Nobel laureate Christopher Pissarides earlier this week gave a lecture at the London School of Economics on the theme “Is Europe Working?”. It is an extremely interesting lecture. I disagree with a lot of what professor Pissarides is saying. He focuses far too much on fiscal policy issues and far too little on monetary policy. But it is in general a very enlightened lecture and he raises a number of extremely important questions about the future of the euro zone.
Pissarides is clearly an old-fashioned Keynesian. I used to think that that was horrible, but frankly speaking old-fashioned Keynesian analysis of the euro crisis at least gets to the right conclusion in the sense that Keynesians agree with (market) monetarists that the core problem in the euro zone is weak aggregate demand (we – the monetarists – call it weak nominal spending/income growth). They are wrong on the solution (expansionary fiscal policy), but at least they make a lot more sense than the “calvinist” austerians who think that both fiscal and monetary policy need to be tightened.
Interestingly enough Pissarides used to be a “euro cheerleader” (Keynesians historically have been a lot more happy about fixed exchange rates than monetarists), but he now actually suggests to split-up the euro and it seems like he is realizing that different countries with different structures and fundamentals need their own sovereign monetary policy. He is not clear on that at all – after all he is a Keynesian so he doesn’t fully get that the “solution” is monetary rather than fiscal.
We don’t need fiscal union and fiscal transfers in the euro zone (this is Pissarides alternative to an euro split-up). What we need is for the ECB to provide nominal stability (See one of my suggestions on that topic here). At the moment the ECB is only providing continued deflationary pressures and therefore we are likely to continue to face debt-deflation problems. To avoid falling deeper into a deflationary trap we obviously need significant monetary easing within a forward-looking and rule-based framework. I wonder whether Pissarides would support that.
Listen to Professors Pissarides’ excellent lecture here (I say this despite the fact he says in the end of the lecture that he “was born a Keynesian and will die a Keynesian”)
PS I now know how uncomfortable Gustav Cassel must have felt agreeing more with Keynes than Hayek on the causes of and the solutions to the Great Depression.
PPS maybe the euro zone’s real problem is that European economists are all either Keynesians or Austrians (or should I say “Germans”?) Where are the European monetarists? And Market Monetarists?