Greece: not exporting its way out of trouble

Gideon Rachman’s column in today’s FT suggests (if he doesn’t quite directly say) that for Greece to leave the euro would now be the best way forward for everyone. He uses the analogy of a struggling marriage in which both parties might be happiest apart, however traumatic the breaking up might be. Where I come from marriage is “until death alone parts us” and my reading of the literature suggests that many unhappy couples who chose to stay together end up happier than those who separate. But the euro isn’t a lifelong covenant. It is an act of foreign economic policy among a group of sovereign states. While it serves the interests of their respective peoples it should last, and when it doesn’t it should be dissolved or slimmed down.

Rachman’s line is similar to ones I’ve run in a couple of recent posts (here and here), although my focus has been more on the idea that there is no politically saleable path (saleable in Greece, and in the other eurogroup countries) that offers both a robust Greek recovery and the whole euro group of countries remaining together. There is no guarantee that exit would be in the long-term best interests of Greece, but the status quo looks pretty awful.

Everyone knows how large the fall in real GDP has been, and how high the unemployment rate now is, years on from the start of this crisis. With no scope for discretionary monetary policy, and limited fiscal room even if the sovereign debt is mostly defaulted on (since the near-term appetite of new lenders is surely going to be limited), the source of any sustained boost to demand must either domestic innovation and productivity, or external demand.

Those wanting to put an optimistic gloss on the data can certainly produce real exchange rate measures that seem to show some gains in competitiveness. Perhaps, but it is difficult to adjust for compositional effects (the least productive people will have lost their jobs, but presumably want to be employed again one day).

These two charts just look at some of the key aggregates, drawing from the OECD’s quarterly national accounts database.
Exports have been recovering somewhat since the trough after the global recession of 2008/09, but the volume of exports is only now back to 2007 levels. In an economy with unemployment in excess of 25 per cent, there is no crowding out of the export sector.

Import volumes have certainly fallen, very substantially. That might reflect competitiveness gains, and greater opportunities for domestic import-competing tradables producers. But it looks a lot more likely to mostly reflect a severe compression in demand. The collapse in real investment is particularly telling.


It is not quite all bad news. Greece has experienced an improved terms of trade over the last few years. But there is no sign of it translating into the sort of robust export growth, or business sector investment, that might enable the external sector to begin to pick up the huge slack in Greece’s economy. Whether that is because firms just aren’t competitive or because of rising uncertainty (or some combination of the two, as seems more likely) isn’t immediately clear. But note that these data go up only to 2014q4 – this was what things were looking like under the previous government and the old programme (for all its limitations). Any uncertainty has only become greater since then.

WIth almost nothing going well in Greek economy, and limited tolerance in the rest of Europe, the status quo surely can’t go on much longer.  One piece of good news today is reports that the IMF is no longer willing to extend and pretend, in this case at least.

(Lack of ) transparency at the Reserve Bank

I’ve mentioned on a few occasions that the Reserve Bank is much less transparent about monetary policy, and especially the process behind the final outcomes, than it likes to represent.

A good example is the email below that I just received.  I  requested copies of papers relating to the March 2005 Monetary Policy Statement.  To be clear, that is documents relating to a monetary policy report from 10 years ago.  It is hard to conceive of what specific or general ground under the Official Information Act the Reserve Bank could have for wanting to withhold anything from that long ago, or for why it would have taken more than 20 working days to gather and look through the material  (or, indeed, why they would realise this difficulty on the very last day on which they could respond to the first request).

No doubt, the Reserve Bank is no worse in this area than many other government agencies.  Fortunately, the Ombudsman is currently looking into the operation of the Official Information Act.

The key principle of the OIA is that information shall be made available unless there is good reason for withholding it.  The purpose of the Act is really nicely expressed as follows:

The purposes of this Act are, consistently with the principle of the Executive Government’s responsibility to Parliament,—

(a) to increase progressively the availability of official information to the people of New Zealand in order—
(I) to enable their more effective participation in the making and administration of laws and policies; and
(ii) to promote the accountability of Ministers of the Crown and officials,—

and thereby to enhance respect for the law and to promote the good government of New Zealand:

(b) to provide for proper access by each person to official information relating to that person:
(c) to protect official information to the extent consistent with the public interest and the preservation of personal privacy.

And here is the email:

Dear Michael

On 2 April 2015, you made a request under the provisions of Official Information Act section 12 seeking:  All papers provided to the Bank’s Monetary Policy Committee, and Official Cash Rate Advisory Group, in preparation for the March 2005 Monetary Policy Statement.

Meeting the original 20-day time limit would unreasonably interfere with the operations of the Reserve Bank. Accordingly, and under the provisions of section 15A(1)(a) of the Official information Act, the Reserve Bank is extending by 20 working days the timeframe for a substantive response to your request.

You have the right, under section 28(3), to make a complaint to an Ombudsman about the Reserve Bank’s decision.

Yours sincerely

Angus Barclay

External Communications Advisor | Reserve Bank of New Zealand

2 The Terrace, Wellington 6011 | P O Box 2498, Wellington 6140

  1. +64 4 471 3698 | M. +64 27 337 1102

Monopoly money

The Reserve Bank of Australia yesterday put out a Research Discussion Paper containing some discussion of the nature, and estimates of the size, of the social costs of counterfeiting of Australian banknotes.

It is good to see a central bank producing research in this area, and opening it to public scrutiny.  But I question the starting point.  I wonder how confident the Reserve Bank of Australia (and perhaps more importantly, the Australian Treasury as advisers to the Treasurer) can be that the statutory monopoly on physical currency  – which is what the anti-counterfeit measures are protecting –  is itself socially beneficial?

Without that statutory monopoly (on notes in section 44 of the RBA Act, and on notes and coins in section 25 of the Reserve Bank of New Zealand Act) banks would have been likely to have gone on issuing their own notes (and perhaps coins).  New Zealand banks issued their own notes until 1934, when the first Reserve Bank of New Zealand Act prohibited them from offering that payments medium, as part of (but not a necessary part of) the establishment of a central bank in New Zealand.

If the monopoly were removed today, it is likely that private issuance would resume, and central bank notes would revert to being issued/used primarily in quite extreme crises, when there was a generalised loss of confidence in liabilities of the banks.    There is no obvious reason why, in normal times, people would be any more reluctant to hold, say, ANZ banknotes delivered from an ANZ ATM than they would be to hold an ANZ demand deposit (as they were doing just prior to withdrawing the notes through the ATM).  People happily hold notes from the (legally limited) private issuance in Scotland and Northern Ireland.

Actual and potential dishonesty poses major and pervasive costs to society.  A society in which all people were angels would be unrecognisable to us mere flawed mortals. So private note issuers would, of course, have to spend money to protect the integrity of their notes, in just the same sort of way they need to spend to ensure the integrity of both physical (eg cheques) and electronic payments media (credit and debit cards, for example).  Banks must make judgements about how much to spend, and what balance to strike between imposing liability on customers, and assuming responsibility themselves.  It isn’t obvious ex ante what balance should be struck, but they face market tests in making those choices (unlike central bank issuers).  And in a competitive market for physical currency issue we would normally expect a much greater degree of product innovation, including perhaps around security features.

The market for physical currency is highly distorted.  The RBA paper focuses on the extent to which counterfeiting discourages use of physical currency, but currency is probably already under-held and underused even if there were no counterfeiting at all.   At least two factors drive that.  First, using legislation to prohibit use of any notes other than Reserve Bank ones imposes considerable private holding and transportation costs on banks, and customers  (some portion of which probably amounts to deadweight social costs).  By contrast, own-bank notes have no material holding costs to banks.  And second, central banks choose (legislation does not force them) to offer no return on their monopoly note issue[1].

Sometimes it is argued – usually by central bankers – that the zero interest nature of monopoly central bank currency issuance represents an efficient tax (since demand appears to be fairly interest- inelastic).  But, whatever the merits of the argument might be on certain textbook assumptions, it isn’t an approach countries take in the practical design of modern tax system.  Using state-granted monopolies as a source of revenue has been somewhat frowned on in advanced economies for several centuries.

Nothing about monetary control would be jeopardised if the note monopolies were repealed.  So perhaps the RBA could be asked to have its researchers go back to their desks and start a new study on the social costs and benefits of a state currency monopoly.   It might be a small regulatory issue in its own right, but regulatory restrictions should remain on the statute books only when there is a clear continuing case for them. I doubt there is such a case for the physical currency monopolies.  Perhaps repeal of these monopoly provisions could be added to the list for the Australia government’s next “Repeal Day”?

[1] Various authors noted years ago that lotteries based on serial numbers offered one way of providing a positive expected return.

UPDATE:  Just to be clear that what is proposed here is not what is described as “free banking”.  Free banking would involve the abolition of the central bank and a shift to a model in which banks’ issuance of credit etc was constrained only by market forces.  Simply abolishing the bank note monopoly does not change how current monetary policy works, operating on the marginal cost of/return to central bank electronic liabilities  (settlement account balances).  I might come back and explore some of the free banking ideas at some stage.