easyMoney could save the eurozone
[This article is joint with Declan Gaffney, who blogs (mostly on welfare and benefit related issues here; it was prompted by a twitter conversation with Sue Marsh, also a prolific blogger on disability issues. After writing it, we became aware of this FT article by James Mackintosh, who obviously thought of the basic idea first, but having written it we thought it was worth posting, and it makes some additional points].
A few weeks ago it was reported that a group of holidaymaking Germans in a Cretan bar refused to pay their bill on the grounds that it was “their money”. Unsurprisingly, a fight broke out. This microcosm of the political and economic troubles of the eurozone is revealing – because both sides had a point. More optimistically, it points to a possible solution to the fundamental problems of the eurozone that could benefit all sides.
The key to this lies in a simple question raised with us (on twitter) by Sue Marsh [Sue discusses our conversation here] . The most embattled eurozone economies are also popular holiday destinations, so why couldn’t policymakers help resolve their difficulties by channelling money to the citizens of less troubled countries to spend on holidays in these destinations?
That may sound too good to be true: in fact, it goes straight to the heart of the issue. The European Central Bank has understandably objected to buying bonds from countries in difficulty, on the grounds that this is less a monetary policy operation than a bailout. We agree. Instead, they should buy bonds from all eurozone countries. For those countries in difficulty, this would just be quantitative easing.
But the key is what other countries, such as Germany, would do with the money. Our proposal is that they should issue vouchers to their citizens, redeemable only on spending in goods and services in those countries suffering financing difficulties (Spain, Ireland, Portugal, Greece, Cyprus and Italy). Holiday vouchers, in other words. So German holidaymakers could pay for their drinks in Cretan bars (and their flights, hotel bills, souvenirs, ferry tickets and the like) with “money” created by the ECB and distributed to them by their own government. The Greek businesses would in turn be able to trade in the vouchers for euros from the German government (via the banking system and the ECB).
This solves a number of problems. It would loosen monetary policy across the eurozone and ease the financing problems of the periphery countries. But most importantly, as Martin Wolf has long argued, the fundamental problem of the eurozone is not fiscal profligacy in periphery countries, but internal current account imbalances. Consumers in the periphery countries have been spending on goods and services from Germany and the Northern countries, but not vice versa, financed directly or indirectly by capital flows from those same countries. Now those flows have dried up; so one way or another, the current account balances must be corrected.
Our proposal would do exactly that, quickly, directly and in a growth-friendly way. Tourism is a major export in all of the countries listed above, especially Spain and Greece. It is a large employer, especially of young people. And – unlike other export industries which will take time to establish international competitiveness and to expand – it is flexible and can respond quickly to increases in demand.
Crucially – unlike virtually anything else on the table at the moment – our proposal could be politically sustainable across the eurozone. It would address imbalances by boosting export demand, growth and jobs in the periphery countries, not by imposing self-defeating austerity or years of grinding “internal devaluation”; policies we have already seen are doomed to failure both economically and politically.
And it addresses the legitimate concerns of citizens in Germany and elsewhere in the North. It would not be a gift or a bail-out. Rather than restoring balance by asking workers and companies in Germany to become less competitive or productive it would do so by raising their real wages and increasing their consumption. And rather than asking the German government to increase taxes or borrowing to bail out “profligate” southerners, it would enable it to give something of real value to its own citizens to the benefit of the whole eurozone.
Finally, it should be acceptable to the ECB, which would be able to loosen monetary policy, but without having to worry about the inflationary consequences, since it would boost demand precisely in the regions which are currently suffering from deficient, rather than excess, demand.
The basic idea is not new: Milton Friedman famously recommended that in extreme circumstances the fiscal and monetary authorities, working together, could solve a depression with “helicopter money.” Our proposal is a version of that, but with the crucial difference that it addresses not only the eurozone’s overall shortage of demand, but also the internal imbalances that threaten to tear it apart. Call it easyMoney.