www.thesuniljain.com

Talking turkey PDF Print E-mail
Thursday, 22 September 2011 00:00
AddThis Social Bookmark Button

The euro, many argue, is responsible for the current mess Europe finds itself in since it essentially binds weaker economies to an artificially strong currency—if Greece could go back to the drachma, it would have depreciated sharply in recent months, giving the economy the much-needed competitive edge as far as exports are concerned. So, the argument goes, countries like Greece would do well to leave the euro. The latest Economist cites research by UBS to argue that leaving the euro would impose huge costs on everyone—in the case of Greece, leaving the euro would make all the euros deposited in Greek banks useless, so holders would form a queue to take them out, leading to a run on all Greek banks even before you can spell d-r-a-c-h-m-a. In the event, UBS estimates there will be a 40-50% fall in Greek GDP and a 20-25% fall in German GDP in the first year itself.

In this context, the IMF suggests mimicking the effect of a devaluation while not actually devaluing, an impossibility as long as any country continues to use the euro. The idea of ‘fiscal devaluation’ proposed by the IMF in its just-released Fiscal Monitor, the IMF says, is not a new one. The idea of moving from taxing goods at their origin (where they are produced) to taxing at their destination (where they are consumed), which was an essential feature of the formation of the EU, is essentially equivalent to an exchange rate devaluation since exports are taken out of the tax net while imports are brought in. A reduction in payroll taxes, the IMF now argues, will make exports more competitive. If the reduction in tax collections as a result of this is now made good by raising VAT rates, this will raise the costs of imports. Making exports more competitive and imports more costly is what an exchange rate depreciation does.

It remains to be seen how well the system works—the IMF itself lists various pitfalls—but the IMF says it accelerates the elimination of unemployment while leaving the real product wage unchanged. The important thing to focus on, though, is how the current need is for unconventional thinking, as the political class seems to have completely run out of ideas on how to fix the crisis. Another set of unconventional ideas, put forward by India’s chief economic advisor Kaushik Basu, pertains to monetary policy. Basu says Turkey lowered interest rates and, by stimulating production, this lowered inflation rates—on January 22, 2011, FE carried a set of graphics (http://www.financialexpress.com/news/price-in-that-production/740607/) to show that, in the last decade, the goods for which production rose dramatically (Maruti cars, for instance) saw price declines while those for which production rose slowly (most food articles) saw large doses of price hikes.

 

You are here  : Home Economy Talking turkey