Greece, the eurozone crisis and the case against fiscal discipline

Professor Jeffrey Frankel (Why Germany must not make the same fiscal mistakes as the US, 1 October) claims that “the 2010 euro crisis would not have happened had Greece, after joining the euro, maintained the fiscal discipline called for under the stability and growth pact”. This narrative of the eurozone crisis is very familiar but also very misleading. If fiscal indiscipline by Greece was the cause of the eurozone crisis in 2010, why, at the same time, did the fiscally prudent governments of Ireland, Spain and Portugal find themselves in the same sinking boat as Greece, in need of international rescue? The fiscal irresponsibility of Greece caused the bankruptcy of Greece, but the 2010 eurozone crisis was caused primarily by misbehaviour and indiscipline in the private sectors of the economies of the eurozone periphery. Professor Frankel’s sympathy for “Germans’ much-maligned attitude toward debts and deficits” is misplaced. The German attitude to – some would say obsession with – fiscal discipline and balanced budgets was certainly not sufficient to prevent the eurozone crisis. A strong case can be made that this attitude is also not necessary.
Prof Philip Arestis Department of land economy, University of Cambridge
Dr Yiannis Kitromilides Associate member, Cambridge Centre for Economic and Public Policy


• Your editorial (Populism can be met by a bazooka, not a peashooter, of a eurozone budget, 2 October) is quite right to say that monetary policy has failed to reinvigorate market economies and that the public sector needs to play a more active part. This is envisaged as a fiscal process of raising taxes and/or borrowing money from the market to put “idle money” back into circulation.

However, the distinction between a monetary and fiscal stimulus is based on a series of myths that lead to the claim that new money can only be generated by the private sector. Public spending then depends on harnessing this money through tax or borrowing to provide a fiscal stimulus. This ignores the fact that public spending is just as important a source of new money as bank lending.

As has been acknowledged by the International Monetary Fund and the Bank of England, bank lending is new money that increases the money supply. No existing bank accounts are raided. Similarly, public sector budgets are drawn up and spent in expectation of tax take, with deficit spending covered by post hoc borrowing.

Public spending comes first: states do not rely on piggy banks to fund their spending. Both banks and states add to the money supply when they spend or lend, and reduce it when loans and taxes are paid. State spending should be seen as a debt-free source of monetary stimulation, with taxation removing all or some of that money to prevent inflation. Money is not the prerogative of the market. It is a public resource that can be a bazooka to counter the simplistic messages of populism.
Prof Mary Mellor
Author of Money: Myths, Truths and Alternatives (2019)

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