In May 2023, when the British Office of National Statistics (ONS) released the March-quarter national…
As they say in the classics – “some of my best friends are” … and in my case I might have added German. The Euro crisis – that is, the crisis that has arisen because the creation of the Euro stripped member nations of their capacity to defend their economies against negative private spending episodes – is being worsened because of the incredible resistance by Germany and the Troika (EU, ECB, IMF). The Brussels-Frankfurt consensus – which claimed the creation of the Eurozone would engender stability and growth is shattered – irretrievably humiliated one might venture to say – yet the cabal that hides behind that “consensus” maintains power and influence. The hypocrisy that the cabal engage in is staggering. Their narrative is almost totally dislocated from the reality. They regularly disregard their own rules to favour the vested interests that keep them in power. And meanwhile, they are overseeing a collapse of all the ideals they claimed their system was designed to achieve.
This article in the UK Observer (November 13, 2011) – There is only one alternative to the euro’s survival: catastrophe – talks a little about “blinkered Germans”. It was written by Will Hutton.
I agree that the crisis is marked by “an insupportable burden of private debt created by oversized, undercapitalised banks” which is a common problem across the globe and constitutes “a crisis in contemporary capitalism” but the EMU crisis is different again.
The US and the UK have a way out of their crisis should they choose to use the capacities that are intrinsic to their fiat monetary systems. Their treasuries and central banks can cooperate to ensure that growth is strong enough to create enough employment to eliminate their unemployment.
Such growth in national income would provide the capacity to the private sector to save and it would also see what are now toxic or difficult loans to the private sector become performing loans. The strain on banks would be significantly reduced.
This is not to say that the credit binge overhang would be eliminated speedily. Far from it. This “balance sheet” recession will take a decade or more to resolve but that resolution could be quicker and less painful if governments used their fiscal capacity to support growth. That should be the priority.
Unfortunately, under pressure from my corrupt profession and the media lackeys who take the ideas of mainstream economists in to the public sphere and the competing vested interests (in the financial markets) who actually profit from the crisis, our governments are not exercising those choices and so the crisis drags on.
But the EMU situation is a step removed from that. There is no elected government that has the capacity to stimulate its own economy.
Why? They signed away their currency sovereignty and now operate in a foreign currency – the Euro. And in doing so they agreed to make their public spending reliant on their tax bases and their capacity to access funds from the private bond markets. Once their tax bases shrunk as a result of the crisis and the bond markets worked out that insolvency was a real possibility, public spending opportunities declined.
You will note that I have been saying that the ECB could rescue the European economy should it use its fiscal capacity (the fact that it has the monopoly rights to issue the currency). But consistent with my tastes for democracy that should only be done through the elected governments (via funding their fiscal decisions) and that is not happening at present.
The ECB is bailing out the system – but only as it descends more or less into its death spiral. The ECB – as part of the cabal that runs Europe – aka The Troika – is forcing its member nations to adopt anti-growth policies which just worsen the financial ratios and prospects and damage the citizenry – while keeping the bond markets out of the picture. This ridiculous and myopic strategy is based on some notion that they don’t want a government to announce insolvency.
Presumably they are delaying that inevitability while they organise all the vested interests and minimise their losses. They are prepared to attack the living standards and opportunities of the unemployed, the pensioners, the elderly, the sick, the small businesses, etc while they preserve their own hegemony and that of their mates.
Hutton, however, doesn’t support the break up of the Eurozone. He seems to think that Britain’s interest “lies in the survival of the euro” and rattles out all the usual stuff about “seismic bank runs in Ireland, Portugal, Spain and even Italy as citizens and companies, fearing the same could happen to them, moved their cash out of their countries” and folding banks, etc. Apparently, the ECB “would be overwhelmed” and the “European economy would slump – and Britain with it”.
None of that bears scrutiny when you understand the options that each nation would have with its own currency. There might be bank runs but we have already seen a great number of banks nationalised in 2008 and still functioning.
Each nation would be able to fully capitalises its banks and protect deposits in its own currency.
Each nation could immediately announce large-scale public employment programs and restore incomes (in the new currencies) to their citizens who are now facing no or little income.
Each nation would immediately be able to pursue domestic growth strategies which would spill over into increased import demand which would help their neighbours.
At present, all those avenues of growth and stability are being thwarted by the manic austerity bias in Europe.
Hutton claims the only two options for Europe are debt forgiveness or inflation. He supports the former with the ECB acting as the “lender of last resort everywhere in the eurozone” – bailing out private banks, governments etc.
It could do that given its capacity. But then what happens when the next negative aggregate demand shock hits? And if you stick with a system that forces governments to issue debt to net spend, how will governments be able to underwrite growth if they are being forced to reduce debt, even if the ECB is bailing them out as they do delever?
Hutton notes that Germany appears to be the sticking point – “consistently blocked making the money flow”:
It has said no to the European Central Bank operating as a lender of last resort across the eurozone; no to creating a genuine European Monetary Fund on the scale needed; no to the creation of single euro bonds. Ireland, Greece and Italy are all doing their part. Germany must now do its – or the euro will buckle.
Germany’s phobias are well-known – inflation and then slump led to Hitler. What’s more, the German constitutional court has ruled that the EU is a Staatenbund (a group of states). This means that Germany can only constitutionally make fiscal transfers to other members if each one is agreed by the German parliament. But phobias and constitutional courts cannot trump the agonising choice facing Germany and Europe.
Before I come back to that, I conclude that Hutton also doesn’t really get to the nub of the problem – of loss of currency sovereignty.
He claims his aim is to promote policies that are in Britain’s best interests – but then says that if “Germany were to act responsibly” and help the EMU out of this crisis then the British Prime Minister should announce that:
Britain would peg sterling to a reformed euro and in the long run even consider joining the regime. Moreover, Britain would do this either way, he could argue – eventually joining a single currency in which Germany accepted its responsibilities or a single currency without Germany.
That would just add another economy to those who risk insolvency and would ensure that Brits no longer had much say on what government policies were followed.
Britain would become another domain for the EU cabal (which includes the IMF) to rule over.
This article in the UK Guardian (November 13, 2011) – These bailouts aren’t democracy. What’s worse, they aren’t even a rescue – touched on some of the anti-democratic developments in Europe that have intensified as a result of the crisis.
Heather Stewart writes:
The deeply undemocratic nature of the euro project had already been laid bare in Cannes by the European elite’s outraged response to George Papandreou’s announcement that he would hold a referendum on the latest “rescue” package for his country … [and] … Italy’s neighbours to be demanding the departure of its democratically elected leader was hardly a shining moment for European democracy … In case there was any doubt that Italy faces joining Greece, Portugal and Ireland as closely monitored protectorates of Brussels, economic and monetary affairs commissioner Olli Rehn wrote to the Italian finance minister last week, demanding details about each one of the 39 reform measures Italy has promised to take.
The article also notes that a report (published November 9, 2011) by the Centre for European Reform – Why stricter rules threaten the eurozone – reminds us that “Germany and France haven’t themselves always embraced the reforms they are now recommending”.
I will consider that paper in another blog later. It has its own issues.
But the hypocrisy of the core EMU states which are now turning on Italy is manifest.
Remember the Stability and Growth Pact (SGP) – aka (The “neither stability or growth pact”) which was adopted in 1997 after the Maastricht Treaty was formalised? It said that:
- An annual budget deficit no higher than 3% of GDP (this includes the sum of all public budgets, including municipalities, regions, etc.)
- National debt lower than 60% of GDP or approaching that value.
My 2008 book with Joan Muysken – Full Employment abandoned – was written before the crisis emerged although it was clear that during the period we were writing it that the world economy was headed for a major recession. We wrote extensively about why the SGP had failed to stimulate growth and was incapable of maintaining financial stability.
The mainstream of my profession, of-course denied most of the obvious criticisms of the SGP. Their usual retort was that I had failed to understand the victory that macroeconomics had achieved by focusing on price stability and adopting largely conservative fiscal positions.
Please read my blog – The Great Moderation myth – for more discussion on this point.
In our book, we analysed the so-called – Sapir Report – otherwise known as the An Agenda for a Growing Europe – which was published in 2003 and was a report to the EU edited by a “panel of experts”. André Sapir managed the project which was funded by the President of the European Commission.
The Report was intended to be a review (evaluation) of how the EU was travelling in the wake of the decision to create the Eurozone within it.
It is interesting to go back to read the sort of doctrinal briefing documents that the EU was receiving from the mainstream economists and then compare what they are saying today. The conclusion – they didn’t get it then – were totally wrong in their assessments – and they use the same logic now to inflict massive damage on the citizens of Europe in the name of an economic strategy.
Sapir is now a “resident scholar” (very high sounding) at a Brussels-based “think tank” – Bruegel. In 2010, it received over 2 million euros from European governments with the bulk coming from France, Germany, Italy, Spain and the United Kingdom. Greece decided not to waste any money supporting the centre. They also receive significant funding (just under a million euros from the big financial institutions such as Deutsche bank, Goldman Sachs, BNP and other corporate heavyweights.
Some of the so-called “experts” that contributed to the Sapir Report also work for the Bruegel Organisation. If you read the 183-page Sapir Report you will see what I mean about these “experts” and their capacity to understand what they were talking about.
The ideas that come out of that so-called “think tank” are nowhere near as beautiful as the paintings of the tank’s namesake. a Flemish renaissance painter and printmaker Pieter Breugel
Faster growth is paramount for the sustainability of the European model …
The Group considers that three pillars upon which the European economic edifice is now built are fundamentally sound …
Expanding growth potential requires first reforms of microeconomic policies at both the EU and national levels …
there is no doubt that the period of the last 15 years has been a tremendous success …
The main emphasis was that the challenges were at the microeconomic level – to free up more markets and reduce welfare budgets etc.
It argues that the EU should create a “framework of strengthened budgetary surveillance and more effective and flexible implementation of the Stability and Growth Pact, while sticking to the 3% ceiling. The Commission should reinforce its surveillance and be given more responsibility to interpret the rules of the SGP. Also, budgetary responsibility would be enhanced by establishing independent Fiscal Auditing Boards in the Member States”.
So the classic unelected group (Fiscal Auditing Boards) crammed full of mainstream economists like them who pressure and cajole governments into adopting conservative fiscal positions.
On Page 41 of the Sapir Report, you will read the following “manifesto” of the Brussels-Frankfurt consensus:
The maintenance of price stability – reflected in low rates of inflation – facilitates achieving higher rates of economic growth over the medium term and helps to reduce cyclical fluctuations. This shows up in a lower variability of output and inflation. In turn, sound public finances are necessary both to prevent imbalances in the policy mix, which negatively affect the variability of output and inflation, and also to contribute to national savings, thus helping to foster private investment and ultimately growth. The latter beneficial effect is magnified as low deficits and debt, by entailing a low interest burden, create the room for higher public investment, “productive” public spending and a low tax burden. Finally, the beneficial effects of price stability and fiscal discipline on economic performance reinforce each other in various ways. On the one hand, fiscal discipline supports the central bank in its task to maintain price stability. On the other hand, prudent monetary and fiscal policies avoid policy-induced shocks and their unfavourable impact on economic fluctuations while ensuring a higher room for manoeuvre to address other disturbances that increase cyclical instability.
This is the orthodoxy that has created the mess the world economy is now in and, in the case of the Eurozone, driven it to the brink of insolvency and forced the Euro cabal to break its rules about bailouts and forced the ECB to run against its inflation obsession and buy billions of euros worth of public bonds to keep the system from collapsing.
It is also the orthodoxy that is imposing mass hardship on the citizens across the EMU.
In February 2011, Sapir wrote (as a co-author) – A comprehensive approach to the euro-area debt crisis (published by the Breugel Organisation).
The document blames Greece, Ireland, Portugal and Spain for living “beyond their means by accumulating private and/or public debt and running large current account deficits” but fails to mention France and Germany who were exporting to these nations to allow the deficits to occur in the first place.
They claim that workers in these nations enjoyed real wages growth that was “too fast”.
They claim that Greece’s government spent too much and mismanaged its budget.
Their solutions have all been the standard EU cabal gibberish. “Give the EFSF the mission and the financial means to carry out” salvage operations. Enforce fiscal austerity which includes wage cuts. Provide incentives to private firms to invest.
There is always a curious disconnect within papers like this. They realise that growth is the only way out but fail to join the dots.
For example, they claim:
In the meantime, growth will remain subdued and debt, though reduced, will remain high. Private and public sector efforts to pay off their debts will have a negative impact on growth, and low growth will it make more difficult to reduce debt levels.
All of which is true. But then they claim that the EU should “front-load” its structural spending to contribute to “fostering reform and growth” via a “This also requires a joined-up, coordinated approach”.
That jargon-overload claims that if firms get some innovation funding from the EU central structural funds they will speed up the process of wage cutting and sacking (to “increase competitiveness”) which is likely to frustrate the private sector efforts to “pay off their debts” – which is already having a “negative impact on growth” – at the same time fiscal austerity is ravaging growth prospects – and from out of that morass – you will get growth.
These characters are worse than the Alchemists who claimed all sorts of transmutations were possible.
The sort of questions that arise include:
Wasn’t the ECB telling Greek consumers that they were free to borrow at the interest rates that Frankfurt considered to be appropriate?
Did the ECB seek to place restrictions on bank lending to Greek consumers?
Did the EU cabal tell Ireland (the “Celtic Tiger”) or Spain or Greece to stop their consumers buying houses? To place restrictions on banks and financial engineers who were plying consumers with credit? Did anyone in the cabal tell Greece to stop buying ageing German military equipment to satiate their territorial paranoia about Turkey?
Here are some more questions that French financial market commentator Erwan Mahé wrote in his regular newsletter on Friday:
• Who allowed Greece entry into the Eurozone while being aware that its books were cooked?
• Who admits today that the country should have never been admitted entry?
• Who guaranteed investors, based on Maastricht’s criteria, that any country showing a lack of budget discipline would be brought to order by its peers?
• Who decided to ignore these criteria at the first signs of an economic slowdown (2003)?
• Who promised that no country would be allowed to default on the eurozone, but who then proceeded to launch a “voluntary” default?
• Who strongly “encouraged” institutional investors at the time of the first alert in May 2010 to maintain their exposure to Greek government debt? (Apparently, French investors seemed to have taken this encouragement to heart much more than their German peers, which may explain Merkel’s drive to push forward this PSI as well as Sarkozy’s initial resistance).
• Who signed an agreement authorising a 21% discount on NPV (Net Present Value) only to come back three months later to impose a nominal discount of 50%, which probably amounts to a 75%-80% on NPV?
• Who, after earlier introducing the notion of credit risk (with this PSI), has just added the notion of currency risk via their statement that if Greek must hold a referendum that should only concern its continued membership in the eurozone?
The hypocrisy in Europe is staggering.
Consider the following two graphs taken from the detailed government expenditure and revenue data available from Eurostat. The first graph shows the annual evolution of the Budget Deficits (as per cent of GDP) for the “core” EMU nations (Germany, France, Italy) from 1990 into the convergence period leading to the creation of the common currency and to 2010.
The red line is the SGP upper limit deficits (3 per cent). Between 2001 and 2005, Germany violated the Treaty without penalty. France violated it between 2002 and 2004 and Italy between 2001 and 2006.
Why didn’t the Euro cabal (and the IMF) and all the rest of the mainstream commentators demand fiscal austerity for these nations. Why didn’t they at least invoke the EMU penalties that were enshrined in the agreement?
Why did the EU pursue penalties under the Treaty (which the SGP is contained) against France and Germany? Further, why did they pursue Portugal in 2002 for breaching the SGP?
The so-called corrective arm of the Stability and Growth Pact is called the excessive deficit procedure (EDP) which the EU’s ECFIN calls the “dissuasive arm”.
ECFIN write that:
The EDP is triggered by the deficit breaching the 3% of GDP threshold of the Treaty. If it is decided that the deficit is excessive in the meaning of the Treaty, the Council issues recommendations to the Member States concerned to correct the excessive deficit and gives a time frame for doing so. Non compliance with the recommendations triggers further steps in the procedures, including for euro area Member States the possibility of sanctions.
Fines of up to 0.5% of GDP are allowed for in the Treaty.
I dug this BBC article (2002) out of the archives – Row over ‘stupid’ EU budget rules – which reported that the then President of the European Commission (Romano Prodi) was quoted as saying:
I know very well that the stability pact is stupid, like all rigid decisions. If we want to adjust these, unanimity is needed and it doesn’t work … The stability pact is imperfect, it’s true, because there is a need for a more intelligent tool and more flexibility.
The comments followed the admission by Germany that they had breached the SGP as had “France, Italy and Portugal”.
Germany was the nation that insisted on the inclusion of the SGP (and as I have noted previously wanted it to be called the “Stability Pact”). They were the first to trangress against it.
This ECB Occasional Paper (published September 2011) – The stability and growth pact crisis and reform contains some interesting history of the SGP.
For example, the authors say:
When it came to implementing the Stability and Growth Pact in a rigorous manner, the first test was failed. Faced with a need to fully apply the provisions of the corrective arm of the Pact in the autumn of 2003, France and Germany, among others, blocked its strict implementation by colluding in order to reject a Commission recommendation to move a step further in the direction of sanctions under the excessive deficit procedure.
Now consider this graph which shows the budget history since joining the EMU of Greece, Spain, Ireland and Portugal. The intense cyclical deficits are clear in the recent years.
But if you put the two graphs together (I did but the detail is difficult to discern) you would find that the only nations that actually ran surpluses in the common period were Ireland and Spain.
While Germany and France were “living it up” on budget deficits and then bullying the EU Council of Ministers to turn a blind eye to their (stupid) regulations, Ireland and Spain were acting like model EMU citizens.
Should you conclude from this that I would have supported punitive action against Germany or France when they violated the SGP rules? Clearly not. I think the rules are contrary to sound fiscal management and their presence (rather than enforcement) creates an environment – a pretext – for the bullies of Europe – the Troika – to impose whatever ideological slant they want on things. The manifestations of that behaviour are almost beyond belief.
As Heather Stewart’s article says:
… These bailouts aren’t democracy. What’s worse, they aren’t even a rescue.
In closing, over the weekend I re-read and article by American “institutional” economist Richard Freeman wrote once:
What explains strong adherence to a claim whose empirical support is “fragile”, “mixed”, “contingent on factors that need to be clarified”, and so on? The best interpretation I can give is that these economists come to the problem of explaining unemployment with the prior that markets work well absent interventions, and thus that the right place to look for causes of problems is at institutions that may impede the operation of the markets. They have fairly tight bands around this prior, so that it dominates weak evidence, and thus produces posteriors close to the priors, as in standard Bayesian inference.
(Full reference is Freeman, R. (2005), ‘Labour market institutions without blinders: The debate over flexibility and labour market performance’, International Economic Journal, Korean International Economic Association, 19(2), 129-145).
The point he is making is that when the facts contradict their theories, most economists deny the facts. I have noted before that one professor who taught me explicitly said that once – when confronted about why the theory kept failing to explain anything he said “the facts must be wrong”.
The Euro cabal and its supporting “experts” fit into this category perfectly.
I am rushing to catch a flight (sorry for flying!) and so …
That is enough for today!