Thursday, 10 May 2012

Is Keynes's Clearing Union the Solution for Europe?

The Wolfson Economics Prize, about how to fix/break up the euro, was in the news some weeks ago. After having skimmed through, certainly not read thoroughly, some of the works that were handed in (I did read the entry of the 10 year old Dutch kid, thumbs up for trying) and with this paper in mind - A post-Keynesian interpretation of the eurozone crisis - it has started started to dawn upon me that Keynes may well have the solution: his Clearing Union (CU).

The essential core of the CU was that (current account) surpluses were to be recycled, in a way, between countries. The surpluses would build up as "pool of funds" (don't think for a second that I believe in the nonsense of Loanable Funds Theory just because I use this term) at the Clearing Union. Those surpluses would then be available to countries in deficits in the form of overdraft facility, at very low rate of interest. In today's Europe, the equivalents of the surplus countries are of course Germany and other current account surplus countries. The Peripheries are the deficits countries.

If the CU would be adopted between the countries of the euro zone the surplus of the Core would be up for grabs for the Peripheries, at a very low rate of interest. The Peripheries could therefore finance employment schemes and public investment projects with money from the Core, hoping that the resulting increase in income would get the economy back on track and possibly even getting some capital-and-income convergence with the Core.

In the meanwhile, the Surplus countries would be induced to spend more at the given exchange rate of the euro since the rate of interest of the surplus, ending up being a overdraft facility at the CU, is very low. The increased spending of surpluses would, if spent outside the euro zone, send the exchange rate down, assisting the deficit countries to export their way out of recession. If the spending is euro-zone-internal the increased income of the peripheries, as the surplus is recycled into imports from there into the core, would kick them out of recession.

Note that this system basically fights against huge disbalances in the current account between countries. Today's problem arise from the fact that even though the current account of the euro zone as a whole may be in balance to the rest of the world, there are huge imbalances between countries within the euro zone. This CU system would wipe those imbalances out or at least mitigate their negative effects as the deficits can be financed at low rate of interest.

The beauty of this CU system is that there doesn't seem to be any need to breakup the euro. Obviously, the creditor countries (the Core) are being asked to spend their own money to clear up the internal imbalances. If they don't want to do that, the debtor countries (the Peripheries) get the savings at a very low rate and can do what they want with it. No need for fiscal union.

I don't expect this idea to reach the ears of ruling politicians however, they are already "slaves to some defunct economist" who thinks the way out of the current problems is to apply more and more austerity. One can only hope they realise that it's like trying to put out fire with a dash of petrol.

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