European Union – Page 30 – William Mitchell

Chaos in Europe and the flawed monetary system

March 23, 2016
bill
European Union
17 Comments

I spend a fair bit of time in various airports each month and hate the onerous security checks, which at times seem petty in the extreme. It always amused (not the right word) me that a passenger could just walk straight on with a bag full of duty free whisky which would make a lethal weapon if smashed, yet characters like me with pins in my legs (old bike crashes) have to nearly strip each time we have to fly. Now I suppose they will have security screening outside the terminal entrance just to enter. The authorities would have been better ensuring that their youth had access to employment rather than allowing them to wallow in unemployment and the resulting social exclusion. It is too simplistic to attribute the growing dangers in Europe and elsewhere to concentrations of high unemployment. But if a society deliberately denies a particular generation of the chance to gain employment and, instead, vilifies them as lazy, wanton individuals then it is easy to see why those characters will conclude that society has nothing to offer. In Europe where these manifestations are becoming increasingly obvious, the flawed monetary system is at the heart of the problem. It has failed categorically and the fall out of that failure is multi-dimensional.

February 29, 2016
bill
Economics, European Union
8 Comments

Towards the end of last year, I wrote a blog – Finland should exit the euro. I had been undertaking some detailed research on the plight of this relatively small Eurozone nation for a number of reasons. First, it had recently undergone a major industrial decline as Nokia/Microsoft missed market trends and went from world leader to irrelevance. Second, Finland was a vocal proponent of the view that Greece should be pillaried into oblivion by the Troika – to ‘take their medicine’ (more crippling austerity). Third, the data trends were unambiguously pointing to Finland descending into the Eurozone ‘basket case’ category itself as its own conservative government imposed harsh fiscal austerity on the tiny, beleagured nation. Two things are clearer than ever about the Eurozone. First, it is a dysfunctional mess and efforts to reform it so far have only made matters worse. Second, any single nation (and all together) would be unambigously better off exiting the mess and restoring their own currency sovereignty and letting their exchange rate take up some of the adjustment. The following text covers an article that I have written for a Finnish Report coming out in May 2016 to be published by the Left Forum Finland, which is a coalition formed by the political party Left Alliance, the People’s Educational Association (KSL) and the Yrjö Sirola Foundation.

If I was in Britain I would not want to be in the EU

The foundations of national sovereignty are the currency-issuing capacity of the national government. The foundations of a democracy include the ability of the citizens of that currency zone (the ‘national government’) to choose the political representatives at regular intervals who will make decisions on their behalf. A direct chain of responsibility between the elected officials to the voters is thus established and the citizens can take action accordingly if they feel they are being disadvantaged by the legislative outcomes. The anathema of this sort of direct responsibility and accountability is the European Union, which is cabal ruled by unelected officials (in the conventional sense) who are not held accountable for their decisions, no matter how poor they turn out to be. The history of the Eurozone is one of policy failure with millions of people rendered unemployed, in poverty, or otherwise disadvantaged by the destructive decisions made by successive European Commission administrations. There was a good reason why the French president Charles de Gaulle resisted the development of supranational power blocks in Brussels and elsewhere (for example, in Frankfurt under the Eurozone). His preference for Inter-Governmental relations, where large common issues such as climate change, migration, rule of law, etc could be decided upon by representatives of each Member State government, without surrendering national sovereignty, was sound. Given all of that, the United Kingdom should exit the dysfunctional European Union immediately and only negotiate with other states on a government to government basis.

The European circus continues

Yesterday, I briefly examined how a pack of big-noting financial market traders were trapped in stupidity by patterned behaviour and self-reinforcing group dynamics (aka Groupthink). Today, we consider the neo-liberal Groupthink that continues to trap political leaders and policy makers in Europe into a web of denial and stupidity.

In both case, innocent people have suffered huge negative impacts while, by and large, the idiots have escaped fairly unscathed. The recent data from Eurostat shows that growth is fairly flat in the Eurozone and industrial production is in recession. It also shows that the banking system is in deep jeopardy and the so-called reforms that were introduced post-GFC are not considered robust by investors. With massive bank deposit flight going on and banking share prices plunging, it is clear that the ‘markets’ have lost faith in the financial viability of the Eurozone. Meanwhile. Mario Draghi winds the key up in his back and tells the world that everything is fine and the ECB is on top of the situation. With chaos descending on the monetary union again, the ECB cannot even achieve its single purpose – a stable 2 per cent inflation rate. It has failed to even achieve that over the last four years. One couldn’t write this sort of stuff if they were trying.

The reality of Germany and the buffoons in Brussels intervenes …

This week, I seem to have been focused on central banking this week, which is not my favourite topic, but is all the rage over the last several days given the decision of the Bank of Japan to use negative interest rates on any new bank reserves and then continue to pump reserves into the system via its so-called QQE policy (swapping public and corporate bonds for bank reserves), and then imposing a tax on the reserves so created. Crazy is just one euphemism which comes to mind. So still on that theme and remembering that the Bank of Japan explicitly stated that the combination of QQE and the tax on reserves (they call it a negative interest rate – same thing) was introduced to increase the inflation rate back up towards its target of 2 per cent per annum, I thought the following paper was interesting. The paper from the Research Division of the Federal Reserve Bank of St Louis (published July 2015) – Current Federal Reserve Policy Under the Lens of Economic History: A Review Essay – considers the unconventional monetary monetary policy interventions taken by the US Federal Reserve Bank between 2007 and 2009 and comes to the conclusion that “there is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed inflation and real economic activity”. Maybe the Bank of Japan and the ECB bosses should sent this researcher an E-mail and request his evidence. They don’t seem to have been able to escape from the straitjacket of their neo-liberal Groupthink.

The ECB could stand on its head and not have much impact

As the Bank of Japan began its hopeless quest to stimulate growth with negative interest rates (see my blog yesterday – The folly of negative interest rates on bank reserves), the latest data from the ECB came out on lending to households and non-financial institutions. It tells an interesting story. The story has to be framed within the knowledge that oil prices have now fallen by some 77 per cent. But the major factor that is not usually mentioned when commentators talk about ECB policy changes and the likely impacts is the on-going and manic fiscal austerity in the Eurozone, which puts the whole region in a recession-type straitjacket, where monetary policy changes, weak in impact at best, have little hope of achieving anything positive. The logic of the reliance on monetary policy for counter-stabilisation is also built on a failure to understand what drives the economic cycle. The belief that banks will suddenly lend just because the central bank imposes a tax on their reserve deposits (negative interest rates) or offers them cheap loans to on-lend to households and firms is misplaced. Banks do not loan out their reserves and firms will not borrow from banks no matter how cheap the money is if there are no profitable opportunities to pursue. It is time the authorities abandoned their neo-liberal myths and got real. The Eurozone needs a massive fiscal expansion and it needed it 7 or 8 years ago. The ECB is the only institution in the flawed system that can provide the financial resources to make that happen and it could, with Brussels approval, bypass the ‘no bailout’ clauses in the Treaty to make that happen. It won’t, and the Eurozone will muddle on with increased poverty rates and rising social instability. What folly!

January 27, 2016
bill
European Union
33 Comments

On June 10, 2015, the Italian finance minister wrote an Op Ed article for the UK Guardian – Couldn’t Brussels bail out the jobless? – which continued the call from those who sought ‘reform’ of the Economic and Monetary Union in Europe for a European-wide unemployment insurance scheme. This idea continues to resonate within European circles and is held out as a major improvement to the failed Eurozone system. My response is that if this is as far as the political imagination can go in Europe among progressives then there is little hope that the EMU will become a vehicle for sustained prosperity. The creation of a European-wide unemployment insurance scheme is better than the current situation where the responsibility for providing income support to the unemployed outside of the private insurance arrangements is left to their Member States who surrendered their currency sovereignty upon joining the Eurozone. But, it is a weak palliative at best and fails to address the basic problem of mass unemployment, which is inadequate capacity for Member States to run fiscal deficits of a size necessary to bridge the spending gap left by the savings desires of the non-government sector. Until the European debate shifts towards that issue and the policy players and the people who elect them realise that the fiscal design of the Eurozone is flawed at the most elemental level and that the fiscal rules superimposed upon that flawed design only serve to exacerbate the initial failure to construct a sustainable monetary union. Introducing a European-wide unemployment insurance scheme does not take us very far down that road of enlightenment.

Exchange rate movements and exports

There was an article a few weeks ago purporting to show that public deficit expansion (increased net public spending) has never worked. I won’t link to the article because I would not want the Magazine to get any advertising revenue via my blog and also because, frankly, the article is one of those reinvent history efforts – along the lines of when the facts do not align with theory the way forward is to just make up some new facts and deny what actually happened. But one of the examples use to justify the claim “Keynesian deficit spending … over and over again … has not worked” is the Ireland and Denmark experience in the 1980s when these nations “reduced their government budget deficits, which according to Keynesian theory should have depressed the economy. But on the contrary, the economies did particularly well”. This example is often used these days to justify the claim that deficit spending does not promote growth and fiscal austerity does not damage growth. However, no ‘Keynesian’ theory I know suggests that cutting the fiscal deficit will ‘depress’ the economy. It all depends … and that is what this article (like all the others that use this example) fails to recognise or admit. It bears also on current events in Canada and Argentina, which are demonstrating some other interesting facets of macroeconomics.

Europe’s future is bleak with an ageing population and policy failure

I read an interesting article that was published on December 18, 2015 by the Center for Global Development, which is one those centrist-type research and advocacy organisations that lean moderately to the right on economic matters. The article – Europe’s Refugee Crisis Hides a Bigger Problem – discusses what it considers to be “three population related crises”, two of which at the forefront of public attention (because they are moving fast) – the “refugee crisis” and the “terrorism crisis”. The third is “Europe’s slow moving and in inexorable ageing crisis”, which is largely being ignored in the public debate. The article provides a basis to link the three crises together – in the sense that “Europe actually needs millions of migrants a year to mitigate its ageing crisis”. While I have some sympathy with the article, there are many omissions that reflect the bias of the author. Two major issues – mass unemployment and productivity growth are ignored completely. The emphasis in the article is on whether the public sector can afford not to bring in more people to offset the ageing of the EU28 population. That emphasis discloses the bias of the author and diminishes the strength of the article.

January 6, 2016
bill
European Union
16 Comments

On December 21, 2015, there was an article on the Social Europe portal – A New Plan for Greece And Europe: A Defining Moment For European Social Democracy – which I found interesting, though very incomplete, given its title. In fact, the ‘New Plan’ is really a series of fairly general statements, which at times, are somewhat inconsistent if you extend them into the necessary detail that they imply. For example, one of their key observations is that within the European Union there is a “wide and growing gap between national control over budgets that people have voted for and the post-national governance imposed on them”. Which would suggest that the solution requires that there is an aligning of the fiscal responsibility and control at the level of the currency-issuing unit. However, there is no hint of that in their ‘Plan’. They talk about an “Enhanced respect for the fiscal sovereignty of Greece” but fail to articulate how that can occur within the common currency when the Greek government has no currency-issuing capacity. Of course, if we want to increase the fiscal sovereignty of any Eurozone nation, then the only sustainable way of doing that is for that nation to re-establish its own currency and exit the monetary union. However, this would appear contrary to their “pan-European” sentiments, which dominate their overall vision. In short, once again the bogey person of the pan-European appears to be taken as a given and then specific matters that might appear inconsistent with that old ‘social democratic’ obsession in Europe are glossed over.