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Paul De Grauwe

The Greek crisis and the future of the Eurozone
The structural problem in the Eurozone is created by the fact that the monetary union is not embedded in a political union.
Paul De Grauwe Eurointelligence 11.03.2010

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Financial markets and rating agencies fail to see
the interconnectedness of government and private debt
Paul De Grauwe Eurointelligence 6/5 2010

Paul De Grauwe, a Brussels-based economist who advises European Commission President José Manuel Barroso, displayed more than a wry sense of humor when he told reporters, "If there are fears now that a breakup of the euro zone will lead to a weakening of the euro, then that is good news. So we should congratulate Greece for getting us out of … having a euro that is too overvalued."
WSJ 11/1 2010

Government debts are both unsustainable and desirable
Government debts today is a natural consequence of the unsustainable
debt explosion in the private sector during the last ten years

Paul de Grauwe, Eurointelligence 18/6 2009
Excellent article

There are four deflationary spirals presently at work in the world economy, i.e.
the Keynesian savings paradox, Fisher’s debt deflation,
the cost cutting deflation, and the bank credit deflation.
Each of these deflationary spirals can be dealt with when they occur in isolation.
They become lethal when they interact with each other.
Paul de Grauwe 6/4 2009

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The payment system is a collective good.
The central bank, as lender of last resort, is the ultimate guarantor of this collective good.

This implies that in times of crisis it should provide unlimited amounts of liquidity to ensure the smooth functioning of the payment system.
There is a problem, though. Central banks are responsible not only for the present but also for the future stability of the payment system.
Excellent article by Paul de Grauwe, Financial Times, August 13 2007

Uncertainties about the future development of the US economy run deep.
There are two opposing views of what has happened to it since the early 1990s,
which originate in two very different theories of the business cycle.

Paul de Grauwe, FT 16/7 2007

The contrast between the macro­economic management of the US and that of the eurozone during the past five years could not be greater
Where does this difference come from?
The practical men in Frankfurt have become the slaves of a theory telling us that the sources of economic cycles are shocks in technology (productivity shocks) and changes in preferences.
Paul de Grauwe, Financial Times 17/8 2005

ECB is a law unto itself
FT 98-11-12

Paul de Grauwe says the European Central Bank is accountable to no one, which compromises its chance to be truly independent. Do the conditions exist for the successful independence of the European Central Bank? The answer is no, for the following reasons.

The author is professor of economics at the University of Leuven and a member of the Belgian parliament

First, the independence of Euroland's central bank was imposed by Germany as a sine qua non for the start of economic and monetary union. While central bank independence has strong political and social support in Germany, it lacks the same kind of support in most other Euroland countries. Thus, the willingness to defend the ECB's independence will be weaker in these countries.

Second, and more importantly, political independence of the ECB has been based on a very primitive political theory. According to this theory, the ECB consists of wise men, whereas politicians are wicked people who are eager to undermine the good policies of a central bank. It follows, therefore, that politicians should be kept as far away as possible from the monetary action.

The statutes of the ECB (which are a part of the Maastricht treaty) have been very much influenced by this antagonistic view of relations between a central bank and the political world. Not only is the ECB shielded from politicians, the statutes have also placed the ECB beyond the reach of democratic rules that sanction bad behaviour.

Let us look at a few examples of the ECB's lack of accountability.

The ultimate control which politicians have over a central bank lies in the fact that they can change its statutes: the terms of appointment for governors, for example. This is the case in Germany, where a simple majority in parliament can change Bundesbank law. But this possibility is totally absent in Euroland. The statutes of the ECB can only be changed by revising the Maastricht treaty, which requires unanimity of all member countries. As this will be very difficult to achieve, the power of the politicians to discipline the ECB (to which they have delegated their power) will be non-existent. The stick politicians have been given to call the ECB to order may turn out to be only a straw.

It is sometimes said that there will be political control over the ECB because the president of the ECB will have to appear before the European parliament to explain its policies. However, the impact of these regular appearances is likely to be small because the European parliament is weak and lacks the power to change the bank's statutes.

The situation is very dif ferent in the US, where the chairman of the Federal Reserve has to appear before Congress every quarter, knowing that the politicians on the opposite side of the table have the power to break the independence of the Fed. This leads to a situation in which US politicians perceive themselves as stakeholders in the Federal Reserve. Sadly, this stakeholder attitude will be absent in Euroland. Wim Duisenberg, the ECB president, has aggravated this state of affairs by announcing that secrecy will be the guiding principle of the ECB board's deliberations.

In democracies, all power is delegated power. People delegate power to politicians. Politicians delegate power to specialised institutions. In order for this pyramid to work well, at each stage there must be a strong mechanism which ensures that those who receive power remain accountable. These principles were not taken into account when the ECB was being set up. It was generally thought that the construction of a Chinese wall between the bank and political institutions would strengthen the ECB. But the opposite is the case. The political no man's land that surrounds the ECB will weaken it as an institution because few politicians will have an incentive to defend it. It is a paradox. The excessive independence of the ECB will be a source of weakness rather than strength.

This is a shame because the case for a successful and independent ECB is strong. Economic theory and empirical evidence have taught us that a central bank's independence is necessary to guarantee that monetary policies are conducive to price stability. But it is also true that independent central banks generally operate in countries where a strong consensus exists in favour of independence.

Thus, political independence can only exist when politicians, as stakeholders, believe it is in their interest to continue to defend that independence. And a crucial factor necessary to keep this equilibrium is accountability. Intelligent central bankers understand this. They are willing to explain their behaviour, they avoid secrecy and allow their decisions to come under scrutiny. Only then, can they ensure the political support that is necessary for their survival.

The design of the ECB is flawed and will have to be changed. Failure to do so will jeopardise the whole European project of economic and monetary union.

Kurt-Ove Johansson (s) (f.d. ordf. i KU)