New (short) paper

Click here to read my discussion of the paper by Tito Boeri and Juan Jimeno, “Unemployment in Europe: what does it take to bring it down?”, presented at the ECB forum on Central Banking, Sintra, Portugal, 21-23 May 2015.


Two things I do not get about Greece

There are two things that baffle me about Greece.

First, the insistence on linking sovereign default with exiting the Euro area. Technically there is no relationship between the two. Greece can default on its debt and continue to use the single currency (in fact its seignoriage share could be confiscated by the creditors), just like many American states defaulted without stopping to use the dollar. Conversely, Greece could decide to exit the euro area and continue to meet its oligations. Indeed, there is talk in Finland of leaving the Euro and this has nothing to do with any looming sovereign default.

The Grexit ghost is a superstition which allows to mutualize the bailout among members of the eurozone in a way which is disconnected from their holding of Greek debt. Conversely, non euro area members contribute little or nothing to supporting Greece.

Second, the Grexit ghost is a way of manipulating public opinion in solvent euro area countries so as to make them accept the bailout. The implicit blackmail is that Greek default would trigger Grexit, then contagion and a collapse of the Eurozone, which would be a catastrophy. In order to avoid catastrophy, we are told, the taxpayer, not the holders of debt, should bear the cost of the Greek default. This blackmail is backfiring against its conceptors as Greece voted for a government which plans on reneging on austerity and live off other people’s money. This blackmail works well as the troika has just offered another 15 bn euros of our money to postpone a decision by five months. Presumably the Spaniards are taking due notice of this hilarious joke and will gladly adopt the Greek mutilated beggar strategy in the next elections.

Second, the lack of recognition that Greece suffers from a debt overhang problem. Despite falling wages the economy is not recovering, because firms expect that the profits they make will be taxed so as to meet the sovereign debt obligations. This is a well understood problem that has been identified decades ago in the context of similar crises and popularized by prominent economists such as Dornbusch, Krugman, or Sachs.

There is no difference between erasing a debt and lending to your debtor the interests he owes you: in both cases you do not get your money back. But in the second case the debt overhang problem destroys the economic incentives of the debtor. Instead of renewing the loans in exchange for fuzzy structural reforms that are unlikely to work because of the debt overhang problem, the troika should erase 75 % of Greek debt once and for all and stop any new institutional lending to the country. Greece will then be able to grow again for ten years. Private lending will resume relatively fast, as suggested by the historical experience.

This has little to do with Euro membership, except that once private lending resumes, another crisis may graduallybuild up. Greece will be too happy to live again with large twin deficits financed by capital inflow, because this will generate an economic boom driven by demand, a welcome substitute for the structural reforms its government is unwilling to do. It will accumulate the competitiveness problems and the debt overhang of the next crisis. For this reason it is not in the interest of Greece to remain in the Euro. Should it have its own currency it could supplement its insufficient fiscal receipts with seignoriage (as recently as 1990, inflation in Greece was 20 %, yielding perhaps 2-3 % of GDP in seignoriage revenues). It could devalue to boost its competitiveness (prices have fallen by 2 % in Greece and only very recently, despite then huge fall in GDP), maintaining external balance despite its tendency to create inflationary surprises so as to boost the economy. All these considerations are important, but they do not imply conditioning exit on default. If anything, it is the future defaults that the exit prevents.

Wealth, materialism and spirituality

I am half-way through the reading of Bobos in Paradise by David Brooks, and he traces the Bourgeois Boheme (aka bobo) lifestyle back to both the French “bohemian” rejection of bourgeois values in the nineteenth century as well as the American transcendentalist movement of Emerson, Alcott, and Thoreau. Presumably the intellectual heirs of that movement are the so-called post-materialistic philosophers, who have some influence on the bobo lifestyle.

So we have to figure out what is so despicable about the bourgeois ideal of competing, thriving, and accumulating wealth, and what makes the bohemian lifestyle desirable and praiseworthy. An immediate, naïve answer is that it is cool to be a rebel, even without a cause, but one has to go beyond such adolescent posturing.

Many would concur with Brooks that the original sin of the bourgeoisie against which the bohemians, the transcendentalists, the dandies, and the modern bobos react is its materialism. This brings forward three questions. In what sense is the bourgeoisie materialistic? Why is such materialism contemptible? And in what sense is the attitude of the bohemian crowd a deviation from materialism?

So what makes the traditional bourgeoisie materialistic? This is supposedly because of their excess taste for wealth and social status. If we consider the meaning of those words, we end up with a paradox. For neither wealth nor social status are material things. They are abstractions. It is true that wealth buys you material things, like a yacht or a plane, but the bourgeoisie against which the bohemians were rebelling was also noted for their relatively austere lifestyle. They might have impressive mansions, but while a mansion is a material object what really matters here is the impression. Therefore, we may want to keep in mind that materialism might not be the right word to qualify those bourgeois values. Another dimension that is discussed by Brooks is the fascination of the nineteenth century bourgeoisie for new technologies (railroads, electricity, and so forth), that the bohemians rejected as vulgar and dehumanizing. Again, what is remarkable about new technologies is that they witness human capacity to get rid of the constraints imposed upon us by our material condition, such as gravity. Therefore, fascination for technology hardly qualifies as materialism.

Nevertheless, it is likely that the bohemians reject such lifestyle because they deem it superficial and soulless. They of course have the right to conduct their life as they wish, but there seems to be a presumption that their lives are somewhat more worthy than those of the bourgeois, according to some reasonably accepted scale of values. So what is above technology, wealth, and social status in such a scale of values? Two common buzzwords are “Art” and “Spirituality”.

Spirituality is as elusive a concept as materialism. The origin of the word is religious; spirituality has to do with some invisible world, maybe the inner world, or the outer world. But, surely, spirituality cannot be defined as the absence of something. Not having wealth, not having a high social status, not being invited to cocktail parties, does not make you more spiritual. It can at best make you nihilistic, which does not qualify as spirituality. The claim by bohemians that they forsake a career in business to focus on their spirituality should therefore be evaluated upon the merits of their actions.

We can observe that most bohemians tend to live pretty secular lives, and in many cases are atheists. They are no Ignatius of Loyola, no Teresa of Avila. The French impressionists, for example, are a cliché of bohemian lifestyle. And their paintings were depicting trivial scenes, quite unlike the despised pompiers who were continuing to produce historical and religious paintings. A cornerstone of the bohemian lifestyle is enjoying daily pleasures without restraint, such as nice wine, dinner parties with friends, dancing in a guinguette, and casual sex. All of this seems pretty materialistic to me. More materialistic, in fact, than the life of an uptight WASP industrialist of the early twentieth century, simply because it resembles more the life of animals. In the 1920s, the American “lost generation” replicated the bohemian lifestyle in Paris and elsewhere, and by all accounts this was quite down to earth and unspiritual. In his novels, Hemingway frequently insists on details such as food, wine, and the like, to the point of having been accused of writing tourist guides. Rejecting the corset of bourgeois conventions may make you more relaxed and more “authentic”, but does not qualify as spirituality. What is going on here, is a false belief that if an individual is subject to less tight social control, he will be freer to express himself, and he will naturally express spirituality, as though humans in wilderness were ontologically more spiritual than civilized beings. Over and over again, we observe instead that this reduced level of self-restraint promotes animal instincts, not spirituality. Indeed, wilderness is a pretty materialistic environment, because survival is the main concern.

How about “art”? Here the implicit view is that the old style uptight bourgeois were incapable of appreciating art, stuck that they were in their vulgar and petty pursuits. In contrast, the bohemians, having freed themselves from material constraints, could fully enjoy the beauty of art, and of course many were artists themselves. It is true that the artists can afford the bohemian lifestyle, because their activity is not sensitive to organized interaction with other people.  It would be a disaster if the train driver, the hospital director, the pizza deliverer, the soldier, became bohemians. But the artist is much less bound by schedules and the need to cooperate. That being said, throughout the ages artists were not typically bohemian: think of Rubens, Bach or Tolstoi. Furthermore, just being a bohemian does not make you an artist. At best you are just mimicking some artists, and this hardly qualifies for a badge of moral or aesthetic superiority. Furthermore, the aesthetics are now self-referential. In the past, an artist was in fact an admirably skillful craftsman. The romantics came and popularized the view that an artist is some genious; art was no longer about beauty or skills, but about innovation. The impressionists are considered as superior to the pompiers, not because they are better painters, nor because their paintings are more beautiful, but because they invested a new way of painting. This avant-gardiste posture culminated of course with the Dada movement and Duchamp’s hanging of toilet bowls on exhibition walls. The end result is that there are no longer accepted criteria to define what art is. If anything, it seems that usefulness (a car design does not qualify as art) and popularity (Sinatra is less highly regarded than Duchamp) are at best irrelevant, as is beauty of course. Yet, as there are many things left that are new, uninteresting and useless, it would be suicidal if they were all considered as art. So only a subset of those artefacts qualify as art: those that are coopted by the self-appointed bohemian elite. An additional irony is that the reason why, historically, art is highly regarded, is because of its spiritual dimension. The Sixtine Chapel elicits emotions that may help connect the individual with some invisible, superior, truth. This can hardly be said of most of the Duchamp inspired contemporary art that is valued by hipsters and bohemians. Nothing is more materialistic than a toilet bowl. While the bohemian lifestyle may be more friendly to art, what passes for art nowadays has no external validity and has been stripped of any spirituality. There is therefore no reason to consider it more highly than any other human activity, such as a football match, a good dinner, or cleaning the (now mythical) toilet bowl.

We conclude that the claim of bohemians to moral and aesthetic superiority is largely bogus. The world they are promoting is in fact more materialistic than that of the despised bourgeois industrialists.

PS – I would speculate that the ideas above bear some relationship to Deirdre McCloskey’s Bourgeois Dignity, which I still have to read.

When did France become a non-employment society?

As of 2015, the general stereotype that the French are somewhat lazy and work little is well established worldwide. Indeed, on this site, I have repeatedly commented on the “non-employment society”, the 35 hour week, etc. For some economists, this is the natural result of regulations and of the very high tax rate on labor which prevails in the country. For others, it is at least in part due to French preferences for working less (although why a preference should be embodied in a regulation remains a mystery to me).

While I do believe that taxes have an important effect, I also always thought that if you deregulate the labor market and reduce taxes down to reasonable levels, the French would still work substantially less than Americans.

So here is a little quiz that may help shed light on this question: what is the average number of hours worked per employed in France in 1950, and in the US?

The answer can be gotten off the shelf from the Penn World Table, and it comes as a big surprise: in 1950, a French employee was working 2158 hours per year, and his american counterpart was working 1900 hours per year on average! Furthermore, the employment/population ratio in the U.S. was 40 %, while it was equal to 46 % in France. The non-employment society, then, if anything, was the US, not France.

In 2011, the French was working 1475 hours a year, and his American counterpart 1700 hours. The French employment/population ratio was down to 41 %, the American one had gone up to 45 %. And this cannot be due to differences in female participation rates, they are virtually identical between the two countries at close to 69 % in 2011.

As a result, French society was providing 1000 hours of work per person in 1950, and it is down to 600. In the US, there were 760 hours of work per person in 1950, and in 2011 it is slightly up to 771.

When did French workers start working less in a given year than American ones? You cannot make this up: In 1982, 1 year after the first socialist/communist coalition came into power.

Therefore, there is no inherent French preference for working less. Rather, skilled politicians managed to put together coalitions of people who increasingly lived off (and therefore supported) a zero sum redistributive game. As a response to that, the population gradually learned to refrain from wealth creation. Perhaps it may become a second nature after a while, but let us not be too pessimistic.

Euro Blackmail

The Greek election results are the perfect answer to the IMF’s, ECB’s and European Commission’s pledge to defend the eurozone at any cost, and their repeated claims that they are willing to exchange any asset against euros in order to reignite the anemic economies of the area and prevent another sovereign debt crisis. So, in effect, the Greeks are saying : you want to buy junk ? Here it is ! Where is the money ? It would be foolish of them to continue their painful austerity policies when they can instead get their deficits financed by using one of the facilities offered by the ECB under the “save the euro” motto. Conditionality is supposed to apply, but the ECB has given every hint that it would yield to blackmail, so why should the Greeks refrain from it ?

The relative lack of reaction of the euro/dollar exchange rate baffles me. Markets do not seem to understand the significance of the Greek election results.

The most favorable scenario would be Greece being kicked out of the Eurozone, defaulting on its debt, and starting over again at a depreciated exchange rate, with a balanced government budget (although Syriza would be unlikely to run a balanced budget) and a depreciated currency that would allow export demand to make up for the fall in domestic spending. Hopefully, after a couple of years of recovery and virtuous fiscal policies, Greece could borrow again on international markets, and even repay its original creditors a little bit. But the episode would set up a precedent, and bring about the possibility of renewed attacks on the sovereign debt of other euro area countries, under the belief that such attacks would lead to their exit from the currency area. This would be 2010-2011 all over again.

At the opposite of the spectrum, the troïka may yield to blackmail as Syriza reverts to primary deficits following a string of demagogical policy measures. The ECB will pose as responsible while running a Ponzi game, purchasing all the debt issued by the Greeks. The Greeks will do just fine, like a teenager, because they will be spending the taxpayer money from other European countries, through the mutualization scheme implicit in the ECB debt purchases. Things will eventually turn nasty as the electorate in other countries – Portugal, Spain, Italy, France – will conclude that blackmail works better than austerity and vote for their own populist parties. The ECB will find itself compelled to issue more money, and it will have lost any credibility regarding its ability to control the price level. Inflation will pick up and the euro will continue to fall. German consumers and pensioners will then increasingly favor a German exit, as it would occur at an appreciated exchange rate, thus improving solvency and purchasing power.

Finally, an intermediate scenario is that the troïka refuses to continue to purchase Greek debt unless the government goes ahead with austerity. This will be a casus belli, likely to trigger immediate default as the Greek government will revert to primary deficits. Since it will then be unable to borrow, it will want to exit the euro area so as to be able to monetize its own deficits.

I suppose the euro establishment believes that Syriza will turn out as  Lula or Menem style leftists, that is, they will renege on their most demagogical campaign promises and continue to pursue austerity.  They forget that Lula and Menem did not have a foreign entity with a wide open cheque book for them.

There is no such thing as bad publicity

One of the big frustrations of my life was not to be cited in those books that regularly come out in France and complain about economists being stupid, ignorant, or evil lackeys of capitalism. This always gave me a sense of failure. For this reason, I am happy to learn that I am one of the “architects of the ongoing disaster”. It gives me a sense of power, at least for fifteen minutes. You can read it here and have fun.

Do we need a macroeconomic imbalance procedure?

This statement was made at the European Parliament, Brussels, Dec 10 2014.

0. Introduction

The macroeconomic imbalance procedure is a device for monitoring the EU member states’  economic situation, in order to detect imbalances pertaining to the external sector, competitiveness, asset prices, and the financial situation of the private sector. When the procedure is fully in place, “excessive macroeconomic imbalances” are supposed to be detected and a correction mechanism is supposed to be enforced.

The plan assumes that there is an objective way of detecting an imbalance, that sustainability of such imbalances can be assessed, that it is socially desirable for a supranational entity like the European Commission to impose corrective measures upon member states, and finally that those corrective measures are enforceable.

I believe there is no firm basis in economic analysis or in the record of the European Union to justify such a procedure. I will now explain my reasons for this belief.


  1. We do not know what an imbalance is

The notion of an imbalance is not properly defined, and, if it were, it would be unclear why one should fight it as such. An economy can be “balanced” and yet pursue highly inefficient policies; or it could appear as “imbalanced” while any intervention to correct the imbalance would be harmful.

Consider the example of trade deficits. Against which benchmark should we evaluate whether the trade deficit is problematic? In a world with free capital movements, trade imbalances and their counterpart capital flows should not come as a surprise. Trade deficits occur whenever national savings fall short of investment, and this may be for perfectly good reasons, like a surge in investment opportunities, transitory  needs for public or private consumption, or a change in the age structure of the population. This is not only a corollary of the existence of a single market for goods and financial assets, but one of its benefits.

Similarly, a country may seem to lose competitiveness, without this being a problem per se. Competitiveness will fall if the domestic price level goes up relative to the rest of the world (that is, the real exchange rate appreciates). This may be just due to the allocative response of prices within the country to a shift in the composition of aggregate demand; for example, the surge in public spending following German reunification had to be matched by  a real appreciation in order for productive resources to be reallocated away from exports and toward the domestic economy. Another example occurs when a poorer country is catching up with the rest of the world in productivity terms. In such a situation, the relative price of non traded goods (such as haircuts) has to go up. If the country is in a monetary union, it will experience more inflation than its neighbors. This necessary adjustment in relative prices may be wrongly interpreted as an imbalance in competitiveness.

Putting these two examples together, a country growing fast because it is catching up will be observed to run a trade deficit — because its residents borrow against future higher incomes so as to smooth consumption — and to simultaneously experience a real exchange rate appreciation, i.e. “loss of competitiveness”, and yet it will be at an economic optimum.

As a third example, it is quite difficult to distinguish an asset bubble from an appreciation of the fundamental value of the asset. In the case of the Spanish housing market bubble, for example, real interest rates were low, while potential economic growth appeared to be high, and the demand for housing was boosted by immigration. It was perfectly possible to interpret the appreciation of house prices as entirely due to fundamental factors.

This does not mean that worrisome imbalances do not arise, but it does mean that detecting them  may be beyond the expertise of either the EU or national institutions. The macroeconomic imbalance procedure may therefore lead to a large number of type I and type II errors (subjecting a sound economy to corrective measures, and ignoring unsustainable developments).


  1. We do not know whether an imbalance is “unsustainable”.

One central argument in favor of preventive and corrective procedures is that the imbalance may be “unsustainable”, and the procedure may avoid future catastrophies.  For  example, we could imagine that protracted trade deficits in some Eurozone countries might lead to a speculative attack against the euro, or to a critical mass of private defaults that may lead to a wave of contagion.  But this overlooks the fact that markets provide self-correcting mechanisms; a country that accumulates trade deficits is depleting its foreign assets, which eventually makes its residents poorer in financial terms. Accordingly, they will cut on consumption which will work toward restoring equilibrium. The opposite occurs if a country accumulates trade surpluses.  In recent years, the Spanish trade deficit has been reduced drastically, while Japan has moved from a surplus situation to a deficit one. These episodes illustrate the strength of the self-correcting mechanisms.


  1. Some perceived imbalances are consequences of legitimate choices by sovereign governments

A “macroeconomic imbalance” will often be the market response to decisions made by sovereign governments. We can refer again to the German reunification example. In such situations, an injunction by the European Commission or Council to correct the macroeconomic imbalance may amount to a confiscation of sovereignty away from an elected constituency in favor of a supranational non-elected entity.

More fundamentally, to establish the legitimacy of a macroeconomic imbalance procedure, one has to prove that such imbalances exert “externalities”  upon the rest of the Eurozone. The effect on interest rates, asset prices, etc, is no proof of such externalities; any action by a market participant affects market prices, and it does not follow that such action is inefficient nor that “corrective” measures would improve welfare.


  1. The process may add to economic uncertainty due to ambiguities in enforcement

The record of the European Commission in enforcing its own rules is not encouraging. Unlike national governments, the EC does not have a police force that it can use for the purpose, say, of seizing property as a penalty for noncompliance. To be sure, the EC may reduce transfers to net recipients of CAP or structural funds, but it can hardly impose financial sanctions on net contributors to the Union’s budget.

When sanctions are due, national governments may opportunistically collude to block imposing them,  as was the case back in the 2000s under the Stability Pact  when France and Germany violated it.  The EC itself may postpone action, thus behaving in a discretionary way, because it is considering only the immediate consequences of its measures, irrespective of the need to apply rules. For example, during its current excess deficit procedure, France is facing (in my view) considerable leniency on the EC side, because the EC fears that an obvious tough stance vis à vis France could scare markets, raise sovereign spreads, and reignite the Eurozone fiscal crisis.

Because of those shortcomings, the existence of a euro area macroeconomic imbalance procedure may fuel policy uncertainty rather than reduce it, as market participants will be uncertain, in each instance, about the likelihood of sanctions and their nature.