Economists warn CEE against adopting modern monetary theory

Modern monetary theory has become a rallying cry for the left in the United States where its advocates say it can unlock state spending without sparking inflation. But economists in the CEE warn it would have dire impacts in the EBRD region

  • By Phil Thornton
  • 07 May 2019
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The new-fangled modern monetary theory (MMT) that says a country can borrow in its own currency without worrying about inflation or government deficits and debt is not the right recipe for central and eastern Europe, according to the EBRD’s chief economist.

EBRDThe idea that a country can run larger budget deficits has made MMT popular with left-leaning politicians in the United States such as Bernie Sanders and congresswoman Alexandria Ocasio-Cortez who want to fund schemes for healthcare or a Green New Deal to tackle climate change.

Sergei Guriev, EBRD chief economist, said the argument might work for the US, where government bond yields are so low that it can benefit from increasing sovereign debt provided the funds raised are used for productive purposes.

“This is especially true in countries where interest rates are below the GDP growth rates so countries naturally ‘grow out’ of debt,” he told GlobalMarkets. “This unfortunately is not the case in most of EBRD countries of operations where debt sustainability is still a very salient issue.”

His criticism echoed the verdict of the International Monetary Fund. At the spring meetings last month, incoming chief economist Gita Gopinath said there was “no free lunch”, adding: “There are limits to how much countries can spend.” The IMF’s financial counsellor Tobias Adrian said: “Unsustainable fiscal policies are problematic. They can trigger crises.”

Currency weakness

Petr Krpata, chief EMEA strategist at ING bank, said MMT would not work for countries in the CEE that tended to be price takers in financial markets. He told GlobalMarkets the US was in a unique position because the dollar was the world’s reserve currency.

“One of the by-products of MMT would be a sharply weaker currency,” he said.  “Clearing the bar for smaller currencies and more open economies to do something like this is way, way higher because their currencies would of course decline meaningfully. The idea that MMT could be applied to more open economies that are price takers is not on the cards.”

James Knightley, ING’s chief international economist, said the imperative to tackle climate change was much greater in the US than in Europe. “The US is in a very different position than Europe,” he told GlobalMarkets. “Europe is prepared to take very aggressive action — if you think of emissions targets and the fuel economy in comparison with the US.”

A survey of leading economists by the Chicago Booth IGM Forum in April found 76% strongly disagreed and 24% disagreed with the statement that countries that borrow in their own currency could finance as much real government spending as they want by creating money. None agreed.

  • By Phil Thornton
  • 07 May 2019

All International Bonds

Rank Lead Manager Amount $b No of issues Share %
  • Last updated
  • Today
1 JPMorgan 358.05 1659 8.33%
2 Citi 332.29 1407 7.73%
3 Bank of America Merrill Lynch 284.66 1219 6.62%
4 Barclays 257.19 1062 5.98%
5 HSBC 211.94 1165 4.93%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $b No of issues Share %
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1 BNP Paribas 40.25 189 7.05%
2 Credit Agricole CIB 37.82 159 6.62%
3 JPMorgan 30.92 83 5.42%
4 Bank of America Merrill Lynch 26.57 82 4.65%
5 UniCredit 26.09 141 4.57%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $b No of issues Share %
  • Last updated
  • Today
1 JPMorgan 11.53 77 9.62%
2 Morgan Stanley 11.15 54 9.30%
3 Goldman Sachs 10.04 53 8.37%
4 Citi 8.06 63 6.72%
5 Bank of America Merrill Lynch 5.64 31 4.70%