This week, PS talks with Ashoka Mody, Visiting Professor of International Economic Policy at the Princeton School of Public and International Affairs.
Project Syndicate: Last September, you warned that further monetary stimulus measures by the European Central Bank “will either amount to less than anticipated or will not be sustained – yet it could still undermine the eurozone’s financial system and public finances in far-reaching ways.” Since then, the COVID-19 pandemic has spurred sharp monetary expansion by the ECB. How do you rate its actions? What measures would be more effective, not only to prop up Europe’s economy, but also to protect the viability of eurozone banks?
Ashoka Mody: The ECB will face major tests in the next six months. Fiscal deficits in Italy and Spain are rising rapidly, and their economies have contracted substantially. Their debt-to-GDP ratios are skyrocketing – a process that would be accelerated further by a slower-than-anticipated economic recovery. To avoid disaster, the ECB will need to make large debt purchases from these countries, especially Italy – so large that the ECB could effectively “own” the country. The risk of an Italian default will raise a very difficult political challenge for the fiscally conservative “northern” countries on the ECB’s Governing Council.
As for banks, their chronically low profitability is suffering as a result of the ECB’s negative interest rates, which are needed to prop up the eurozone economy. The ECB helps to some extent by subsidizing the banks. But what the banks really need are higher interest rates. This creates a serious dilemma for the ECB.
PS: You were sounding the alarm about the crisis risk Italy poses back in April 2019, citing factors like zero – possibly negative – productivity growth, and a high debt-to-GDP ratio.” The pandemic has placed such concerns on the back burner, if not rendered them moot. Could the COVID-19 crisis be an opportunity for a comprehensive policy reset for Italy and other struggling EU countries?
AM: Italy’s debt-to-GDP ratio may be getting less attention now, but the risks are only growing. From the time it joined the eurozone in 1999, Italy has suffered from poor productivity growth, resulting in persistently low economic growth and rising-debt-to-GDP ratios. The COVID-19-induced economic standstill will exacerbate this long-standing problem.
We ask all our Say More contributors to tell our readers about a few books that have impressed them recently. Here are Mody's picks:
by Richard J. Bernstein
“We are now living in dark times that are engulfing the entire world.” Bernstein wrote these words in 2018. They resonate loudly today. As the title suggests, Bernstein explains why it is worth “reading and rereading” Arendt in such a context: “she is an astute critic of dangerous tendencies in modern life, and she illuminates the potentialities of restoring the dignity of politics.”
by E.H. Carr
This classic text shows that nation-states always act in their own self-interest, at the expense of others. While the world has changed significantly in the nearly 80 years since this book was published, it remains composed of nation-states, which seek to impose their power on others. Carr’s work thus remains as relevant as ever.
by Richard Neustadt and Ernest May
“Look back to look ahead,” the authors write in this 1986 book – a must-read for historians. In looking back, they advise, don’t get distracted by bureaucratic and technical explanations. Instead, focus on political motives at key moments in the storyline, for these motives endure – and shape the future.
From the PS Archive
Mody examines the factors that led to German Chancellor Angela Merkel’s decision to step down in 2021. Read more.
Mody says the IMF’s global growth forecasts underplay rich-country risks and pay too little attention to China. Read more.
Around the web
In an article for VOXEU, Mody and Milan Nedeljkovic assess the ECB’s performance during and after the global financial crisis. Read the paper.
In a 2018 article for Bloomberg, Mody called on Italy’s leaders to pursue a costly and possibly disruptive process of repairing their fragile banks – or face even higher costs and more serious disruptions later. Read the commentary.