Modern Monetary Theory will not solve Europe’s problems.

Some MMTers currently seem to claim that MMT offers a solution to Europe’s problems. I doubt it.

Describing the recent MMT meeting in Rimini in Italy, Michael Hudson says, “So what then is the key? It is to have a central bank that does what central banks were founded to do: monetize government budget deficits so as to spend money into the economy, in a way best intended to promote economic growth and full employment.” And there is more in roughly similar vein from Warren Mosler.

Well obviously that would bring back full employment in Euro periphery countries. Problem is that it does not deal with the fundamental problem (correctly identified by Paul Krugman), namely that periphery countries are not competitive. And that lack of competitiveness explains why periphery countries are in debt.

That is not to say that the EZ’s method of dealing with lack of competitiveness is all that wonderful: Greece is obviously a disaster area. But imposing severe deflation on uncompetitive countries so as to get their costs down (in Euro terms) is the only method or tool they’ve got.

Euro core countries are reluctant to allow the periphery any more credit because the periphery’s EXISTING debts are arguably not worth the paper they are printed on – never mind further debts. The continual granting of pocket money to uncompetitive debtors is of course a subsidy of those debtors. And no country joined the EZ on the basis that it was going to have to subsidise another country.

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