Regular readers will know that I have written a lot about the topic of European integration. My 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015) – was a detailed study of the evolution of the Economic and Monetary Union (EMU) from the origins of the ‘European Project’, as peace came in the late 1940s. I have argued that the creation of the EMU, after several failed attempts in the 1960s and 1970s, was only possible because of the emergence of Monetarism in the academy and its related socio-political manifestations which we call, generally, neoliberalism or market liberalism. If France had not succumbed to the neoliberal myths and believed it could dominate the currency union with a ‘franc fort’ then its traditional rivalry with Germany would have continued to prevent the adoption of the common currency. What I have been arguing since the ECB introduced the Securities Market Program (in May 2010) is that despite the success by the EMU architects (Delors and his gang) in embedding neoliberal principles into the legal structure of the European Union and its institutions the reality has overtaken them and a dysfunctional dystopia is only maintained by the ECB and other institutions defying the ‘rules’ established. We are now starting to see other researchers take up that angle, which is progress.
The Eurozone continues to stumble on, held together by the vast bond-buying program of the ECB, which has saved several Member States from insolvency over the last several years. While all the talk at present has been about what to do about the punitive and unworkable fiscal rules in a post-pandemic (when will that be?) period, when the emergency waivers of the Excessive Deficit Mechanism procedures are withdrawn, the reality is that under the current architecture, the only thing that keeps the currency union intact is the ECB acting outside of the legal structures set down by the treaties. Yes, I know full well that the elites have massaged the public into believing that there is no breach of the no bailout clauses, but the reality is different. The ECB is (indirectly) funding Member State fiscal deficits through its massive asset purchasing programs, the two relevant ones being the PSPP and the PEPP. And ever since they introduced the Securities Market Program (SMP) in May 2010 they have been providing funding to Member States to allow them to run fiscal deficits while maintaining low bond yields. With the Pandemic Emergency Purchase Programme (PEPP) scheduled to end in March 2022, the fears are growing that Italy will be the first Member State to succumb to the bond markets – the yields on debt will rise because the investors appreciate the credit risk and will know they cannot offload as much debt onto the ECB in the secondary markets. The fact that these fears are becoming more widespread should tell you that the role of the ECB is exactly what I say it is rather than the ‘maintaining order in investment markets’ spin that the ECB runs as the smokescreen.
It’s Wednesday so not much today. I offer some comments on the latest data release from Germany (not good) and the probability that the new German finance minister will be anything other than a dangerous dud. An announcement about the edX MMTed course (coming back). And then Blind Willie Johnson serving up Great Depression angst.
Given my inflation report yesterday, I have shifted my usual Wednesday light blog post day and music feature to today. The economic debate has moved in recent years from ‘when is the government going broke’ to ‘hyperinflation is approaching’. It amazes me how puerile the economic commentary is as journalists and economists seeking headlines trot out headlines about how bad something (insert: insolvency, inflation, whatever is the latest craze) is going to be and what needs to be done about it. Nothing much happens in the real world and they keep their jobs and begin the next mania. Replay. And so it goes. It seems though that within this fictional world, that masquerades as informed economic commentary, subtle changes are underway. Governments worked out that during the GFC, the only weapon they had that would save the system was fiscal policy. They also worked out that large-scale bond buying by their central banks complemented the effective use of fiscal policy and didn’t deliver all the maelstrom that the mainstream New Keynesian textbooks predicted. The pandemic has accentuated that. And now there is this sort of stand-off between the ‘markets’ that were given too much latitude in the pre-GFC period and governments. The market players, who have become accustomed to manipulating government policy to ratify their speculative bets, which delivered massive profits to the hedge funds and the like, are now confronting central banks and treasuries that actually have power and cannot be bullied into delivering such policy ratification. That is progress and interesting to observe.
It is a public holiday today celebrating – Labour Day – which recognises the struggles to successfully gain an 8-hour working day for workers. The first of the many marches in this struggle occurred in my hometown of Melbourne on April 21, 1856, and history shows that this march was successful in achieving the first 8-hour day decision in the world, without loss of pay. So today we think of that. If workers unite they have the capacity to achieve great things. What follows is a brief report and footage from a debate I participated in on October 2, 2021, which was organised by some groups in Helsinki, Finland.
Its seems the conservative economics press is going through a hard time as it tries to wrest itself from its past litany of errors of judgement, backing the wrong horse, whatever. The latest example is The Economist Magazine, which ran a Leader Article over the weekend (September 25, 2021) = The mess Merkel leaves behind. It eviscerates the Merkel period for leaving Germany with a legacy that will cause headaches for future leaders and for the German people. This runs counter to the usual stuff the Magazine has offered about the soundness of Germany over many years as a bastion of stability and good financial management. It also provides a dose of reality to the raft of ridiculous glowing assessments of the Merkel years. In my view, she has overseen a government that has undermined its own prosperity, deliberately disobeyed the very rules it enforces on other nations in the Eurozone, and bullied leaders of other nations to enact dreadful policy shifts that have impoverished defenceless citizens. It is a cause of celebration that she is going not because we laud her work, quite the opposite. One failure less in public office.
The ECB published a Working Paper recently (September 2021) – Monetary and fiscal complementarity in the Covid-19 pandemic – which represents progress in the narrative. While the technical model that the ECB uses is just an ad hoc attempt to reverse engineer the reality so they can claim they can explain it, what is useful from the exercise is that the old mainstream narratives that fiscal policy is ineffective in providing permanent boosts to real output (or that austerity does not permanently damage the growth trajectory) can no longer be sustained. The taboo surrounding central bank purchases of government debt because they cause accelerating inflation can no longer be sustained. The claims that fiscal deficits drive up interest rates can no longer be sustained. Now the public debate just has to reflect that reality and we will have made progress. Of course, this is all core MMT – we knew it all along!
It’s Wednesday, so just a few items that have passed me by this week. Eurostat published the latest national accounts data yesterday (September 7, 2021) that reveals that key Eurozone states are still lagging behind where they were before the pandemic. In some cases (Italy and Spain), they hadn’t even got back to pre-GFC levels of activity before the pandemic stuck. So a double hit to these nations in the space of a decade or so. That damage will be immense and demonstrates once again the dysfunctional nature of the currency union. Then I consider the latest nonsense from the Business Council of Australia – which is just a special pleading organisation for the top-end-of-town. They think it is time to go back to the deficits are bad narrative (except when their members are receiving corporate welfare that is). And to calm down after that we have some jazz, of course.
Last year, the US Federal Reserve dropped a bombshell on mainstream macroeconomics by abandoning the consensus approach to monetary policy, which prioritised fighting inflation over maintaining low levels of unemployment, and, increasing interest rates well before any defined inflationary pressures were realised – the so-called forward guidance approach. It has also been buying massive quantities of US government debt and controlling bond yields in the markets as a result. Attention has been on the ECB to see where it would pivot too and whether it was going to abandon its own massive government bond buying program any time soon, which has been effectively funding the fiscal deficits of the 19 Member-States of the Eurozone. Recent statements have indicated the QE programs in Europe will not be ending any time soon. And an ECB Board member all but tied the scale of the purchasing programs to the size of the fiscal deficits as a guide to how long and how large the QE interventions would be.
Today is Wednesday and we mourn the death of Charlie Watts. But while we are doing that, here are some snippets on C18th philosophy and Modern Monetary Theory (MMT), the ideological poverty of German politics, vaccines, and then some Charlie.