skip to Main Content

ECB deficit funding or persistent mass unemployment

Yesterday’s Statement from the US Federal Reserve Open Market Committee (FOMC) stated that the US economy is slowing and the “housing sector remaining depressed” and employment growth slow. The US central bank indicated that moderate growth would persist for the immediate future but that it was threatened by events overseas (read Europe). And over in Europe – the pressure is mounting on the ECB, which knows it must continue to work out ways to fund member states but is being constantly pummelled by the inflation-phobes in Germany (and elsewhere). The problem in Europe is not sovereign debt but a lack of spending. Even within the flawed European monetary system design, the ECB has the capacity to fund increased spending. Those who claim this would be disastrous have a strange view of the consequences of not doing that. This debate resonates with that between Keynes and the Classics in the 1930s. The former demonstrated categorically that without external policy intervention (for example, fiscal stimulus) economies tend to states of chronic mass unemployment with massive income losses (and other pathologies) being the result. Do the Euro leaders really want that state to evolve? They are at present doing everything they can to ensure it does.

The FOMC decided to:

… keep the target range for the federal funds rate at 0 to 1/4 percent … at least through late 2014 … [The Committee also decided to]and] … to continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June …

So as expansionary monetary policy that the central bank can maintain and extended for at least 2 years.

Back in Europe – the former Greek finance minister (Mr Venizelos) had apparently made it clear to the Troika representatives who are in Greece this week to check whether that nation is cutting their budget hard enough “that the measures that Greece’s institutional partners were demanding were not possible to take.” (Source).

I love the terminology – the ECB, EC and IMF are now termed “Greece’s institutional partners”. They are more like concentration camp wardens.

But the resistance didn’t last long and the latest news reports that PASOK and the Democratic Left members of the coalition government have backed down (Source):

… over their opposition to the way Greece will implement 11.5 billion euros of spending cuts demanded by the troika …

The Greek economy has been in recession for five years and things are getting worse.

The EC boss (Jose Manuel Barroso) was adamant. He was reported as saying (Source) that:

To maintain the trust of European and international partners, the delays must end. Words are not enough. Actions are much more important … The key word here is: deliver. Deliver, deliver, deliver.

Deliver what exactly? More about that in a moment.

Meanwhile, there has been mounting pressure from the German media on the ECB to coincide with the major meeting that was held yesterday where presumably Mr Draghi (the ECB boss) had to explain to his Governing Board colleagues the comments he made in his Speech in London last week (July 26, 2012) where he said:

Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.

That has sent the Germans into paralexia and all the inflation phobias have been rehearsed in recent days in a variety of press outlets.

For example, the German media site Welt Online carried an Op Ed yesterday (August 1, 2012)- Verklagt die EZB! Rechtsstaat kann Europa retten – (Sue the ECB! State Law must save Europe) – written by German economist and lawyer Hans-Walter Forkel.

Die Welt is a conservative national newspaper published daily in Germany with links to the UK Telegraph, Le Figaro in France and ABC Spain – to give you some reference points on its position in the market.

The article said that the Euro crisis had torn up all the rules that were agreed when the monetary union was established. He argues that the German government is complicit in this disregard for the agreed rules and the only recourse is for the citizens of Germany to sue the ECB in the European Court of Justice for violating the rights of holders and depositors of money (“Sie verletzt die Rechte der Geldeigentümer und Sparer”).

The implicit argument is that the ECB’s SMP and LTRO programs (with what he considers to be inflationary consequences of expanding the money supply) and the low interest rates penalising depositors have undermined the rights of citizens in Europe.

He considers that to be a violation of tax equity (“Über Inflation und bewusst niedrig festgelegte Zinsen finanziert die EZB die Staaten und deren Schulden mit. Staatsfinanzierung über Inflation und Niedrigzins ist ungleich, willkürlich und verstößt so gegen die Besteuerungsgleichheit.”)

He considers that critics of the Euro focus on the problem with the legal structure of the monetary union which impedes the functioning of the system. He believes that if the laws had have been enforced then there would not be a problem now:

Der Rechtsstaat ist bei der Euro-Krise nicht das Problem, sondern die Lösung. Die Politik tut so, als ob das Recht der Lösung der Krise im Wege stünde. Dies ist grundfalsch. Die europäische Staatsschuldenkrise gäbe es nicht, wenn das Recht durchgesetzt worden wäre.

I do not agree with this for reasons to be explained. If the ECB had not breached the spirit of its charter then the Eurozone would be dead already.

But I do agree with this accompanying argument that the “Rule of Law” is an essential device to preserve modern democracies. However, he claims that the trend towards governments running budget deficits is a violation of the rights of citizens within a democracy and thus compromises the viability of the state.

Why? Because he claims there should be equality of taxation and receipt of benefit. Which stretches the concept of a democratic state to the extreme.

I agree with him that governments should disclose the true cost of their policies (“Nur über den Rechtsstaat werden die Herrschenden gezwungen, die wirklichen Kosten ihrer Politik offenzulegen.”) although he is referring to the state stealing from the people via inflation and low interest rates.

I consider the state lies about the true cost of persistent unemployment and underemployment. If the citizens really knew what these costs were – they dwarf any costs associated, for example, with inflation and “microeconomic inefficiency” – then the public debate would be different.

Meanwhile, the German press reported in this article (August 1, 2012) – Deutschland muss über Euro-Austritt nachdenken – (Germany must think about exiting the Euro) – we read that is no minor media group or extremist think tank in Germany. It is a “German national and international television news service produced by Norddeutscher Rundfunk (NDR) on behalf of the German public-service television network ARD”. It is watched by around 10 million viewers in Germany each night which is reported to be about a 33 per cent audeince reach.

So mainstream.

The article rails against the ECB for being incompetent and untrustworthy. The two obvious policy directions for the ECB – buying government bonds from Spain and Italy and/or giving the ESM a banking licence so it can borrow cheaply from the ECB and, in turn, buy bonds from the ailing governments – are eschewed by the article.

They say either plan violates the Maastricht Treaty and the ECB is not to fund states (“Der Plan verstößt eindeutig gegen den Maastrichter Vertrag. Die EZB ist nicht dafür da, Staaten zu finanzieren”).

There main complaint – a rehearsal of the constant German refrain (or obsession) – is that the injection of cheap money (“dass die Politik des billigen Geldes grenzenlos fortgesetzt wird”) will result in a disastrous inflation (“Die Folgen werden fatal sein”) and the population will lose their savings (“Dadurch verlor die Bevölkerung endgültig den Wert ihrer Ersparniss”)

With the German government spending billions in bailouts and the German taxpayer continually being required to support failed states elsewhere in Europe, the article asks the question – is it worth it? (“Ist der Euro den hohen Preis seiner Rettung wert?”).

The fact that this sort of argument is appearing in the public broadcasting service is quite a change.

It is also no surprise that there are allegations of impropriety being made against the ECB boss. Apparently he is being investigated by the EU Ombudsman over “an alleged conflict of interest” (Source).

And the UK Guardian article (August 1, 2012) – Bundesbank warns over eurozone crisis as ECB prepares to meet – reported that the boss of the Bundesbank, Jens Weidmann said that the BuBa is opposed to the ESM being granted a bank licence and that the ECB should “not overstep its own mandate” and that the ECB was being abused by European politicians for:

… fiscal policy objectives.

Which goes to the heart of the problem. In a monetary system the central bank and the treasury functions of government work closely together.

The two arms of government (treasury and central bank) have an impact on the stock of accumulated financial assets in the non-government sector and the composition of the assets.

The government deficit (treasury operation) determines the cumulative stock of financial assets in the private sector. Central bank decisions then determine the composition of this stock in terms of notes and coins (cash), bank reserves (clearing balances) and government bonds with one exception (foreign exchange transactions).

Please read my blog – The consolidated government – treasury and central bank – for more discussion on this point.

The Eurozone deliberately deleted the treasury function and took the central bank function out of the control of the member states. The fiscal function remained at the member state level with some EC redistributive capacity and then imposed rules on the member states (the Stability and Growth Pact) which were designed to limit the freedom of the states to use that fiscal capacity.

The problems were many:

1. The member states abandoned their currency sovereignty so became dependent on their tax bases and their capacity to borrow (outside of the redistribution that occurred under the EC’s regional strategies). At that point, the member states took on default risk on their debt and bond markets clearly knew that and have acted accordingly.

2. The fiscal rules (SGP) were unrealistic in the context of a major negative shock in aggregate demand which undermined the member states’ tax bases and drove up welfare-oriented spending. The 3 per cent rule barely contained the cyclical swings in the budget outcome much less any structural net spending that was required to offset losses in non-government spending arising from the crisis.

3. There was no federal fiscal capacity created to work with the ECB to ensure that asymmetric negative demand shocks could be quickly dealt. The avoidance of that fiscal capacity was deliberate because the Euro leaders were intent on pushing neo-liberal limits on the fiscal capacity of the member states.

4. Any functioning monetary system requires both the treasury and the central bank capacities to be working together to maintain prosperity. The absence of the federal fiscal capacity in the Eurozone meant that, by default, the ECB had to play both roles.

Within the highly constrained (arcane) rules within which is has to act, the ECB has been able to keep the bond markets at bay, although its ideological partnership with the EC and the IMF has meant these interventions have only been of temporary benefit.

The fact is that the problem in Europe is not a sovereign debt problem. It is a growth problem. The ECB can take care of any perception that member states will default on their outstanding debt – with a stroke of a pen (computer keyboard). But by imposing austerity on the member states most in need of growth, it has become partner to an evolving and downward spiral in the Eurozone’s viability.

Instead of using its capacities to engender growth and quickly short-circuit the crisis, the ECB has on the one hand wielded the axe which has undermined growth and on the other hand, done just enough by way of administering band-aids, to stop the Eurozone collapsing (in its current form).

The Germans are not very clear on what they expect will happen if the ECB abandons this role. Consistent with their free market leanings (although the Germans could hardly be called free marketeers), there is some abstract notion that the market will sort this all out and nations have to rebalance their costs and productivity to restore growth through trade.

Further, the solution for what they consider to be bloated states (for example, Greece) is widespread privatisation and job and salary cuts. They also think that welfare entitlements have to be cut to provide incentives to the unemployed to work.

All of this debate is – of-course – a rerun of the 1930s. This is the sort of logic that John Maynard Keynes came up against when confronted with the views of the British Treasury who would have been touting the German line in the current situation.

You can understand this debate, in part, by considering the different views of unemployment. The Classics considered unemployment to be a transitory phenomenon – a disequilibrium state – which would be quickly resolved if market prices were allowed to adjust to reflect underlying productivity.

Keynes was adamant that this was not the case. For him, mass unemployment was an equilibrium state, which meant that it could persist indefinitely unless there was some “exogenous” intervention (from government policy).

The Classics allowed for some transitory unemployment when the composition of aggregate output was disrupted. So if there was a shift in demand from product A to product B, workers employed to make product A might find themselves unemployed until they accepted jobs from firms making product B.

The Classics believed that wage movements would ensure these resource transitions occurred.

They denied the possibility of a deficiency in effective (aggregate) demand.

Keynes showed that involuntary unemployment was an equilibrium state – in the sense that there are no dynamics present that will change the situation.

Firms are producing and hiring at levels that are consistent with their sales expectations and so have no desire to change output levels. The unemployed clearly desire higher consumption and would buy more goods and services if they were working but that latent demand is “notional” and not effective (backed by cash).

Accordingly, the market fails to receive any signal from the unemployed and so firms cannot respond with higher production.

This distinction between notional and effective demand was at the heart of the “Keynes and Classics” debate during the Great Depression, which pitted the UK Treasury view in the 1930s with the emerging views that became identified with Keynes but were also developed by several others (Kalecki, Marx etc).

A major flaw in the mainstream reasoning in the 1930s (and still today) surrounds the so-called “Say’s law” which claims that “supply creates its own demand”. Say’s law denies there can ever be over-production and unemployment. If consumers decide to save more then the firms react to this and produce more investment goods to absorb the saving. There is total fluidity of resources between sectors and workers are simply shifted from making iPods to making investment goods.

Keynes showed that when people save – they do not spend. They give no signal to firms about when they will spend in the future and what they will buy then. So there is a market failure. Firms react to the rising inventories and cut back output – unable to deal with the uncertainty.

The break with neoclassical thinking came with the failure of markets to resolve the persistently high unemployment during the 1930s. The debate in the ensuing years were largely about the existence of involuntary unemployment. The 1930s experience suggested that Say’s Law, which was the macroeconomic component and closure of the neoclassical system based on the optimising behaviour of individuals, did not hold.

The neoclassical economists of the day who were opposed to Keynesian thinking continued to assert that unemployment was voluntary and optimal but that some factors not previously included in the model prevented Say’s Law from working. These factors included the imposition of minimum wages by government legislation. Keynes, following Marx and Kalecki, adopted the distinctly anti-orthodox approach and refuted the basis of Say’s Law entirely.

The theoretical push to reassert Say’s Law by neoclassical economists was severely dented by the work of Clower (1965) and Axel Leijonhufvud (1968). They demonstrated, in different ways, how neoclassical models of optimising behaviour were flawed when applied to macroeconomic issues like mass unemployment.

Clower (1965) showed that an excess supply in the labour market (unemployment) was not usually accompanied by an excess demand elsewhere in the economy, especially in the product market. Excess demands are expressed in money terms. How could an unemployed worker (who had notional or latent product demands) signal to an employer (a seller in the product market) their demand intentions?

Leijonhufvud (1968) added the idea that in disequilibrium price adjustment is sluggish relative to quantity adjustment. Leijonhufvud interpreted Keynes’s concept of equilibrium as being actually better considered to be a persistent disequilibrium. Accordingly, involuntary unemployment arises because there id no way that the unemployed workers can signal that they would buy more goods and services if they were employed.

Any particular firm cannot assume their revenue will rise if they put a worker on even though revenue in general will clearly rise (because there will be higher incomes and higher demand). The market signalling process thus breaks down and the economy stagnates.

Please read my blog – Fiscal austerity – the newest fallacy of composition – for more discussion on this point.

We read in Keynes’ General Theory (Chapter 3) that:

When employment increases aggregate real income is increased. The psychology of the community is such that when aggregate real income is increased aggregate consumption is increased, but not by so much as income. Hence employers would make a loss if the whole of the increased employment were to be devoted to satisfying the increased demand for immediate consumption. Thus, to justify any given amount of employment there must be an amount of current investment sufficient to absorb the excess of total output over what the community chooses to consume when employment is at the given level. For unless there is this amount of investment, the receipts of the entrepreneurs will be less than is required to induce them to offer the given amount of employment. It follows, therefore, that, given what we shall call the community’s propensity to consume, the equilibrium level of employment, i.e. the level at which there is no inducement to employers as a whole either to expand or to contract employment, will depend on the amount of current investment. The amount of current investment will depend, in turn, on what we shall call the inducement to invest; and the inducement to invest will be found to depend on the relation between the schedule of the marginal efficiency of capital and the complex of rates of interest on loans of various maturities and risks.

Thus, given the propensity to consume and the rate of new investment, there will be only one level of employment consistent with equilibrium; since any other level will lead to inequality between the aggregate supply price of output as a whole and its aggregate demand price. This level cannot be greater than full employment, i.e. the real wage cannot be less than the marginal disutility of labour. But there is no reason in general for expecting it to be equal to full employment. The effective demand associated with full employment is a special case, only realised when the propensity to consume and the inducement to invest stand in a particular relationship to one another. This particular relationship, which corresponds to the assumptions of the classical theory, is in a sense an optimum relationship. But it can only exist when, by accident or design, current investment provides an amount of demand just equal to the excess of the aggregate supply price of the output resulting from full employment over what the community will choose to spend on consumption when it is fully employed.

The concept of an under-full employment equilibrium is thus clear. Rising unemployment means falling incomes, which, in turn, means falling spending, which, in turn, means rising unemployment.

The situation stabilises when firms revise their expectations of aggregate demand downwards and start to meet the actual spending that is forthcoming. Then employment stabilises at the lower level.

The existence of such a chronically depressed state was the reason Keynes advocated external policy intervention to break into the malaise. That rationale became the justification for counter-cyclical fiscal policy and it remains as valid today as it did then.

In the context of the current situation, the outstanding budget deficits will continue to provide some demand support around which the real economy will stabilise at horrifically high unemployment rates.

The equilibrium has not yet been achieved though because of the continuing call for further cuts in public spending and the attack on workers’ pay and conditions and welfare entitlements. Fiscal austerity will continue to undermine total spending and so firms will continue to lay off workers.

Presumably, once the fiscal austerity gets the budget deficits down to some level the state of demand will stabilise – but the consequences will be profound in terms of the resulting poverty and despair.

At that point the Euro leaders will probably hail the exercise a success because they will produce graphs showing the hideous rise in unemployment has stabilised.

Of-course, within the official numbers are inter-generational dysfunction (the massive youth unemployment) – and the costs of this policy folly will reverberate for the next 50 odd years at least.


The Rule of Law does demand that governments be accountable and provide their citizens with information about the costs and benefits of policy choices.

I wonder whether Dr Weidmann has done those calculations. I wonder whether Mr Barosso has a spreadsheet calculating the costs of persistent mass unemployment for a decade or more in nations throughout Europe. It is fine for him to tell the Greeks to “deliver” but all they will be delivering is decades of disadvantage arising from mass unemployment.

The solution is obvious – the member states have to spend more in their domestic economies to break into the downward spiral in aggregate demand and avoid a chronic underemployment equilibrium from occurring.

At present, the only real option open to them is for the ECB to fund that spending.

In that context, I urge the German government to provide free psychological counselling to all of its citizens (including BuBa officials) to help them work through their inflation phobias and see the damage that the current policy framework is actually causing.

Alternative Olympic Games Medal Tally

My Alternative Olympic Games Medal Tally is now active.

I update it early in the day and again around lunchtime when all the sports are concluded for the day.

That is enough for today!

(c) Copyright 2012 Bill Mitchell. All Rights Reserved.

This Post Has 16 Comments

  1. Another bloody brilliant and insightful blog, Bill!

    Is it fair to say that this need not be framed as a left vs right battle? As long as the there was a net fiscal stimulus, it could still be that parts of government could shrink if other areas (eg education and research) were expanded. I’m not suggesting that is what should happen – just that if we can get past the hurdle that fiscal stimulus is necessary for growth then a separate discussion could take place about the form (and distributional aspects) of the package. Thus ‘small government’ types are not in a position to reject the idea
    of a fiscal stimulus out of hand. If they do so, then it must be a purely ideological and irrational position.

  2. I find it fascinating the level of vitriol Bill constantly emits against Germany, its political class and now its citizens (psychological counselling? really?). But I guess this is a blog, so no wonder if the discourse level ends up from time to time in the basement.

    At least we are making some progress: Bill finally acknowledges (though only in passing) that the EU has long had a EU-wide fund redistribution system between the richer and poorer regions.

  3. Dear Bill
    The desire of households to save and the inclination of firms to invest are indeed antithetical. The more households desire to save, the less inclined firms will be to invest. I use the following example. In a town of 1000 people, everybody spends 100 dollars a month in a restaurant. Now they all want to reduce their restaurant spending to 80 per month. The 20 they save they want to lend to the restaurant owner so that he can expand his restaurant. Is the restaurant owner going to do that? Obviously not. He just lost 20% of his gross sales, and now he should consider expansion?

    Still, households save all the time, but we aren’t in recessions all the time. To me, that is one of the mysteries of economics.

    Regards. James

  4. According to David Harvey, Marx crushed Say’s Law in Volume I of “Capital”, circa 1865. JMK certainly crushed it again in the General Theory, this time using the classicals’ own methodological framework. Here we learn that Clower and Leijonhufvud spent the 1960s putting a few more nails in its coffin. But by 1980, it had been so thoroughly rehabilitated by the Chicago Boys that it became an intellectual centerpiece of the New Right.

    Did they just buy the economics profession outright? That’s Charles Ferguson’s thesis in “Predator Nation”, and I’m starting to agree with him. This isn’t about truth or science anymore. No matter how many times you win this argument, you still can’t win it. The other side isn’t really arguing – they’re just trying to blind us with algebra. They work for somebody – Wall Street. They’re just another branch of the elite propaganda machine – and one of the highest-paid branches. That’s why being wrong doesn’t affect them. It’s not about right-or-wrong, or true-or-false to them. It’s about money – and prestige within their peer group, which consists entirely of paid shills for the predator class.

    We can’t change anything just by being right. The only way we will ever change anything is by taking these people down. I don’t want Jamie Dimon or Larry Summers to get a smaller bonus. I want to see them perp-walked to a fair trial followed by a long stay in a federally-funded facility.

  5. @James Schipper: My simplistic understanding is that government deficits are the funding source for private savings. When deficits go down, the private savings rate decreases as in the Clinton surplus years ( assuming net exports remain constant). One of the MMT writers had an article a few years ago ( I can’t find it) with two Wall Street Journal headline articles next to each other in around 1998 or 99 ( during the Clinton surplus years). One headline extolled the Budget surpluses ( a new Golden Age!) and the other expressed bafflement at the decreased private savings rate, wondering why, if the economy was doing so well, was the savings rate decreasing. It is basic Flow of Funds accounting relationships. Regards, Jim

  6. Andrei: I think Bill has been very clear on the inadequacy of the EU’s equalization arrangements, as compared to those of the better structured federalist systems, or even the more ad hoc spending arrangements in the US.

  7. Another great blog Bill, crystal clear. Many, many thanks.


    I agree with your sentiments. The mainstream economists are a complete disgrace, most especially in the eurozone (where I live) & by now extremely culpable for the ongoing & worsening misery of mass unemployment & wage suprression.

    In any case, I see no alternative but to keep challenging them at every opportunity, in the hope some will begin to engage in what Daniel Kahneman calls ‘System 2’ brain usage, with appropriate reference to reality.

  8. @Jim Thomson

    I recall James Galbraith being literally laughed out of the White House in the late 90’s for making the point that for government to be running surpluses the private sector must be spending and accumulating debt.

  9. @Andrei:

    He’s actually not being vitriolic – in this particular case he’s suggesting they’re disturbed and need counseling to get over their unfounded phobias…which is a pretty good description of how most German citizens see the eurocrisis.

    Now, the reason they see the eurocrisis in those terms can be found in the announcements of politicians all across the spectrum (with the governing coalition a bit more unrealistic than the “opposition” but not by far) and the mainstream media spreading these views and the accompanying messages from orthodox economists.

    The way I, as a German, see it, there’s two options as to the behavior of Germany’s political and economic decision makers: they’re acting incompetently or maliciously. Given the obvious and observable effects of austerity politics in Greece, Spain, Ireland, the UK, I have to admit that I lean towards the latter while Prof Mitchell assumes that they simply can’t help it.

  10. @Marquis Wheat:

    I can’t claim to have read each of Bill’s posts, since they are usually quite verbose and generally pretty hard to get through given the amount of copy & pasting, but I have tried to go through all of his Eurozone/EU related ones, and I have had to repeatedly correct him on the point that the EU most certainly has a federal-level funding redistribution mechanism. This particular blog post is the first one I can remember (though I may well be wrong, and I would love to see a link that proves me so) where Bill even acknowledges (in a hand-wavy way, but whatever) that there is such a mechanism.

    One can begin to discuss whether the level of redistribution is commensurate with the needs, how the mechanism is different to true federal states, whether the technicalities of its implementation actually make a difference, and maybe even end up at the conclusion that it is inadequate, but you can’t ignore its existence.


    No, I am pretty sure that if I were to reffer Bill to a psychologist based on his misguided obsession with Germany, I would be vitriolic.

    Instead, I preffer to keep correcting his misunderstandings (or deliberate misrepresentations, I can’t quite figure out which) about the history of the EU and the Euro, how the EU budget is actually redistributed between countries and generally challenge his theories wherever they seem to be weak or ask questions when I don’t understand them. Seems to me to be a more constructive approach than just sending him to the head doctor.

    And as someone living in Germany, I most certainly share most of the same “irrational” fears, both in terms of the current situation as well as in regards to the future, looking at some of the cockeyed solutions proposed by the southern states.

  11. Andrei: Well, the idea that economics & economists & policy makers & people who believe in the stuff they’ve been saying for the last 40 odd years, need psychiatrists is not unique to Bill.

    I think part of the problem is in the way you are looking at things, thinking about things, seen in phrases like: “re-distribution of wealth within the Eurozone and the EU.” ” the EU most certainly has a federal-level funding redistribution mechanism.” “net donor .. and net receiver countries”.

    Bill’s comrade Wray in the comments to this recent post ON THE SUPPOSED WEAKNESSES OF MMT: RESPONSE TO PALLEY succinctly provides insight on this precise problem, of how such words misguide thinking:

    Commenting on why one doesn’t see US states suffering the fate of Greece, because of “fiscal transfers”:
    There is no Uncle Sam in Europe to do it; and “transfer” is the wrong word. Uncle Sam issues the currency and does not have to reduce income in one state to increase it elsewhere. That is precisely the problem identified by MMT. ….. Yes it is “fiscal”, no it is not “transfer”. If we had a fixed economic pie then in real terms we’d be transfering real stuff to the poor regions. But that ain’t true, either, as outside WWII we’ve never operated continuously at anything approaching capacity.

    The Eurozone economy works as a fiscal transfer mechanism – to Germany. This is not sustainable. This mechanism needs to be offset to ameliorate the “paradox of thrift” externality, the damage it is causing elsewhere. Net donor / net receiver “redistributions” that you point to can help somewhat. But they can’t do it all, and can increase rather than decrease political tensions, especially in a weak confederation, especially because reliance on them would have to increase in already bad economic times.

    The only solution is genuine distribution (Ideally & most “cheaply”, a JG), not redistribution, targetted where & when it is needed – just what a normal country always does and always did, like the USA or the UK or Germany under the Mark.
    It’s not donor/receiver, redistribution or transfer, but rational economic coordination.

    Based on genuine economics, not the weird, preposterous, unworkable sh*t that led to the creation of the Eurozone. The ECB, acting in concert with the Eurozone states, could imitate an Uncle Sam in Europe, by forthrightly backing their bonds to a point – a point which is far off at present. It could make it so “does not have to reduce income in one state to increase it elsewhere”. It would be a magical free-lunch win-win for everyone, including Germany, relative to the current trainwreck. But the outlook does not look bright, because of fear based on irrationality.

  12. Some Guy, no offense, but when you say:

    The Eurozone economy works as a fiscal transfer mechanism – to Germany.

    it’s hard to be sure if you are being serious when you are talking about how misguided statmenets can shape one’s thinking. There is no fiscal transfer mechanism to Germany, because whatever trade surplus Germany achieves with its Eurozone partners, is based on trade, meaning that other countries receive german goods in exchange for their money. There is on the other hand a clear fiscal transfer mechanism from Germany, since ever since the beginning of the European Union project, Germany has always contributed significantly more to the EU budget than it received back from it.

    If you feel inclined to, you could try to calculate an average profit margin on whatever trade surplus Germany has with the Eurozone (i.e. the supposed net benefit Germany has from being a member of the Eurozone), and then substract from that the net contribution of Germany to the part of the EU budget that gets redistributed within the Eurozone (i.e. the “price” Germany pays for that benefit), to determine whether Germany actually has a positive or negative overall position from this constellation of trade and fiscal aid, but I am guessing the error margins of such an estimate would be so large as to make it more or less useless.

    And of course the second problem would be that it is far from clear that Germany wouldn’t have a trade surplus with the Eurozone countries even if it weren’t part of the Eurozone. Germany has a significant trade surplus with a whole lot of other countries that are sovereign in their own currency, like for instance the UK, the US or Australia. On top of that, even back in the DM days, Germany managed to have a trade surplus with a majority of their trade partners. So it is quite unclear to me that why the situation should be significantly different in a fictional alternate universe where there is no Eurozone – sure, other Eurozone countries would have had more flexibility to devaluate their currency to try and compete with Germany, but then again, Germany would have had the same means at its disposal, and both sides would be limited in their use of such measures by their dependance on raw material imports (like oil, etc.). It is no wonder that back in the early days of the Euro project, the French saw the new currency as a way to handicap a re-unified Germany and make sure its economical dominance is kept under control.

    The only solution is genuine distribution (Ideally & most “cheaply”, a JG), not redistribution, targetted where & when it is needed – just what a normal country always does and always did, like the USA or the UK or Germany under the Mark. It’s not donor/receiver, redistribution or transfer, but rational economic coordination.

    Since Germany is a federation of states, your example of normal countries is actually more appropriate than you might suspect. Because Germany has a horizontal redistribution mechanism between the german states (and has had one ever since the beginning of the 50s), which results at the end of the day in the same situation as the european-wide system. Some of the german states have a net donor position (generally those that have a better economic position), others have a net receiver position (generally those that have a weaker economic position).

    Not to say that beyond the current but relatively modest mechanisms for wealth redistribution in the EU there is no need for suplimentary direct investments combined with economical policy coordination from a integrated federal EU government. That certainly happens internally in Germany (and other normal countries), and it would be very much a worthwhile goal for the future within the Eurozone.

  13. “There is no fiscal transfer mechanism to Germany, because whatever trade surplus Germany achieves with its Eurozone partners, is based on trade, meaning that other countries receive german goods in exchange for their money.”

    That’s right, but the money for those goods was lent by Germany.

    So that’s not trade. That is vendor financing – and in business that usually involves the lender going bust about five minutes after all its ‘customers’.

    Unfortunately they didn’t design an administration process for the states in Europe or the banks – despite them both being spending limited entities in that arrangement. If they had then Greece, etc. would have gone into Chapter 11 and the creditors would have had their savings eliminated.

    The German problem is the same problem as everywhere else. They are saving too much within the currency union and there are no policies in place to either confiscate the excess savings, or accommodate them. And the elites won’t let the standard process that would eliminate excess savings (ie state bankruptcy) run to a conclusion.

    This crisis is not one of debt. It is one of people with financial savings desperate to hold onto the illusion of wealth. Half of Europe has turned into a huge Victorian debtors prison.

  14. @Andrei:

    First off, please stop talking about “Germany” as if it is a singularity profiting (or suffering) from the EU. There has been enough evidence by now that shows that the real income of the German working class has stagnated or even fallen between 2000 and 2010. If you add in the Hartz IV regimen, and if you live in Germany then you know what this means in material terms, then what has been termed in recent years the 99% quite frankly got fucked in the last decade. Let for the rest of this discourse “Germany” mean “German corporate stakeholders”.

    Second, I have some trouble digesting your claim that:

    There is no fiscal transfer mechanism to Germany…

    since one of the effects of the common currency, an effect that is even acknowledged by its proponents, has been that in one fell swoop it took out the chance of anyone joining Germany in this union to compete with it since they would have lower productivity without the opportunity of devaluing their currency w.r.t. the Deutschmark.
    In this way, business was driven the way of Germany, as you yourself point out:

    Germany has a significant trade surplus with a whole lot of other countries that are sovereign in their own currency, like for instance the UK, the US or Australia.

    And indeed, Germany would have had the same opportunity for devaluing its currency, which as Prof Mitchell pointed out, the Bundesbank was busy doing, much as China is today. The beauty of the euro, however, lies in the fact that this became an automatic mechanism that the Bundesbank didn’t have to have an eye on anymore.

    Now, as someone living in Germany, you might share the fears of its population. Those fears are not irrational: fearing that their standard of living will go down is very rational, giving the track record of German policy makers from both sides of the center. Yet instead of focusing on the neoliberal lunacy, people like you prefer to engage in victim blaming – and victims blaming victims instead of the perpetrators is indeed irrational.

Leave a Reply

Your email address will not be published. Required fields are marked *

Back To Top