Modern Monetary Theory … macroeconomic reality
When the elites wine and dine together and hand out prizes to each other
What I learned studying history at university about
I have mostly forgotten other than the broad brush of his historical presence. I know where he is buried because his Frankish home base was Aachen on the extreme west of Germany bordering with the Netherlands. I have spent a lot of time in that area (given my association with the University of Maastricht) and have visited the cathedral that houses his grave. What I can recall is that he was a Christian imperialist who forcibly imposed “Germanic” rule on most of what is now Western Europe. But while he largely restored the old “Holy Roman empire”, this “unity” did not last long after his rule ended. That is, he dramatically failed to embed a lasting unity. I think it is appropriate then that yesterday, the President of the ECB, Jean-Claude Trichet, was awarded the famous
which is in honour of Charlemagne. The Germans think it is about unity or at least that is what they claim it is about. The other analogy with Charlemagne is that just as he sought to impose his religious views on the “heathens”, Trichet is also seeking to impose another religion on the people of Europe – neo-liberalism. It is a religion that has failed to provide succour to those who have had to endure it. It works well for the “priests” as all religion seem to. But it is imposing harshness and calamity on the rest. Anyway, in Aachen yesterday, it was another one of those days when the elites wine and dine well together and hand out prizes to each other.
A group of citizens in Aachen set up a prize –
– in 1949, which they say was intended to advance the aim of “integrating West Germany into a supranational Europe” after the appalling behaviour of the Germans during the Second World War. It was initially conceived as the “Charlemagne Prize of the City of Aachen” and was to be awarded “for service in the cause of West European unification, world peace and humanity”.
If you read back through the documents you see strong religious (Roman Catholic) overtones which was consistent with Charlemagne’s imposition of Christianity (Roman Pope-style) on whoever he conquered. This was a strongly anti-muslim period in Europe. What changes?
Anyway, fast track to June 2, 2011 – and the scene is the Town Hall in Aachen – and the 2011 Karlpreis is awarded to Mr Humanity himself Jean-Claude Trichet, President of the ECB. He joins an “illustrious” group which included German Chancellor Angela Merkel (won the prize in 2008) and Bill Clinton (won the prize in 2000).
What you might say – a prize for unification and humanity to the boss of the ECB?
Hasn’t the Euro experiment largely failed to meet the needs of the people who use it? Hasn’t the crisis torn apart any sense of common purpose in Europe, with the wealthier north against the poorer south? Hasn’t the crisis proven that the common currency zone is incapable of withstanding significant negative deand shocks without imposing massive costs on the less advantaged and without extraordinary intervention (bailouts etc) which arguably flout the original design principles?
Yes, yes, and yes.
In their <a href=" (&#8220;Begründung des Direktoriums der Gesellschaft&#8221;) the awarding panel claim that the European unity is dependent on the Euro surviving as a currency under the management of the ECB. They claimed that the Euro is a &#8220;success story&#8221; (&#8220;eine Erfolgsgeschichte&#8221;) having withstood the global financial crisis. They claim that the ECB has been crucial to the fact that &# million citizens of the Eurozone &#8230; can trust their currency&#8221; (&# Millionen Bürgerinnen und Bürgern der Eurozone bewiesen, dass sie auf ihre W?hrung vertrauen k?nnen&#8221;).
The organisers didn&#8217;t mention that at least 15.529 million of these citizens (or 9.9 per cent of the active working age population) can no longer earn that currency because they have been made unemployed by the austerity policies promoted by Trichet and his European ruling class elite. See the latest
to see how poorly the labour market in the EMU is faring. Mentioning that data might have complicated the narrative of the prize-giving committee somewhat.
It is true, on one level, that the ECB has been responsible for the continuation of the Eurozone over the course of the crisis, with several national governments now dependent on it buying their official paper in secondary bond markets at heavily discounted to par prices for their solvency. As soon as the ECB stops acting as a &#8220;fiscal agent&#8221; then the member states will go broke &#8211; one after another.
The EMU has failed as a monetary system and has failed to unify Europe. Like Charlemagne&#8217;s religious unification, the &#8220;unity&#8221; which is tied up in the common currency is oppressive and will fail in the longer-term unless serious design changes are made to the system.
The EMU is not akin to a monetary union that might exist in a normal federation (say like Australia or the United States). The stunning feature that was deliberately left out of the system by the ruling elites intent on imposing a neo-liberal agenda of central bank rule and fiscal policy passivity was that the EMU does not have a &#8220;national government&#8221; that takes responsibility for fiscal policy and can control the central bank &#8211; that is, the democratic process does not regulate economic policy as it does in true federations.
Each of the member states effectively agreed to operate with a &#8220;foreign currency&#8221; that was issued by an unelected central bank. To keep national governments in check the system imposed tight fiscal rules (Stability and Growth Pact). The elites also imposed a multilateral system of surveillance on the member states to discipline the individual governments. In effect, the rest of Europe is now living the legacy of (and being punished for) the 1920s hyperinflation in Germany not to mention the military excesses of the same nation a decade or so later with the Bundesbank morphing into the ECB.
The upshot has been that in the face of the first large negative demand shock to hit the region, the nation states have quickly found they cannot use fiscal policy in a responsible way to protect its economy from rising unemployment and collapsing income. In a normal federation, the national government can always ensure the solvency of the constituent parts via fiscal transfers. In the legal design of the EMU, there is no such role specified and attempts by the member states to cushion the demand collapse quickly raised the ire of the Euro elites with the ECB leading the charge to impose austerity on errant governments.
In a normal federation, the Greek or Irish governments would have been perfectly capable of limiting the damage of the demand collapse. But in the EMU they are constrained and are now being forced to impose pro-cyclical fiscal retrenchments which are the last thing their economies need and which violate all known macroeconomic common-sense.
However, the only thing between Greece becoming insolvent and its current parlous state has been the &#8220;quasi-fiscal&#8221; intervention of the ECB. In taking up this role &#8211; by way of the ad hoc bailouts and secondary bond market purchases, the ECB has become a sort of &#8220;fiscal tsar&#8221;.
But in exercising this power it has mis-used its position to force harsh austerity programs onto government which are now imposing severe costs on the people who live in these nations (for example, Greece and Ireland).
In the UK Guardian yesterday (June 2, 2011) &#8211;
&#8211; we read that social unrest and political instability is increasing as a result of the the Greek government announcing:
&#8230; fresh austerity measures &#8230; in an effort to restore waning confidence in its economic performance a year after securing EUR110bn (?96bn) in emergency loans, the biggest bailout in western history.
The plan will &#8220;include savage spending cuts, tax rises and the acceleration of a huge privatisation programme&#8221;. The elites which include the Euro bosses, the IMF bosses etc have not been satisfied with the damage they have imposed on the Greek economy already. They want more. 16 per cent (and rising) unemployment is not enough for this lot.
The Guardian reports that &#8220;tens of thousands of protesters &#8230; [converge] &#8230; daily on public squares&#8221; protesting at the policies.
The so-called &#8220;troika&#8221; (the IMF, EU and ECB) has recently upped the ante &#8211; with by demanding &#8220;extended foreign supervision of the day-to-day running of Greece&#8217;s public finances&#8221; and insisting that &#8220;the privatisation programme, the plan&#8217;s centrepiece, is overseen by a foreign agency&#8221;.
The problem is of-course that with the rest of the world (bar China) still mired in slow or declining growth rates it is nigh on impossible to grow when private spending is flat, unemployment is rising and government net spending is being slashed. The elites claim the aim is to reduce deficits but cuts like this increase deficits because the automatic stabilisers turn hostile.
The elites know that but are seizing this chance to further embed their position power and that of the private larger corporations (not the street corner capitalists who are also going under). The EMU situation is a classic case of the needs of a few (including wealthy banks in Germany and France) being nurtured at the expense of millions.
Revolutions follow when that culture is perpetuated.
Anyway, with that setting, it is easy to appreciate the arrogance visible in the Trichet&#8217;s
in Aachen yesterday (June 2, 2011).
He gave the assembled audience a lecture on the need for European unity and that the role of European institutions was vital.
His message was to become clear but he knew he had to blur it somewhat early on &#8211; presumably while the audience was still awake. He said that advancing &#8220;peace and security&#8221;:
&#8230; calls for continuing to strengthen Europe’s institutional framework. In the economic and financial fields it demands to reinforce in a decisive way the institutions of the economic and monetary union.
By institutions, I do not mean technocrats making complex decisions remote from citizens.
I mean the rules and organisations that preserve our core values and guide our actions towards the common good.
Institutions that build trust between peoples and nations in Europe.
Institutions that foster cooperation for mutual benefit.
Institutions that manage our interdependence by preparing collective decisions.
You will be already noting the tension in the message &#8211; Brussels is remote from the citizens in southern Europe. It is where the elites lunch and talk and make decisions that are then imposed on the people. Even the decision to create the EMU was taken away from the citizens when it became obvious that supportive national referenda would fail. Quick march &#8211; goose-step-style to Portugal and impose the Lisbon Treaty &#8211; determined by the elites and eliminating any complication that democracy might bring.
The entire behaviour of the EMU since it was created has been remote from the citizens. For a time it did not matter because the world economy was growing and times were (relatively) better. But now, with the fabric of European life being torn apart by continued recession and the remote elites in Brussels and Frankfurt demanding even harsher policies be imposed on the member states, the detachment of the citizens is obvious and will matter.
Trichet had the audacity to declare the EMU a success &#8211; &#8220;EMU is the area where Europe has progressed furthest&#8221; and is &#8220;an unprecedented achievement in the history of sovereign nations – a goal to which generations of Europeans have aspired&#8221;.
I am always circumspect when making statements about places I do not live nor share in any outcomes but if the EMU is the exemplar of long-held European aspirations then they have not wished for much.
By any economic standards, the EMU has failed &#8211; exactly in the way that the critics predicted it would when it was created. It is incapable of defending itself against external demand shocks. There are other reasons for its failure (relating to disparate labour markets, lack of internal migration etc) but the major reason why Greece and Ireland (and Portugal) are now effectively insolvent is because they surrendered their currency sovereignty. The Euro is the problem not the basis for a solution.
After praising how successful the EMU has been, he then went onto the main agenda of his speech &#8211; to lay down some more law for the future. He said:
Just as the success of the euro as a currency is due to well-designed institutions, addressing EMU’s difficulties requires a major strengthening of the rules and organisations that govern fiscal and economic policies.
Looking at the euro area today, we see clearly that countries that abide by the rules of the single currency can thrive and prosper. Sound policies and a healthy economy are strongly correlated.
But we also see the opposite. Countries that have not lived up to the letter or the spirit of the rules have experienced difficulties.
He fails to mention that the earliest breaches of the SGP were Germany and France. He also fails to mention that Spain and Ireland can hardly be said to be fiscal profligates (defined within the harsh SGP rules).
Then he said that fundamental &#8220;governance&#8221; reforms were required and he saw this as a two-stage process. The first stage would provide :
&#8230; financial assistance in the context of a strong adjustment programme.
He supported on-going IMF intervention and austerity being imposed on nations that breach the SGP criteria and he considers this process should be taken out of the political sphere (&#8220;governments and opposition – unite behind the effort&#8221;).
The second stage would consolidate the undermining of basic democracy in member states. He said:
Would it go too far if we envisaged, at this second stage, giving euro area authorities a much deeper and authoritative say in the formation of the country’s economic policies if these go harmfully astray? A direct influence, well over and above the reinforced surveillance that is presently envisaged? &#8230;
In the new concept, it would be not only possible, but in some cases compulsory &#8230; for the European authorities – namely the Council on the basis of a proposal by the Commission, in liaison with the ECB – to take themselves decisions applicable in the economy concerned &#8230; One way this could be imagined is for European authorities to have the right to veto some national economic policy decisions. The remit could include in particular major fiscal spending items and elements essential for the country’s competitiveness.
So take economic policy setting off the elected government and transfer it to Brussels (or somewhere where the elites hang out).
So allow elite bureaucrats and mainstream economists (who have failed in every respect to present a meaningful explanation of how the crisis developed) to cut wages in individual countries, increase working hours, reduce welfare and work standards including safety etc, to cut pension entitlements, to reduce access to public education and hospitals, and all the rest of the &#8220;elements&#8221; that the mainstream claim are &#8220;essential for the country’s competitiveness&#8221;.
He then specifically outlined the type of central authority he envisages.
In this Union of tomorrow, or of the day after tomorrow, would it be too bold, in the economic field, with a single market, a single currency and a single central bank, to envisage a ministry of finance of the Union?
Not necessarily a ministry of finance that administers a large federal budget. But a ministry of finance that would exert direct responsibilities in at least three domains: first, the surveillance of both fiscal policies and competitiveness policies, as well as the direct responsibilities mentioned earlier as regards countries in a “second stage”
second, all the typical responsibilities of the executive branches as regards the union’s integrated financial sector, so as to accompany the full integration o and third, the representation of the union confederation in international financial institutions.
It is clear that one solution to the EMU design flaws is to create a national fiscal authority that can make spending transfers to regions (member states) that are enduring a negative demand shock. The creation of such an authority could clearly advance the public purpose of the federation and cross state boundaries seamlessly dispensing a common currency.
So under that schema it would be the same as exists in the US or Australia or any other federation where the national government has currency sovereignty. But to render this consistent with our pretensions to democracy, such a body has to be elected and regularly accountable at the ballot box for its performance.
Already, in sovereign nations like the US etc the conservatives are trying to give so-called &#8220;fiscal commissions&#8221; more discretionary power over the elected representatives of the people. The whole central bank independence agenda over the last three decades is about the diminution of responsibility of our elected representatives.
Please read my blog &#8211;
&#8211; for more discussion on this point.
But the fact remains we can throw our government out if we do not like the fiscal policies it introduces.
So democratic pretensions could only be aligned with sound fiscal design in a monetary union such as the EMU if there were fundamental political changes in Europe &#8211; and the creation of a truly dominant supra-national government.
Belgian economist Paul De Grauwe, who many consider to be a progressive voice in the current debate, comes close to recognising this as the solution. He said in a recent paper &#8211;
&#8211; that:
a budgetary union is the instrument of collective action and internalization. By consolidating (centralizing) national government budgets into one central budget a mechanism of automatic transfers can be organized. Such a mechanism works as an insurance mechanism transferring resources to the country hit by a negative economic shock. In addition, such a consolidation creates a common fiscal authority that can issue debt in a currency under the control of that authority. In so doing, it protects the member states from being forced into default by financial markets. It also protects the monetary union from the centrifugal forces that financial markets can exert on the union.
But he recognises that &#8220;(t)his solution of the systemic problem of the Eurozone requires a far-reaching degree of political union&#8221; and it &#8220;is clear, however, that there is no willingness in Europe today to significantly increase the degree of political union. This unwillingness to go in the direction of more political union will continue to make the Eurozone a fragile construction&#8221;.
His approach is different to the one I propose &#8211; exit and restore currency sovereignty. He says that Europe &#8220;can move forward by taking small steps&#8221;. Which are?
1. Formalise the existence of the European European Financial Stability Facility (EFSF) and the European Stabilization Mechanism (ESM) into the creation of a European Monetary Fund which would provide funds to trouble nations but with conditionality (that is, &#8220;an austerity package&#8221;). He claims that austerity should be imposed so that &#8220;economic growth gets a chance&#8221; but that seems to be a soft &#8220;fiscal contraction expansion&#8221; argument.
How does growth get a chance when private spending is flat, the nation is in external deficit and you are cutting public spending? Answer: you cannot get growth unless there is spending. Some sector has to be adding to demand growth for output growth to occur.
Trying to suggest that it is about &#8220;degrees of austerity&#8221; misses the fundamental macroeconomics issue &#8211; spending equals income.
2. Joint issue of Eurobonds &#8211; so the nations issue debt for which they are mutually responsible for. This idea has been around for sometime now and has been opposed because it introduces so-called &#8220;moral hazard&#8221; (why should a risky nation not just issue more debt than it should) and penalises low risk nations (with good ratings).
De Grauwe proposes to overcome these problems by creating a two-tier system: Blue jointly-issued bonds if a nation is below the SGP debt ratio (60 per cent) and red nation-issued bonds if they are above the 60 per cent.
My problem is two-fold. First, a sovereign nation should be moving forward by eliminating sovereign debt issuance given that a sovereign government is never revenue constrained as the monopoly issuer of the currency. So entrenching a more complicated system of bond market welfare seems to be a regressive step &#8211; a sort of &#8220;soft&#8221; neo-liberalism.
Second, it accepts the SGP public debt limit as being meaningful and optimal. Debt ratios have gone above this limit exactly because the demand collapse has been so profound in some nations. These are the very nations that are likely then to be penalised by bond markets who will shun the &#8220;red bonds&#8221;. The solution is to eliminate the influence of the parasitic bond markets and that requires an exit from the EMU and the reinstatement of sovereign currencies.
3. Coordination of economic policies &#8211; De Grauwe notes in a supportive way (&#8220;an important step forward&#8221;) that the:
The European Commission has proposed a scoreboard of macroeconomic variables (private and public debt, current account imbalances, competitiveness measures, house prices) that should be monitored, and that should be used to push countries towards using their economic policy instruments so as to create greater convergence in these macroeconomic variables. Failure to take action to eliminate these imbalances could trigger a sanctioning mechanism very much in the spirit of the sanctioning mechanism of the Stability and Growth Pact
But he says more has to be done because &#8220;National governments have relatively little control over many of the macroeconomic variables targeted by the European Commission&#8221;.
He says that:
&#8230; any policy aimed at stabilizing local economic activity must also be able to control local credit creation.
He notes that the ECB was created to oversee union-wide monetary conditions but that it should also &#8220;deal with excessive bank credit in parts of the Eurozone &#8230; to restrict bank credit in some countries more than in others by applying differential minimum reserve requirements, or by imposing anti-cyclical capital
These can and should be used as stabilizing instruments at the national level&#8221;.
While many are holding out De Grauwe&#8217;s position as being progressive I just see it as a softer neo-liberalism.
&#8211; Make the pain less but draw it out for longer.
&#8211; Maintain anti-democratic policy power at the union and individual country level in the hands of the ECB.
&#8211; Create a central &#8220;IMF&#8221; which can impose conditionality on elected governments.
&#8211; Maintain the powerless of individual governments by forcing them to use a foreign currency and thus remain hostage to the bond markets.
So it is a matter of degrees he is arguing about.
The problem is that these &#8220;reforms&#8221; will still punish a nation that encounters a serious negative demand shock. Such a nation still faces insolvency and the only adjustments that would be possible include internal devaluation (attacking wages and welfare) and fiscal austerity.
I don&#8217;t see any of that as being progressive when the option is for a government restore its currency sovereignty, float its currency and then take political responsibility for its actions. That is what I thought democracy was about and it certainly is the optimal way of organising a monetary system.
The creation of a truly dominant supra-national government is also not what Trichet is proposing. He wants an unelected bureaucracy to rule without any accountability to the people and impose whatever regime the elites deemed suitable at any point in time. It would amount to the destruction of democracy. I don&#8217;t see much fundamental difference between his viewpoint and that of De Grauwe at the substantive level.
Conclusion
Just as Charlemagne was a Christian imperialist, Trichet is seeking to impose another religion on the people of Europe &#8211; neo-liberalism. It is a religion that has failed to provide succour to those who have had to endure it. It works well for the &#8220;priests&#8221; as all religion seem to. But it is imposing harshness and calamity on the rest.
I suppose it is nice that the European elites get together regularly in relatively sumptuous surrounds, and drink and eat well, and present each other with prizes and honours etc. Better someone is happy in all the mess they have created.
Saturday Quiz
The Saturday Quiz will be back sometime tomorrow &#8211; even harder than last week!
That is enough for today!
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