venerdì 18 luglio 2014

Una vera amica di Israele, nonostante tutto

FRA I MESSAGGI DI CORDOGLIO PER LA SCOMPARSA DI MARGARETH THATCHER, ANCHE QUELLO DEL PRIMO MINISTRO ISRAELIANO BENJAMIN NETANYAHU CHE L'HA RICORDATA COME "UNA VERA AMICA DEL POPOLO EBRAICO E DI ISRAELE"


Da ieri pomeriggio, quando la notizia della scomparsa è stata diffusa dai figli Carol e Mark, ovunque sul web sono ricorse immagini, articoli, dichiarazioni sulla Lady di Ferro. Ad 87 anni, malata da tempo, Margareth Thatcher è stata protagonista indiscussa e controversa della politica britannica ed occidentale per tutti gli anni ’80.
Della sua lunga e dibattuta carriera politica – cominciata negli anni ’50  e culminata con la carica di primo ministro dal 1979 al 1990 – vale la pena ricordare però forse un  aspetto poco noto, poco trattato come i suoi legami con lo Stato di Israele.
Le cronache del tempo, le analisi storiche ora ci ricordano, infatti, innanzitutto la fermezza, talvolta la durezza di Margareth Thatcher sulle questioni del conflitto mediorientale, la sua ostilità manifesta nei confronti delle politiche di Menachen Begin e Itzak Shamir.
Eppure ieri, poco dopo la notizia della scomparsa il primo ministro israeliano Benjamin Netanyahu non ha esitato a definirla “una vera amica del popolo ebraico e di Israele”.
Nel dicembre dell’1981, nel corso di un discorso dinanzi alla commissione di deputati di ebrei britannici, Margareth Thatcher condannò con forza la decisione di Israele di annettere il Golan, e per Begin ebbe parole assai poco lusinghiere – lo definì “uno che potrebbe uccidere l’intero processo (di pace)”. Più tardi, sempre di Begin, disse che fu l’uomo “più difficile” che incontrò nei sui primi anni da primo ministro.
L’incapacità di trovare una soluzione al conflitto arabo-israeliano le faceva temere per Israele come per gli interessi occidentali. Era convinta che i sovietici sfruttassero il loro sostegno ai palestinesi per rafforzare la propria area di influenza nel mondo arabo ai danni dell’occidente.  Anche per questo fu una ferma fautrice della soluzione diplomatica, per la quale contava su Shimon Peres e il re di Giordania Hussein. Come Peres, peraltro, era convinta che il conflitto israelo-palestinese si sarebbe risolto nell’ambito di una federazione con la Giordania, più che attraverso la nascita di uno Stato palestinese indipendente. Lo scoppio della prima intifada nel dicembre dell’87, la rottura di Hussein con i palestinesi della Cisgiordania e la strada aperta che allora l’Olp si trovò di fronte – con le conseguenze che tutti conosciamo sui negoziati di pace – ci mostrano a distanza di quasi 25 anni, che, forse, proprio quella sarebbe stata la strada da intraprendere.  
Ma al di là della politica, i discorsi, le memorie di Margareth Thatcher rivelano oggi più che mai un sentimento di reale ammirazione e amicizia nei confronti di Israele – al punto che critiche e posizioni anche dure, appaiono quasi come una logica conseguenza.
Margareth Thatcher ha sempre visto Israele come una democrazia occidentale, circondata da autocrazie.  “La costruzione politica ed economica di Israele, contro ogni probabilità e acerrimi nemici – ha ricordato – è stata una delle saghe eroiche del nostro tempo. Hanno davvero fatto fiorire il deserto”.
La Thatcher visitò Israele nel 1965, nel 1976 e poi ancora nel maggio del 1986 in veste ufficiale di primo ministro – la prima per un premier britannico, come ricorda, fra gli altri, un bell’articolo uscito su Haaretz.
In quell’occasione, durante la cena offerta da Shimon Peres, Margareth Thatcher espresse parole che tutt’oggi meritano di essere ricordate – non foss’altro perché al fondo, richiamano il discorso che poche settimane fa il presidente americano Barack Obama ha tenuto di fronte ai giovani dell’università di Gerusalemme: “Per i suoi elevati standards il mondo si attende da Israele più di quel che si attende dagli altri paesi; ed è per questo che quando parla di salvaguardia e tutela dei diritti degli arabi nei Territori, guarda ad Israele. Perchè ciò è in accordo con i principi che Israele rispetta e chiede vengano rispettati ovunque. Un futuro in cui due classi di persone coesistono con diritti e standard di vita diversi, non è un futuro che Israele può accettare né un futuro che la reputazione di Israele può permettersi di accettare”.

domenica 13 luglio 2014

Has austerity gone too far?, by Giancarlo Corsetti

Is austerity self-defeating? Is it keeping Europeans underemployed for years and destroying the very growth needed to pay off the debt? Or is it steering nations clear of Greek-like tragedies? So starts a new debate on Vox on austerity, introduced in this column.
Fiscal tightening is the watchword all across Europe. The measures adopted so far have not yet proved to be a cure-all for financial market concerns about debt sustainability. They have, however, coincided with renewed economic slowdown or even contraction. This brings into question the desirability of fiscal austerity.1

Two examples: Italy and Britain

How much of Italy’s slowdown is due to austerity and how much is due to the near debt-meltdown last summer? There is little doubt that the credit crunch that followed the sudden loss of credibility of Italian fiscal policy (whether or not justified by fundamentals) has a lot to do with the severe slowdown that this country is experiencing. The current fiscal tightening is arguably contractionary, but the alternative of not reacting to the credibility loss would have produced much worse consequences.
Things are more complex for the UK; it hasn’t lost credibility and it borrows at low interest rates. Does this mean UK policymakers are shooting themselves in the foot? Are they keeping the economy underemployed for years and thus destroying potential output with their austerity drive? Or, are they wisely forestalling a bond market rebellion like those seen on the continent that would prove much costlier?
Unfortunately we cannot know the answers definitively. Ten years from now some observers will deride the belief that the ‘confidence fairy’ would be summoned by belt-tightening; others will declare that their conservative fiscal attitude saved the countries from Greece’s fate. With only one economic path visible to historians and firm evidence in scant supply, we may never know.

A new Vox debate

The solution is a vigorous debate – which this column hopes to contribute to by launching a new Vox debate on the issue of austerity. There is a lot at stake in addressing the austerity question in the right way; which of the competing views is right matters greatly for policymaking and economic and social outcomes.
The terms of the debate are clear.
  • The debate is not about the desirability of restoring safer fiscal positions after the large increase in gross and net public debt in the last few years.
This can be safely taken for granted.
  • The question is whether governments should relent in their efforts to reduce deficits now, when the global economy is still weak, and policy credibility is far from granted.
  • Under what circumstances would be wise to do so?
Budget policy vastly differs across countries.
  • By and large, countries fall into three categories. At one extreme we have countries already facing a high and volatile risk premium in financial markets. At the other extreme we have countries with strong fiscal shoulders, actually enjoying a negative risk premium. A third category includes countries not facing a confidence crisis, yet with inherent vulnerabilities – a relatively high public debt, a fragile financial sector, and high unemployment.
  • The question of how to ensure debt sustainability is vastly different across these.
Moreover:
  • Not only specific conditions at country-level, but also policies at regional and global level may cause a given fiscal measure in a country to have vastly different effects.
  • International considerations will complicate the analysis; a policy which may be perfectly viable and desirable for a country conditional on an international context, may not work in another, say, depending on the degree of international cooperation, especially in providing liquidity assistance and ‘firewalls’ against contagion.

Issues in front-loading austerity measures

Since 2008, the fiscal policy debate has gone through several phases.
  • The first phase was dominated by a call for fiscal stimulus to avoid another Great Depression.
Thinking about deficit corrections in the future was seen as irrelevant, when not counterproductive, as it was feared that prospective consolidation plans would create additional uncertainty about the terms of the recovery.
  • The second phase, from 2010 onward, saw the focus shift to fiscal consolidation as high public debt started to loom large.
This policy shift occurred despite a global economy that was not yet on a firm recovery path and monetary policy at or near the zero lower bound in many countries.
  • The third phase may have begun; with weak growth, calls for austerity appear to have fallen out of fashion again.
The ranks of commentators who view austerity as potentially self-defeating have swollen (Cafiso and Cellini 2012Cottarelli 2012Gros 2011, Krugman 2012). These authors argue that the weak output growth caused by fiscal austerity may itself fuel market doubts about government solvency. Higher funding costs, combined with lower activity, might thus worsen the fiscal position, defeating the very purpose of the initial tightening measures. As observed by Olivier Blanchard, the “damned if you do it, damned if you don’t” attitude on fiscal austerity by financial markets may appear quite schizophrenic (Blanchard 2011).

New thinking: Self-defeating tightening in a liquidity trap

Recent contributions on the mechanism through which fiscal contraction in a liquidity trap is counterproductive provide an important change in perspective, relative to the initial debate.
A key point here is the recognition that much of the advanced world is currently in an unemployment and underemployment crisis. Destruction of jobs and firms today may be expected to have persistent effects on potential output in the future. These effects in turn translate into a fall in permanent income, and hence demand, today (see DeLong and Summers 2012 and Rendahl 2012).
In a liquidity trap, this creates a vicious self-reinforcing circle. Today’s unemployment creates expectations of low prospective employment, which in turn causes an endogenous drop in demand, reducing activity and raising unemployment even further. This vicious cycle may have little to do with price stickiness and expectations of deflation at the zero lower bound, an alternative mechanism early on stressed by Eggertsson and Woodford (2003) and more recently by Christiano et al (2011). Independent of deflation, the vicious cycle can be set in motion by expectations of lower income when shocks create persistent high underemployment. Theory suggests that this effect can be sizeable. The question is its empirical relevance.
The empirical evidence indeed weighs towards large multipliers at times of recession (Auerbach and Gorodnichenko 2010) or at times of crisis (Corsetti et al 2012), as opposed to very small multipliers when the economy operates close to potential and monetary policy is ‘unconstrained.’ In light of these results, it can be safely anticipated that the current fiscal contractions will exert a pronounced negative effect on output.
This is why, with a constrained monetary policy, there is little doubt that governments with a full and solid credibility capital should abstain from immediate fiscal tightening, while committing to future deficit reduction (the virtues of this policy are discussed by Corsetti et al 2010 and Werning 2012).
The problem is that, in the current context, promising future austerity alone may not be seen as sufficiently effective. Keeping market confident in the solvency of the country has indeed provided the main motivation for governments to respond to nervous financial markets with upfront tightening.

Credibility, sovereign risk, and macroeconomic instability

In a recent paper (Corsetti et al 2012), my co-authors and I highlight issues in stabilisation policy when the government is charged a sovereign-risk premium. The root of the problem is the empirical observation that sovereign risk adversely affects borrowing conditions in the broader economy. The correlation between public and private borrowing costs actually tends to become stronger during crises. Perhaps in a crisis period high correlation is simply the by-product of common recessionary shocks, affecting simultaneously but independently the balance sheets of the government and private firms. Most likely, however, it results from two-way causation.
In the current circumstances, there are good reasons to view causality as mostly flowing from public to private. First, in a fiscal crisis associated with large fluctuation in sovereign risk, financial intermediaries that suffer losses on their holdings of government bonds may slow down lending. Second, both financial and non-financial firms face higher risk of loss of outputs and profits due to tax hikes, increase in tariffs, disruptive strikes, and social unrest, not to mention lower domestic demand.
There are at least two implications of this ‘sovereign-risk channel of transmission’, linking public to private borrowing costs, for macroeconomic stability.
  • First, if sovereign risk is already high, fiscal multipliers may be expected to be lower than in normal times.
The presence of a sovereign-risk channel changes the transmission of fiscal policy, particularly so when monetary policy is constrained (because, for example, policy rates are at the zero lower bound, or because the economy operates under fixed exchange rates). When sovereign risk is high, the negative effect on demand of a given contraction in government spending is offset to some extent by its positive impact on the sovereign-risk premium.
Some exercises we carry out suggest that, typically, consolidations will be contractionary in the short run. Only under extreme conditions does the model predict either negative multipliers (in line with the view of ‘expansionary fiscal austerity’) or counterproductive consolidations (in line with the view of ‘self-defeating austerity’). To the extent that budget cuts help reducing the risk premium, there is some loss in output, but not too large.
  • Second, due to the sovereign-risk channel, highly indebted economies become vulnerable to self-fulfilling economic fluctuations.
In particular, an anticipated fall in output generates expectations of a deteriorating fiscal budget, causing markets to charge a higher risk premium on government debt. Through the sovereign-risk channel, this tends to raise private borrowing costs, depressing output and thus validating the initial pessimistic expectation.
Under such conditions, conventional wisdom about policymaking may not apply. In particular, systematic anticyclical public spending is arguably desirable when policy credibility is not an issue. In the presence of a volatile market for government bonds, however, anticipation of anticyclical fiscal policy may not be helpful in ensuring macroeconomic stability. A prospective increase in spending in a recession may feed confidence crises by amplifying the anticipated deterioration of the budget associated with output contractions.

Thorny issues for highly indebted countries

This possibility poses a dilemma for highly indebted countries. In light of the above considerations, countries with a large amount of debt may be well advised to tighten fiscal policies early, even if the beneficial effect of such action – prevention of a damaging crisis of confidence – will naturally be unobservable. From a probabilistic perspective, even a relatively unlikely negative outcome may be worth buying insurance against if its consequences are sufficiently momentous. In the current crisis, unfortunately, we know that such insurance does not come cheap.

Beyond austerity

The near-term costs of austerity mean we should keep thinking about alternatives, such as making commitments to future tightening more credible (eg entitlement-programme reforms).
However, the presence of a sovereign-risk channel also provides a strong argument for focusing on ways to limit the transmission of sovereign risk into private-sector borrowing conditions.
  • Strongly capitalised banks are a key element here.
The ongoing efforts, coordinated by the European Banking Authority, to create extra capital buffers in European banks correspond to this logic.
  • Another element is the attempt by monetary policymakers to offset high private borrowing costs (or a possible credit crunch) when sovereign-risk premium is high.
Normally, the scope to do this is exhausted when the policy rate hits the lower bound. Recent unconventional steps by the ECB, however, suggest that more is possible. The extension of three-year loans to banks, in particular, appears to have reduced funding strains, with positive knock-on effects for government bond markets.
  • These arguments are especially strong for either countries already facing high interest rates in the market for their debt, or countries reasonably vulnerable to confidence crises.2 These countries would be ill advised to relax their fiscal stance.
  • The arguments apply less to governments facing low interest rates.
The main issue is where to draw the line. Under what circumstances is it safe to postpone implementation of fiscal corrections?

Conclusion

There is an increasing tide in favour of reconsidering fiscal austerity programmes, in recognition of the persistent effects of underemployment of labour and capital on potential output. At the same time, however, it should be recognised that weak growth in countries facing precarious fiscal positions is not sufficient evidence against fiscal austerity. Where sovereign risk is high, fiscal tightening remains an important avenue to bring down deficits at a limited cost to economic activity, as risk premiums recede over time. In addition, fiscal austerity may well have important unobserved benefits, by preventing greater macroeconomic instability which tends to arise in the presence of high sovereign risk.
In light of these considerations, it is perhaps useful to move beyond the headlines of ‘expansionary contractions’ and ‘self-defeating fiscal austerity’. As a matter of fact, most governments face specific questions on how to reform their spending and taxation, rather than a general question of ‘how much’. Not only the intensity, but also and especially the content of upfront budget cuts currently contemplated in countries may be expected to have a first-order impact on the current recession.
Moreover, budget considerations are sensible insofar as in addition policymakers actively explore other ways to contain sovereign-risk premiums, or at least reduce their impact on broader economic conditions. Indeed, the big burden for the crisis countries in the Eurozone may be uncertainty of the common institutional and policy framework, favouring a solution for the debt overhang problem (a stock, not a flow problem), joint support to stem confidence crises and contain the transmission to the private sector (see Whelan 2012 on the ‘fiscal compact’). Fiscal and monetary interventions are sensible when directly targeted to these. They are counterproductive to the extent that they exacerbate the credibility problem and feed uncertainty. There is vast unexploited room for nonstandard and standard monetary interventions. But again, without a sense of direction, ie without a political and institutional development, the scope for the occasional action by existing institutions appears quite limited.

References

Auerbach, A and Y Gorodnichenko (2010), “Measuring the output responses to fiscal policy”, American Economic Journal, Economic Policy.
Blanchard O (2011), “2011 in review: Four hard truths”, IMF.org.
Cafiso, G and R Cellini (2012), “Fiscal consolidations for debt-to-GDP ratio containment? Maybe … but with much care”, VoxEU.org, 20 March.
Christiano, L, M Eichenbaum, and S Rebelo (2011), “When is the government spending multiplier large?”, Journal of Political Economy, 119(1):78-121.
Cottarelli, Carlo (2012), "Fiscal Adjustment: too much of a good thing?", VoxEU.org, 8 February.
Corsetti, Giancarlo, Keith Kuester, André Meier and Gernot Müller (2010), "Debt consolidation and fiscal stabilization of deep recessions", American Economic Review, 100:41-45, May.
Corsetti, Giancarlo, Keith Kuester, André Meier and Gernot Müller (2012), "Sovereign risk, fiscal policy and macroeconomic stability", IMF Working paper 12/33.
Corsetti, Giancarlo and Gernot Müller (2012), “Has austerity gone too far?”, VoxEU.org, 20 February.
DeLong, B and L Summers (2012), “Fiscal Policy in Depressed Economy”, Brookings, 20 March.
Eggertsson, GB and M Woodford (2003), “The zero interest-rate bound and optimal monetary policy”,Brookings Papers on Economic Activity, 1:139-211.
Eichengreen B and K O Rourke (2012), “A tale of two depressions redux”, VoxEU.org, 6 March.
Gros, D (2011), “Can austerity be self-defeating?”, VoxEU.org, 29 November.
Krugman, Paul (2012), "Blunder of Blunders", New York Times Blog, 22 March.
Rendahl P (2012), “Fiscal Policy in an Unemployment Crisis”, Cambridge University, 2012.
Sutherland, D, P Hoeller, and R Merola (2012), “Fiscal Consolidation: Part 1. How Much is Needed and How to Reduce Debt to a Prudent Level?”, OECD Economics Department Working Paper 932, OECD Publishing.
Werning, Iván (2012), “Managing a Liquidity Trap: Monetary and Fiscal Policy”, MIT mimeo
Whelan, Karl (2012), “Golden rule or golden straightjacket?”, VoxEU.org, 25 February.

1 This column draws on Corsetti and Müller (2012).
2 For example, because of a high stock of public debt, small fiscal shoulders, and financial fragility.

Too early to sound the alarm, Manfred J M Neumann

Debt finance of public consumption has clearly gone too far in several countries, reaching the borderline of sustainability. Have austerity measures now gone too far as well? This column argues it seems too early to sound the alarm. First, the global economy is likely to grow by 3.3 % this year, and second, reversing the fiscal stance or exiting the euro are worse options than austerity.
Debt finance of public consumption has clearly gone too far in several countries. Too far in the sense that it has reached if not exceeded the borderline of sustainability. Have austerity measures meanwhile gone too far, too?
I don’t think this is generally the case. Let’s take GDP growth as a rough indicator. According to the IMF the global economy is likely to grow this year by 3.3%. The forecast is down by half a percentage point, hardly an alarming number. The Eurozone, by contrast, is at the borderline to a mild recession; output might shrink by half a percentage point this year.
But let’s look behind the curtain of the average. The Eurozone weak forecast is dominated by the negative growth prospects of the south, where the two larger countries, Italy and Spain, needed cuts in public consumption. The outlook for Greece and Portugal is worse but they have small weight. In sum, if we take output growth as indicator, there is some evidence that austerity may have gone too far in one or the other member country of the Eurozone. On the other hand, if we look at public consumption and public deficits, it is not clear at all whether enough has been achieved.
And what do we mean by “gone too far”? Did anyone expect that short-run growth would go unaffected when countries switch from fiscal expansion to austerity? Even politicians know that there is this price to pay though they might have no idea how large the fiscal multiplier might become. Withdrawing from a drug ‘in one stroke’ can be a potentially dangerous venture. But trying to do it in many small doses makes it most likely to get no lasting results. Moreover, the longer the austerity process takes, the weaker public endorsement will become. A serious problem in this respect is that politicians are often tempted to minimise the austerity measures as well as delay and renege on promises of structural reform.
In sum, it seems too early to sound the alarm.
But let’s assume that the authorities of a high-risk country believe that the country can no longer bear the price of austerity? What can they do? Three options spring to mind:
  • A first option is simply to reverse the fiscal stance.
It seems to be futile to do so, however, as it is likely to immediately unleash a confidence crisis, pushing up the sovereign risk-premium. In brief, it would not only mean to forgo harvesting the fruits of the past austerity efforts but to fall deeper into debt unsustainability.
  • A second option is to check the austerity composition.
As emphasised by Alesina and Giavazzi (2012) the type of fiscal adjustment chosen makes a tremendous difference. Spending-based adjustments are to be preferred to tax-based adjustments. Cutting into spending is able to generate the expectation of lasting budget consolidation and of lower future taxation, hence higher permanent income. Unfortunately, once an ill-designed adjustment programme is under way, attempts at restructuring may become politically very difficult if not impossible.
  • A third option is to exit the euro.
To talk about this option is widely considered politically incorrect. I do understand this insofar as there are still some freaks around who are obsessed with the idea of fractionalising or undoing the euro. Extremism should be disregarded, yet economists must not shy away from doing the analysis of exit.
The exit option has many pros and cons that cannot be taken up here. The main reason to mention the exit option clearly is the problem of insufficient relative price adjustment. Does it make sense forcing Greece into a decade of austerity and slump in order to achieve a sufficiently low wage level? Wouldn’t currency depreciation be a much more effective strategy to achieve price competitiveness in one stroke and turn the country to recovery?

The inflation option

Finally, there is the infamous option of inflation. It is tempting for any government to take recourse to monetary policy. Collecting the inflation tax is the unpleasant solution of the monetarist arithmetic of government finance (Sargent and Wallace 1976). Many governments have chosen this solution time and again when their budget policies got out of hand.
In the south of Europe the inflation tax was considered a normal source of government finance before the foundation of the Eurozone. To be sure a country like the UK that has kept its own currency may choose to inflate its sovereign debt away. But this is no admissible solution for the member states of the Eurozone. They have signed a Treaty that rules out using inflation for government finance. They have tied their hands and must honour the commitment, except if they are prepared to exit the Eurozone. The commitment must equally well be honoured by the jointly owned ECB. The Bank has been provided formally with the status of independence from governments to fulfil the mandate of maintaining price stability. The independence status loses justification should the ECB not deliver the product but concentrate on nursing careless investors and a few high-risk governments.

The ECB should not be lender of last resort to governments

The ECB’s excessive swinging round to massive intervention in selected sovereign markets and the unprecedented blowing-up of long-term refinancing operations can be taken as signals that the ECB erroneously believes it must adopt the function of lender of last resort to governments (Wyplosz 2011). This makes little sense.
  • Since the early 19th century central banks’ last-resort lending serves to provide liquidity to solvent banks when market participants hold off temporarily for lack of sufficient information about solvency.
  • The solvency of countries is much easier to monitor.
A country that is known to be fundamentally solvent will never become illiquid but always be able to borrow at short notice.
In conclusion, the notion that a solvent country needs the ECB to bridge a situation of illiquidity is a non-flyer. The notion serves to hide that the ECB’s securities market programme can be misused to redistribute resources between member countries. That constitutes a serious problem. After all, redistribution is a matter for elected politicians, not for appointed central bankers.

References

Alesina, A, and F Giavazzi (2012), “The austerity question: ‘How’ is as important as ‘how much”, VoxEU.org, April.
Sargent, T J, and N Wallace (1994), “ Some Unpleasant Monetarist Arithmetic”, in The Theory of Inflation, 291–307.
Wyplosz, C (2011), “An Open Letter to Dr Jens Weidmann”, VoxEU.org, 18 November.