Great Leap Forward


Nice piece by Martin Essex at the WSJ today, “fingering” those who got it right about the Euro. He says:

As the world’s financial markets begin to price in a total collapse of the euro project, there’s no shortage of economists and other experts saying they always knew it was doomed to failure. So who warned first?

Well, only last week, a senior International Monetary Fund economist resigned and wrote a scathing letter to the board blaming management for suppressing staff warnings about the 2008 global financial crisis and for an alleged pro-European bias that he says exacerbated the euro-zone’s debt turmoil.

But long before the 2008 crisis, many economists were warning there were structural problems in the euro set up. And now the Levy Economics Institute of Bard College has issued a policy note, provocatively headed Euroland’s Original Sin, which names five of them.

Who are the five? Oh, my goodness it is Bell, Mosler, Forstater, Wray and Godley. You can read the rest here:



LRWrayJuly 24th, 2012 at 4:19 pm

Haven't read the Eichengreen piece yet. As I recall, the Feldstein piece focused on political disunion, different countries pursuing different goals, etc. So while on the right track I don't think he highlighted the key problem–currency sovereignty. Like most critics (even until recently) the focus was mostly on difference of opinion over how tight monetary policy ought to be.

Still, of course, as the WSJ piece says, Levy people were not the only voices in the wilderness.

LRWrayJuly 24th, 2012 at 4:24 pm

OK, looked at Eichengreen and yes am familiar with the argument. It has validity especially as the EMU spread (like a cancer or virus!) across europe. But my response is: the economic differences between a Portugal and Germany are no greater than those between a South Dakota and New Jersey. Heck–SD and NJ do not even speak the same language! So not really on the right track. The OCA literature never understood what a sovereign currency is. And this paper does not even mention it.

PaulJuly 24th, 2012 at 4:43 pm

Agree on the currency sovereignty point. But this is also a crisis in politics and I think Eichengreen, Feldstein and many others understood that ultimately it would be politics that would lead to a suboptimal currency arrangement. I think they deserve a lot of credit for pointing this out long before it came to pass.

LRWrayJuly 24th, 2012 at 5:41 pm

Well, OK I take your point and I agree it is easy to see economic fixes to the euro problem that are politically impossible.
But notice the difference between, say, the politics of SD and those of NJ!!! (-) And I can remember back when the "left coast" was supposedly living in LaLa land completely out of touch with the rest of the USA. Yet, somehow we were in an OCA (even tho those of us who lived on the Pacific coast wanted to get out!). So politics are important but even with political unity, the Euro as constructed would have failed. It is just that they'd have been able to adopt fixes if they were politically unified. That is why I think the OCA critique really did not have it right.

Jim ThomsonJuly 24th, 2012 at 7:13 pm

Also note that politics can destroy a country that has a free-floating non-convertible (fiat) currency, like the US (no, that can't happen here). So predicting that politics will make the Eurozone not work is not particularly insightful. In fact it is almost a given. The insight comes from understanding the fundamental design flaws. Half of all market pundits predicted a crisis, and now claim prescience, but many predictions were premised on runaway government spending and the increase in government debt. Are they now sages?

PaulJuly 24th, 2012 at 7:27 pm

MMT made a great prediction. But so did a lot of other people at the time. The push back against the Euro was broad in the 90's. And Eichengreen was pretty specific in his comments that ceding monetary and fiscal autonomy would hurt:

"Second, even countries that value policy autonomy may be willing to abandon monetary independence if they retain other flexible policy instruments, of which fiscal policy is the obvious candidates. In monetary unions like the US, state and local governments run budget deficits in periods of recession and accumulate nonnegligible debts. "

Give credit where credit is due. This is, as far as I know, the earliest prediction that the Euro would not work.

LRWrayJuly 24th, 2012 at 8:48 pm

Paul: I'm not picking on you or Eichengreen. But I'd say that his paper and this quote actually do not get it right. What he is saying that it is OK to give up your currency and monetary policy so long as you will ramp up fiscal policy as necessary. But that is precisely what the EMU nations COULD NOT DO and that is because they gave up their currency. In my view, who cares much about monetary policy (interest rate setting) as it is impotent anyway. But if you give up your currency you become like a US state–dependent on the currency issuer. You cannot ultimately run independent fiscal policy.

Thomas Palley Tom PalleyJuly 24th, 2012 at 9:14 pm

Permit me to offer the following:

"5.5 Will capital still be able to veto policy?

…First, financial capital may still be able to discipline governments through the bond market. Thus, if financial capital dislikes the stance of national fiscal policy, there could be a sell-off of government bonds and a shift into bonds of other countries. This would drive up the cost of government borrowing, thereby putting a break on fiscal policy (Palley, 1997, p.155-156)"

Palley, T.I., "European Monetary Union: An Old Keynesian Guide to the Issues," Banco Nazionale del Lavoro Quarterly Review, 201 (June 1997), 147-164.

PaulJuly 24th, 2012 at 10:26 pm

Randall, Eichengreen says the exact same thing in his 1994 research – that is makes no sense to give up fiscal policy autonomy. I am not saying MMT did not make a great prediction, but you were not alone pointing out all of this back then. There were a lot of people (many more in Europe) who were saying all of this at the time. You don't really think MMT economists were the only people in the world talking about how and why the euro wouldn't work, do you?

LRWrayJuly 24th, 2012 at 10:45 pm

Paul: No, not at all. I don't see it in the quote you provided, however, nor in an admittedly quick skim of the article, which never even mentions sovereign currency. I'd be glad to see evidence that others also got it right. My bone is not with them.

LRWrayJuly 24th, 2012 at 10:49 pm

And just one other thing: I did spend a lot of time in Europe around the time of the Launch. And I have to say that very few of my friends–even the most heterodox of them–foresaw problems. Especially my Italian friends were enthusiastic about it–finally going to get some Teutonic Discipline in Italy. Some years later, Claudio Sardoni and I wrote a paper together–he was one of the few dissenters I knew–that was not well-received even by our Post Keynesian friends there.

Jose GuilhermeJuly 25th, 2012 at 1:54 am

Sometimes mere observation can substitute for sophisticated theorizing.

Less than a decade before EMU, Germany implemented a successful monetary union that included a federal fiscal authority, a Central Bank acoountable to the whole federation and – last but not least – massive fiscal transfers from the core to the periphery (the former East Germany).

These 3 key elements were all absent from EMU, ergo – the EMU lacked the ingredients for success from year 0.

So perhaps we could say that Dr. Wray’s Italian friends were not only lousy economists (substituting an ideological belief in a Federal, Teutonic Europe for sharp analysis) but also incredibly innatentive observers.

They simply failed to grasp that recent European history, displayed a couple of hundred miles North of the Italian border, was undermining any basis for optimism concerning the euro project.

RonTJuly 25th, 2012 at 1:35 pm


At first I was inclined to agree with you that Mr Wray didn't credit Eichengreen enough, but on inspection I read Eichengreen as follows: "They lose monetary policy, which is troubling, but at least they will be able to rely on the second-best: fiscal policy". While Wray is saying: "They lose monetary policy, which is no big deal, but more importantly they lose the potent tool of fiscal policy which will totally cripple them during a crisis". And this is what happened. So Eichengreen was wrong: they could not use fiscal policy. Losing monetary policy was not a problem. Losing fiscal policy was.

Sean FernyhoughJuly 25th, 2012 at 3:47 pm

I thought Godley warned about the problems with EMU as early as 1992. I Google search may confirm that.

bootsaJuly 25th, 2012 at 7:03 pm

The EURO's creation and problems are hinted at in Alain Parquez's book La monnaie dans la crise (circa 1986). More important, he has the most detailed account of the eventual downfall of the Euro, and the one which (acknowledging Wray's work) most closely prefigured current events, in:
"The Expected Failure of the European Economic and Monetary Union: A False Money against the Real Economy" Alain Parguez, Eastern Economic Journal, 1999, vol. 25, issue 1, pages 63-76. Also at:

This was followed by: For Whom Tolls the Monetary Union: the Three Lessons of the European Monetary Union, by Alain Parguez , January-March 2000 .

LRWrayJuly 26th, 2012 at 3:07 am

Just to be clear, I have no problem with crediting Godley (already discussed here and at NEP–my colleague at Levy) and Parguez (a distant colleague for whom I wrote a number of articles when he edited a French journal, and a frequent guest at our conferences in the US). Parguez is especially good on the political aspects of the creation of the Euro–probably the best there is. Yes, Godley has a piece in 1992, not as specific as the 1997 piece I cited, but still good. A Troll claims MMT plagiarized everything from Godley but anyone who reads the large number of publications by MMT people–from Bell to Kregel–will see nuanced differences in the arguments.

EEBAugust 8th, 2012 at 7:10 am

But this blithely assumes that gov't's. MUST borrow. MMT shows, to the contrary, that gov'ts., if they are bold and radical enough, will cut out the middleman, so to speak, and finance themselves directly via the central bank (i.e., they will "print" money, not borrow it). In fact, that is how the U.S. gov't. ( the Union) financed the Civil War. Borrowing from the banksters is just a sort of "courtesy" extended to them by friendly gov'ts. We could just as well finance our gov't. today with Greenbacks.

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