greece – springs from a lack of solidarity. It is undeniable that the situation of a large proportion of the population has deteriorated. However, Stiglitz does not address the domestic mistakes and abuses of the problem countries, which diminishes the willingness of others to make an exception. It is a little surprising, if understandable if Piketty is somewhat sceptical, even hostile to debt relief. Solidarity is not a one-way street; reforms are needed as a quid pro quo.

With regard to debt relief Stiglitz overlooks the fact that something has happened in that regard: as early as 2012 there was a reduction in the Greek debt of €60bn, and then the prevention of state bankruptcy by means of ESM credits. These credits, secured by guarantees of the euro countries – primarily Germany, followed by France and Italy – are subject to an interest rate of 1 per cent, on average, and repayment has been stretched out until well into the 2040s, partly up to 2055. That is a major, although admittedly concealed debt relief.

The most far-reaching proposal for solving the euro crisis would involve dividing up the eurozone into several currency groups. On the example of Greece Stiglitz explains how a ‘twenty-first century financial transactions system’ might look by means of a ‘Greek-euro’. This currency would not take the form of paper money – ‘funny pieces of paper’ – but be exclusively electronic money and could be introduced immediately. The Central Bank would have sole responsibility for the quantity of money brought into circulation, and banks would be decoupled from money and credit creation. This would happen through credit auctions, at which banks would purchase rights to issue credits from the central bank. Trade deficits could no longer occur: export companies would receive vouchers which they could use themselves or sell to importers. State debts could also be brought under control: the Greek government would have to convert all euro debts into Greek-euros, which could later be depreciated. This would have to be agreed with the euro countries in an agreement on an ‘amicable divorce’. Implementing his proposal would be easy – he says repeatedly – it would restore economic and monetary policy sovereignty and ensure full employment and robust growth.

But he does not believe in his own proposal because he concludes by suggesting that Germany leave the euro, preferably accompanied by other states, which should then establish a northern-euro group. This would be an easy way to bring Europe ‘back to health’. Stiglitz expects a massive revaluation of the northern-euro, which for the problem countries would constitute a due devaluation of their southern-euro. Stiglitz banks here on the panacea, which he never tires of repeating, of devaluation, which would enable the problem countries to cure their lack of competitiveness. This would open a way from ‘a vicious circle to a virtuous circle of growth and prosperity’. This does not, however, coincide with the historical reality of the post-war period with its recurring currency upheavals. Were devaluation to be such a magic potion, a number of other countries would have long achieved competitiveness. Between 1975 and 1995, the French franc lost 48 per cent of its value against the German mark, the Spanish peseta 73 per cent, the Italian lira 78 per cent and the Greek drachma 93 per cent, without anything being corrected. Instead, these countries continue to suffer from the same phenomena. Devaluations are a monetary measure that promise only short-term relief and do not tackle such structural problems as bureaucratic statism, clientelism, tax evasion or chronic youth unemployment.

Against these historical experiences Stiglitz regards the appreciation of the northern-euro as the right instrument for reducing Germany’s export surplus. It is true that the surplus is excessive and the German government is not using its leeway for public investment in infrastructure. However, it overlooks two important counter-arguments:

 (i) Germany’s export strength is based largely on highly specialised industrial goods and not on low prices. Jörg Hofman, leader of IG Metall, says that ‘non-price related competitive factors such as product quality and complexity, reliable supply and service packages are decisive in relation to such price-inelastic industrial goods’ (WSI-Mitteilungen, 4/2014, 313). Stiglitz does not consider this argument, or that exports from Central and Eastern European suppliers would suffer from a major reduction in Germany’s export capability.

The end of cash

The new book by Kenneth Rogoff, The Curse of Cash, appeared just in time for the Frankfurt Book Fair in autumn 2016. It is a brilliant plea for the abolition of cash, an issue that provokes spontaneous rejection in many, but is already on the agenda of economic and monetary policy-makers. Rogoff based his position on two major issues:

 (i) Cash, especially large denominations, makes it possible to carry out illegal transactions anonymously. The spectrum of criminal activities encompasses drug dealing and extortion, money laundering and tax evasion, human trafficking and illegal immigration. The shadow economy is also based on cash because it makes it easy to avoid taxes and social security contributions. A particular concern of Rogoff is the exploitation of workers without work permits. ‘Dirty money’ is much more prevalent than many realise and should be withdrawn from circulation in a long transitional process to smaller denominations and coins.

Rogoff wants to boost the potency of negative interest rates as a tool available to central banks to combat economic depressions. This is his main aim, rather than combating illegal transactions. He regards the extension of the monetary policy toolkit into ‘negative interest rate territory’ as essential. For him negative interest rates are the right way ‘to turbocharge the economy out of a deflationary recession’. Rogoff expects that depressions will recur repeatedly. It remains unclear what the causes are. Occasionally he mentions enormous cost reductions as a consequence of technological innovations. That would explain a deflationary trend.

The author marshalls numerous monetary-theory considerations and examples from monetary history to put forward the point that paper currencies are undermined in an inflationary way by excessive money creation and can become worthless. This danger is likely to become a permanent problem in a cashless economy. Whether boosting the independence of central banks – ‘the single most transformative change in macroeconomic policy’ – can provide an adequate safety guarantee against government power grabs is rather questionable.

Mayntz and Rogoff offer the reader a plethora of insights in two very different problem areas. Anyone seeking a sound understanding of international regulation of the financial markets would benefit from reading Negotiated Reform. The same goes for The Curse of Cash, a book that at least might give the reader reason to pause before rejecting a cashless economy out of hand.

Piketty’s commentaries merit respect as well-considered scholarly interventions in current debates.

Stiglitz’s book suffers from its author’s tendency to believe that all problems can be easily explained and remedied. Unfortunately he misses the opportunity to develop an outline of a modern Keynesianism.