Last week (September 13, 2023) in Brussels, the President of the European Union delivered her annual – 2023 State of the Union Address. We all know that these events are spin-oriented and the leader of the 27-nation bloc is hardly going to come out and talk the arrangement down. But this was an election speech – with the next major elections coming in the year ahead. The President lauded all the half-baked and under-funded programs that they have initiated under her ‘leadership’ and when it came to assessing the state of the labour market she made the extraordinary statement that as a result of Commission policies (such as – SURE) “Europe is close to full employment.” Yes, they are spinning the view that the problem is not a lack of jobs but “millions of jobs are looking for people” while admitting that “8 million young people are neither in employment, education or training” – the so-called NEET generation. Language should above all else convey meaning. Trying to claim that Europe is close to full employment violates that basic aspiration. The reality is that Europe is nowhere close.
I have been avoiding keeping up-to-date with the Irish national accounts over the last several years for reasons that I documented in this blog post – Ireland – not as rosy as the official story might suggest (January 2, 2018). Ireland has been held out as the poster nation for the Eurozone boosters because of its seemingly ‘impressive’ growth performance after entry into the common currency and its resilience after the Global Financial Crisis. During the GFC, I wrote a series of blog posts (see below) that delved into reality of the Irish situation and we learned that the so-called ‘Celtic Tiger’ growth miracle was an illusion and was driven by major US corporations evading US tax liabilities by exploiting massive tax breaks supplied to them by the Irish government. Since then the ‘smoke and mirrors’ have become even more obvious as the Irish national accounts recorded massive increases in business investment all due to fudges in the way several large corporations recorded their tax affairs. I decided recently to see where this was at given the European Commission is still claiming that growth. What I found was that the distortions in the Irish data are influencing the outcomes reported for the European Union as a whole and things are definitely not as robust as the official figures demonstrate.
Yesterday, the – Flash Germany PMI – was released, which shows that “German business activity” has fallen “at fastest rate since May 2020”. Also released was the – Flash Eurozone PMI – which revealed that “Eurozone business activity contracted at an accelerating pace in August as the region’s downturn spread further from manufacturing to services”, Europe is heading to recession or should I rather say – stagflation – because the unemployment will rise sharply while inflation is still at elevated levels. All because the policy settings are wilfully and unnecessarily driving nations into recession. Over the Channel, Britain is going through a similar experience – inflation is falling rapidly and the economy is plunging towards recession. The common link is the policy folly. The European Central Bank and the Bank of England have been increasing interest rates as a ‘chasing shadows’ exercise – meaning that the drivers of the inflation they claim to be fighting are not sensitive to the interest rate changes. But the interest rate hikes are causing damage to the real economy by increasing borrowing costs. Meanwhile, fiscal policy is in retreat because the government thinks it has to set policy to complement the central bank hikes – meaning two sources of austerity. And for those commentators who pine for re-entry to the EU – they should look East and see what a mess the European economy is in!
It’s Wednesday and so before we get to the music segment we have time to discuss a few issues. The first relates to the progress Britain is making in its post-Brexit reality. There is now growing evidence that, despite predictions of economists supporting the Remain case, the newly gained freedom that Britain now enjoys as a result of leaving the EU has allowed it to restrict the entry of lower-skilled and lower-paid migrants (from the EU) and attract a large boost in skilled migration from non-EU nations with net benefits to the domestic economy. Second, it seems the mainstream is now discovering the work of Marxist economists from 5 or more decades ago and concluding that it provides a much better explanation of the inflation process than that offered by Monetarists (excessive money supply growth) or the mainstream New Keynesian theories which emphasise “departures from a natural rate of output or employment” (NAIRU narratives). That’s progress even if it took a while. Once you have absorbed all that there is some great improvisational music to soothe your senses.
In my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015) – I traced in considerable detail the events and views that led to the creation of the Economic and Monetary Union (EMU, aka the Eurozone) once the Treaty of Maastricht was pushed through as the most advanced form of neoliberalism at that time. The difference between the EMU and other nations who have adopted neoliberal policies is that in the former case the ideology is embedded in the treaties, that is, in the constitutional system, which is almost impossible to change in any progressive way. In the latter case, voters can get rid of the ideology by voting the party that propagates it out of office. It is true that in current period, even the parties in the social democratic tradition have become neoliberal and there is little choice. But the EMU is different and has entrenched the most destructive ideology in its legal structures. We are reminded of this recently (April 26, 2023), when the European Commission released its latest missive – Commission proposes new economic governance rules fit for the future. Once operational, the policies advocated in this new governance structure will ensure that Europeans are once again made to endure persistent and elevated levels of unemployment and continued deterioration in the quality and scope of public infrastructure and welfare provision. The collapse of this ideological nightmare cannot come soon enough.
The transitory view of the current inflation episode is getting more support from the evidence. Yesterday’s US inflation data from the Bureau of Labor Statistics (March 14, 2023) – Consumer Price Index Summary – February 2023 – shows a further significant drop in the inflation rate as some of the key supply-side drivers abate. All the data is pointing to the fact that the US Federal Reserve’s logic is deeply flawed and not fit for purpose. Today, I also discuss the stupidity that is about to begin in Europe again, as the European Commission starts to flex its muscles after it announced to the Member States that it is back to austerity by the end of this year. And finally, some beauty from Europe in the music segment.
If you cast your mind back to the peak of the GFC, when people were actually talking about the dissolution of the Economic and Monetary Union (EMU), a.k.a. the Eurozone, or more specifically, a unilateral exit by Greece or Italy, we were told by the ‘experts’ that it would be catastrophic. Over and over, headlines shouted at us how disastrous it would be if the Eurozone failed. Well, guess what, even pro-Euro researchers have come to the conclusion that the effects of collapsing the monetary union would be minimal, to say the least. And when we dig into their analysis a bit deeper, using technical knowledge, the results are even more devastating for the pro-Euro camp. Mostly, using techniques that give pro-Europe narratives the best chance of delivering supportive empirical results, they find mostly impacts that are not statistically different from zero, of an abandonment of the common currency and a return to currency sovereignty for the 20 Member States. I haven’t seen any attention given to this in the mainstream media or from those pro-Euro Tweeters that tweet away with all sorts of nonsense about how good the common currency has been. But then that would be a bridge to far for them I guess.
It’s Wednesday and I have several items to discuss or provide information about today. Today, I discuss the future of the EU-bonds that were issued as part of two main emergency interventions in 2020 as policy makers feared the worse from the pandemic. The question is whether these assets can ever become ‘safe’ in the same way that Japanese government bonds or US treasury bonds are clearly ‘safe’. The answer is that they cannot and the reason goes to the heart of the problem besetting Europe – the fundamental monetary architecture is flawed in the most elemental way. I also provide some updates for MMTed and a great new book. And, of course, this week, I have to remember Jeff Beck in the music segment.
There was a Financial Times article recently (January 8, 2023) – Monetary independence is overrated, and the euro is riding high – from Martin Sandbu which strained credibility and continues the long tradition of pro-Euro economists attempting to defend the indefensible – fixed exchange rate, common currency regimes. He claims that the Euro is a better system in the modern era for dealing with calamity than currency independence. However, as I explain below, none of his arguments provide the case for the superiority of the Eurozone against currency-issuing independence. Currency-issuing government can certainly introduce poor policy – often because the policy makers refuse to acknowledge their own capacity and think they have to act as if the nation doesn’t have its own currency. But the negative consequences that flow from testify to the poor quality of the polity rather than any disadvantages of the currency independence. The Euro Member States are being bailed out by the central bank and if that stopped the system would demonstrate the inherent dysfunction of its monetary architecture and nations would fail.
Well things are going to get messier with the decision yesterday by the OPEC+ cartel to significantly reduce the oil supply and push up prices. On the one hand, when OPEC was first formed and pushed prices up, while there was significant disruption to oil-dependent nations, the substitution that followed (home oil heating abandoned, larger cars replaced by smaller cars, etc) was ultimately beneficial. So given that we need less cars on roads and less kms travelled by cars, one might consider the move to be fine. But given the way the central banks and treasury departments around the world are behaving at present, the short term impacts of the OPEC+ decision will be very damaging. How citizens endure whatever extra inflationary pressures that might emerge will depend on the fiscal and monetary policy responses. We have two diametrically opposed models: the one that most nations are following (hikes and austerity) versus the Japanese approach. I explain the difference below and predict that the latter will deliver much better outcomes for the people.