On July 19 professor Peter Bofinger was in Amsterdam for a lecture organised by the German Embassy in The Hague and the Duitsland Instituut. Bofinger is member of the Sachverständigenrat – comparable to the Council of Economic Advisors in the USA. These German “Five Wise Men” (as they are called in Germany) have rather famously proposed that Europe puts all government debt above 60% in a Redemption Fund. People who understand Dutch or German may want to listen to this short interview on BNRadio. The discussion this evening was in English however.
Bofinger presented an analysis that also can be seen in the Tommaso Padoa-Schioppa Group June 2012 or his earlier lessons May 2011, where the latter is only 5 pages and may be more attractive for a quick read.
Bofinger presented the choice between either more EU integration or deliverance to the markets and the rating agencies. A Euro 2.0 would require a Banking Union and supervision by Brussels on budgets. Who would not stick to the rules could be evicted.
In his view, Greece, Spain, Portugal and Italy have really done much to redress their problems, and deserve to be aided. He also accepts that Germany causes part of the problem by its export surplus, partially caused by stagnant wages.
Professor Lex Hoogduin from Amsterdam was invited to comment on Bofinger’s analysis. His main point was that all depends upon the details, and that it is difficult to say something for or against something when the details aren’t clear yet. Well, great, this is like kicking in an open door.
Hoogduin had one good point: “Expelling a member turns a union into a fixed rate system, and we know that those are instable because of speculation.” The comment made Bofinger doubt. It is nice to see that a speaker shows himself so open on issues that he allows doubt to show. Indeed, in my own proposal to handle debts and rates, a member remains in the union but only loses support from the center.
Overall Hoogduin agreed that more integration was the best option, and that more supervision on maintaining the rules did not turn the EU into a ‘superstate’.
From the audience a student of history from Leiden remarked on the following, apparently not seen by Hoogduin. Bofinger had criticized the markets that rates of interest had converged before the crisis so that they did not include country risks. He also stated that it had been an error to partly default Greek debt. He advised that no eurozone debt should default in the future. This caused the student to point out the inconsistency. If no debt defaults then there should be only a small liquidity premium. To this, Bofinger didn’t have an answer. See again to my proposal for the proper perspective, where so-called interest differentials are translated into proper annuities that contain redemption.
The monitor of the discussion was Sandra Phlippen, chief editor of the Dutch economics magazine ESB. She observed that Greek national debt is insustainable and that part must be defaulted. There has been an article on Greek debt in ESB. A small difficulty here is that ESB puts its articles behind a pay barrier, and that its articles are in Dutch anyway, so that we find a small community of discussants here, and it seems of little use to provide links here. Anyway, Bofinger rejected such defaults and stated that all government debt should be secure and hence redeemed. Indeed, the proposal for the European Redemption Fund makes this feasible. His flat denial left Sandra bewildered.
My own suggestion in the Economic Plan for Europe (September 2011, written a short time before that proposal of a Redemption Fund) was that the ECB steps in. This is based upon the consideration that the inclusion of Italy and Greece in the eurozone was a political decision anyway, so that we merely need to be consistent in the special treatment that is required here.
To my suggestion that we need investment banks, Bofinger referred to the Schuldenbremse or the zero deficit rule that Germany adopted, see his lessons again, and that now is planned for the whole of the EU.
It would seem that if Bofinger studies my book DRGTPE and revises his position in the light of the new analysis there, that there is ample scope for agreement.
Now, given that it appears to be possible to have a good discussion in Amsterdam, at the international level too, is there still need for a boycott of Holland, till the censorship of science there is resolved ? I would say: Yes, of course, there is still censorship, and it wasn’t resolved by this neat discussion on July 19. I felt somewhat embarrassed by the weak performance by Hoogduin, who does nothing about that censorship and who is one of the professors of economics that need to be fired for lack of respect for the integrity of economic science. It was a good discussion but my contribution felt like being shackled in chains.
In the next blog, I will return to the EU ‘superstate’ and its risks of war.