….and the crisis began.
European Monetary Union (EMU) faces the most turbulent period since its creation. Highly-leveraged members are looking desperately for a way out of the interest rate labyrinth. Monetary unification has suspended crucial instruments from the national policy making and thus made countries, which have declared a red alert, less resilient to serious exogenous shocks. Fears, that EU would be exposed to explosive mechanisms (interest-rate spirals and Ponzi structures) via abandoning economic heterogeneity (i.e. decentralized monetary policy) and independence, have been made into light.
The inefficiency of restricting government intervention in Greece solely to fiscal and income policies, especially during periods of instability where immediate responses are highly demanded, has been pointed out in a recent joint work. Two shocks have been identified: an endogenous capturing the period of fiscal intervention (from March 2010) and an exogenous one covering contagion effects of the global financial crisis. The empirical results supported evidence that fiscal austerity measures seriously deteriorated consumer and business sentiment contributing to the vicious circle of debt-deflation dynamics and feeding back the economic recession. In contrast to the theory, we found that intense government “fund-raising” left identical traces into Greek inflation and stock market performance (ATHEX returns), reflecting the combinatory implementation of both direct and indirect taxes in a small-sized, narrow-depth and monetary-constrained economy. It is worth noticing that the fiscal-driven, positive comovement between inflation and ATHEX replicates, paradoxically, the effects of a hypothetical tight monetary policy. It turns out that the synergy of sustained taxation and high domestic debt undermined the efficiency of the intended fiscal-adjustment objectives, giving birth to a disproportional relationship between government revenue and tax rate i.e. a nonlinear (neo-) Laffer curve.
From the view point of the economy as a complex system, determined by “path-dependent” dynamics, it is very likely that its evolution is profoundly interrelated with its own historical patterns. If this path-dependence is not taken into account, we rush to exogenously introduce dysfunctionalities in future trajectories of the system, possibly promoting explosive phenomena and enhancing global instability. The aforementioned mechanism may well lay behind the peculiar strategy adopted by the EU, which still underestimates the dangerous dimensions of “smoothing” national monetary and fiscal heterogeneity. The consequences on the Greek economy have been deeply asymmetric and multifaceted, since Greece joined the EMU without having armored her fundamentals to react properly under situations of financial distress.
We spent too many efforts on investing in a unified framework, at the aim of accomplishing the European dream. What remains to be confirmed is whether it is reasonable to play out the same story and expect an altered reaction, this time from the successors of the Greek “paradigm”.
Catherine Kyrtsou(University of Macedonia, Greece University of Paris 10,
University of Strasbourg & ISC-Paris)
and Christina Mikropoulou (University of Macedonia, Greece)