Nobel-winning economist Christopher Pissarides said yesterday the European Central Bank (ECB) might cause the euro to depreciate by using monetary easing as a short-term measure to lessen the eurozone’s debt burden and help its industry gradually recover.
Even though there is a consensus among economists that strengthening fiscal coordination will ultimately help resolve the eurozone’s debt crisis, Pissarides said it may not do much in the short run, given the levels of debt and the sovereign risks in the region.
“Some of it has already been done [by the ECB], but much more is needed,” Pissarides told a conference in Taipei on the European debt crisis.
Pissarides said the ECB should print more money for buying bonds, helping slow the debt problem in certain eurozone countries.
While a comprehensive policy of buying bonds with new money created by the ECB would spur inflation and the depreciation of the euro, it may help revive the eurozone’s economy as well, Pissarides said.
However, given the strong opposition to inflating internally through the bank’s quantitative easing measure, especially from Germany, Pissarides said temporarily relaxing EU rules on free trade and tax competition could be used as an alternative.
Meanwhile, countries in need, such as Greece and Italy, should be allowed to launch a temporary import levy to generate more tax revenues, while export subsidies would be necessary to help increase the competitiveness of the region’s industry, Pissarides said.
“A combination of an import levy and export subsidy has the same effect as depreciation of the currency,” he said.
Such measures may be against the EU’s rules, but they could be temporary, with the advantage that they would keep all the countries now in the eurozone in the union, which is better in the long term.
“Something drastic is needed,” Pissarides said.
As for the long term, Pissarides said the region’s cooperation could be achieved through the creation of a “Fiscal Policy Council” for Europe. The council should not have executive powers, but should make annual reviews of each member’s fiscal policy, he said.
Pissarides shared the Nobel Prize in Economics last year with Dale Mortensen and Peter Diamond. He is scheduled to speak in Taichung today and leave Taiwan tomorrow.