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2011 12

EMU and International Conflict

Martin Feldstein writing in Foreign Affairs in 1997, demonstrating that the euro crisis was entirely foreseeable:

If EMU does come into existence, as now seems increasingly likely, it will change the political character of Europe in ways that could lead to conflicts in Europe and confrontations with the United States.

The immediate effects of EMU would be to replace the individual national currencies of the participating countries in 2002 with a single currency, the euro, and to shift responsibility for monetary policy from the national central banks to a new European Central Bank (ECB). But the more fundamental long-term effect of adopting a single currency would be the creation of a political union, a European federal state with responsibility for a Europe-wide foreign and security policy as well as for what are now domestic economic and social policies. While the individual governments and key political figures differ in their reasons for wanting a political union, there is no doubt that the real rationale for EMU is political and not economic. Indeed, the adverse economic effects of a single currency on unemployment and inflation would outweigh any gains from facilitating trade and capital flows among the EMU members.

posted on 13 December 2011 by skirchner in Economics, Financial Markets, Monetary Policy

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The Irrefutable Logic of Quantitative Easing

A useful thought experiment from Robert Hetzel:

The institutional fact that makes a liquidity trap an irrelevant academic construct is the unlimited ability of the central bank to create money. One can make this point in an irrefutable manner by noting that the logical conclusion to unlimited open-market purchases is that the central bank would end up with all the assets in the economy including interest-bearing government debt, and the public would hold nothing but non-interest-bearing money. Because that situation is untenable, individuals would work backward from that endpoint and begin to run down their money balances and stimulate expenditure in the current period.

posted on 13 December 2011 by skirchner in Economics, Financial Markets, Monetary Policy

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The Long March of Fightback

I have an op-ed in Online Opinion marking the 20th anniversary of Fightback:

Twenty years ago this November, the Liberal-National Party coalition released Fightback, the most comprehensive and market-oriented policy platform ever taken to a federal election. Conventional wisdom holds that Fightback was a political folly that saw the opposition lose an un-losable election. Yet in the last twenty years, much of Fightback has been implemented and even enjoys bipartisan political support. Fightback was a failure only when viewed through the lens of short-term electoral politics rather than public policy.

The1993 federal election is still considered Paul Keating’s greatest political triumph and John Hewson’s spectacular failure. But this is to elevate personal political fortunes above public policy outcomes. Fightback’s centerpiece, the goods and services tax, was supported by Paul Keating in 1985. It would be surprising if he now called for its repeal. Keating beat Hewson in 1993 but within seven years the GST prevailed and now serves to diminish Keating and his legacy.

Even with the advantages of incumbency, the Howard government’s 1998 tax reform package was as politically risky as Fightback. It nearly cost John Howard both the 1998 and 2001 elections. Yet it made Howard’s reputation as a reformer and few would argue with the economic legacy of the tax reforms introduced in 2000. As Paul Kelly has noted, if the Labor Party had implemented the 1998 tax reform package, the ABC would have been making documentaries about it for the next 50 years.

posted on 12 December 2011 by skirchner in Economics, Politics

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FIRB Should Not be a Model for South Africa

South Africa looks to Australia’s Foreign Investment Review Board as a model:

THE establishment in SA of a body similar to the Australian Foreign Investment Review Board will be vital in regulating the government’s rules on foreign direct investment and removing uncertainty of the kind around this year’s controversial Walmart-Massmart merger.

However, competition experts warn that for the body to function properly, it will have to be independent from the government, will have to be governed by rules that clearly define its role and jurisdiction, and will have to have absolute transparency.

Australia’s FIRB has none of those characteristics.

posted on 07 December 2011 by skirchner in Economics, Foreign Investment

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