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Options for Europe – Part 94

The title is my current working title for a book I am finalising over the next few months on the Eurozone. If all goes well (and it should) it will be published in both Italian and English by very well-known publishers. The publication date for the Italian edition is tentatively late April to early May 2014.

You can access the entire sequence of blogs in this series through the – Euro book Category.

I cannot guarantee the sequence of daily additions will make sense overall because at times I will go back and fill in bits (that I needed library access or whatever for). But you should be able to pick up the thread over time although the full edited version will only be available in the final book (obviously).

Part III – Options for Europe


Chapter 1 – Introduction



This book is about the options that the euro-zone nations currently have to address the social and economic crisis that has bedeviled them since 2008. In the 1970s and 1970s, commentators used the term Eurosclerosis to describe the pattern of low economic growth and persistently high unemployment that the region was locked into. Sometimes, the term was used to describe the lack of progress towards economic and monetary union and the latter was typically implicated as a cause of the former. It was held out that once a single market was established and a common currency introduced, growth and prosperity, that had escaped many European nations for more than a decade, would become sustainable. Today, Eurosclerosis seems to be too weak a term to describe the economic stagnation and record levels of unemployment in Europe, not to mention, the rising social instability and the growing success of extreme anti-Brussels political parties. It is also not an overstatement to say that some euro-nations (for example, Greece) is beyond recession. The term depression, once reserved for a very particular period in the 1930s when the world economy found itself in a catastrophic economic and social crisis, better describes the plight of these nations.

The euro-zone, particularly, is now locked down in a straitjacket of economic austerity, driven by an economic ideology that is blind to the evidence of its own failure. The neo-liberal policies of deregulation created the crisis in the first place, and now, the same sorts of policies are prolonging it. The current policy approach has institutionalised economic stagnation, growing poverty rates and widespread retrenchment working conditions and retirement pensions. The dramatically high youth unemployment rates will ensure that the damage of the crisis will span generations and undermine future prosperity as a cohort of jobless youth enter adulthood with no work experience and a growing sense of dislocation from mainstream societal norms.

It was obvious that concerns for loss of national sovereignty and cultural rivalries, which at times manifested as outright enmity between nations, were always going to prevent the participating countries from agreeing to an effective economic federation. The debate became more dysfunction in the 1980s as a result of the resurgence of neo-liberal thinking among economists, which perverted the way the European political leaders were thinking about economic and monetary union. As a result, they agreed to system that was never going to provide for sustained prosperity and economic stability. Further, the design of the system they created was incapable of withstanding a large spending collapse of the type that hit the world economy in 2008. The euro-zone was doomed from the start and now the same neo-liberal ideology is masquerading as the solution.

Significantly, by insisting on economic and monetary union under these terms, and then imposing self-defeating austerity onto the nations suffering the most from that dysfunctional design, the European political elites have undermined their ‘European Project’. The European nations sought political union as a way of curbing the martial tendencies of Germany and to ensure that there were no more large-scale military conflicts fought on continental European soil. The spread of democracy was seen as a crucial building block of this ‘Project’. Further, Germany strived, with considerable success, to reinvent itself as a good European citizen, after its disastrous and criminal behaviour during World War II. But as the perceived ‘enforcer’ of austerity, Germany is now vilified again – the ‘ugly German’ has returned. The unelected economic mandarins in Brussels and Frankfurt, aided and abetted by the unaccountable officials from the IMF, now influence who remains in political office in some of the nations. The citizens were bullied into accepting the euro and all that went with it by their political leaders and now the same leader are seen to go cap in hand to the Troika to preserve their hegemony, while imposing untold social and economic hardship on their citizens. Open expressions of racism are proliferating (for example, the ‘lazy Greek’ narratives). The media and politicians now regularly engage in the language of retribution with co-operation giving way to hostility, resentment and a breakdown in the social order.

At the recent 2014 European Parliament elections, the anti-austerity parties at the extremes of the political spectrum have in several countries demonstrated stunning success. The majority of the Parliament will still be pro-EU but the shift away from that position at the 2014 poll has been monumental. The French press carried headlines like “séisme”, “éruption volcanique” to express the view that the anti-EU vote was a ‘political earthquake’. Similar sentiments were expressed in many different languages across the European media. The new leftist party in Spain has driven a wedge into the two main political parties hold on power and the stunning success of the far right in France tells us that the French people are sick of austerity and the Brussels bullies. The success of anti-EU parties in Denmark (Danish People’s Party), Britain (UKIP) and Greece (Syriza) are also symptomatic The right-wing parties have also promoted anti-immigration policies, which are becoming increasingly popular. Economic austerity has morphed into a very nasty confection.

The current policy options are thus not working and will not underpin sustained prosperity. Eventually, the European economies will stabilise and start growing again, but the damage of the austerity will be huge and long-lasting and millions will be poorer and without reasonable opportunities as a result. The neo-liberal political leaders will rejoice and claim success but they won’t advertise the low base from which the growth has resumed. The Economic and Monetary Union (EMU) is a flawed system. It has to change and the question that this book addresses is the form that that change should take. Three main options are considered in detail. First, the viability of establishing a true federation, with a European-level fiscal capacity to ensure that total spending in the euro-zone is sufficient to generate enough jobs to satisfy the desire of the workers. Various hybrid schemes that have been proposed by economists in Europe and beyond are considered. We conclude that the differences between the European nations are so great that such a choice is highly unlikely despite the fact that the EMU could function effectively if there was such a capacity.

Second, the proposal that is known as ‘Overt Monetary Financing’ (OMF), where the European Central Bank (ECB) uses its currency-issuing capacity to underwrite the fiscal deficits of the Member States in order that they create growth and employment in their domestic economies without encountering the restrictions that private bond markets place on their spending is considered in detail. OMF is sometimes, but erroneously, called the ‘printing money’ option and is universally considered to be taboo among neo-liberals because they wrongly claim it will lead to hyperinflation. The analysis shows that it can be a very effective way for governments to responsibly manage their economies without having to issue public debt. OMF is a strategy that could render the EMU workable. Equally, it represents a desirable operational option should the euro be abandoned by one or more nations.

The third option considered in detail is the so-called exit option. It is argued that the preferred option, which accords with the historical and cultural realities of Europe, is for the euro-zone nations to agree to and implement an orderly dismantling of the common currency and restore individual currency sovereignty to each nation. Given how unlikely that option is, it is also argued that the exit option is still superior for an individual nation such as Greece or Italy. In fact, it is argued that given the size of the Italian economy in relation to the overall euro-zone economy, Italy should lead by finalising negotiated exit with Brussels that minimises the damage for all parties.

In this sense, the story we are to tell in this book is in black and white. Shades of grey might add interest and nuance but they distract from the argument. The narrative that is under challenge here is similarly expressed in dichotomous terms: the euro is the salvation, abandoning would be catastrophic. There are no nuances. When US President George Bush addressed a joint session of the American Congress on September 20, 2001 he claimed it was as simple as “Either you are with us or you are with the terrorists”. In this context, austerity is a form of terrorism – deficit terrorism – by which the Troika has intimidated and coerced the citizens of Europe (Chomsky, 1991). The choice is stark – abandon this neo-liberal nightmare or continue the suffering. An orderly exit with a policy choices that stimulate growth rather than entrench stagnation and suffering is a superior route for most European citizens, notwithstanding the substantial costs that would be involved in recreating national currencies.

The book is in three parts. Part I provides a detailed critique of the historical decisions that led up to the Maastricht Treaty in 1991 and the decision to introduce the single currency. We learn that the decision had very little economic basis and was largely driven by the French desire to be a dominant European force interacting with the obsessive fear of inflation among German policy makers. It is also argued that the dysfunctional Franco-German dynamic took a turn for the worst when the resurgent neo-liberal economic ideology intersected with it in the late 1980s. The Treaty of Maastricht was a direct result of this combination of factors. Part II examines the period after the inception of the common currency up to the crisis. It is argued that despite the claims by the political leaders that the introduction of the euro had been a great success, the preconditions for the crisis were being put in place. The attack by Germany on workers’ capacity to enjoy real wages growth and the mercantile obsession with increasing export surpluses created dangerous imbalances in other parts of Europe, which would intensify the crisis once it started. But the crisis could have been minimised and a speedy return to growth guaranteed if the Stability and Growth Pact (SGP), an essential part of the neo-liberal attack on the capacity of governments to pursue responsible spending policies in the face of external shocks, had not been enforced. The ECB could have used its currency issuing capacity to ensure the Member States did not run foul of private bond markets. The ECBs reluctance to act responsibly ensured that the private debt crisis became a public debt crisis.

Part III provides a detailed analysis of the options outlined above. It is clear that there are two realities that have to be addressed. The first relates to the intrinsic politics of Europe, which is exemplified by the decades-long Franco-German rivalry. The second relates to the stranglehold that the neo-liberal economists have on the policy debate. The exit proposal is consistent with the first reality and it is argued that breaking the economic union will help restore the effectiveness of the political aspects of the ‘European Project’. In other words, there is no suggestion that the European Union needs to be dismantled to jettison the euro. Whether the Union is functional is a separate discussion, which is outside the ambit of this book. But for exit to be a superior option, it is argued that governments need to abandon their neo-liberal pretensions and understand more fully the opportunities that they have when they restore their own currencies, floating them on international currency markets, and re-establishing their own central banks with the capacity to set their own interest rates. There is a detailed discussion debunking the neo-liberal myths that have constructed austerity as the only alternative. That part of the narrative provides the reader with an adventure into a new way of thinking about economics – one that requires the economics profession to realise that the current economics ‘paradigm’ has failed and needs to be replaced. That task alone will be massively resisted by the entrenched interests that derive their power from a maintenance of the economics status quo, no matter how disastrous it has been for the ordinary citizens.



Additional references

This list will be progressively compiled.

Barbash, J. (1982) ‘The Guilds of Academe’, Challenge, 25(1), March-April, 50-54.

Blanchard, O. (2008) ‘The State of Macro’, NBER Working Paper No. 14259, National Bureau of Economic Research, August.

Democracy Now (2007) ‘The Conscience of a Liberal: New York Times Columnist Paul Krugman on Healthcare, Tax Cuts, Social Security, the Mortgage Crisis and Alan Greenspan’, October 17, 2007.

European Commission (2014) ‘History of the CAP’,, Accessed May 26, 2014.

Independent Evaluation Office (IEO) (2011) ‘ IMF Performance in the Run-Up to the Financial and Economic Crisis: IMF Surveillance in 2004-07’, Washington, International Monetary Fund.

Janis, I.L. (1972) Victims of Groupthink, New York, Houghton Mifflin.

Janis, I.L. (1982) Groupthink: Psychological Studies of Policy Decisions and Fiascoes, Second Edition, New York, Houghton Mifflin.

Goodacre, H. (2014) ‘Economics Departments have fallen behind’, Financial Times, May 23, 2014.

Gordon, D.M. (1972) Theories of poverty and underemployment, Lexington, Mass: Heath, Lexington Books.

Grim, R. (2009) ‘Priceless: How the Federal Reserve Bought the Economics Profession’, Huffington Post, May 13, 2009.

Gross, C.C. (2008) ‘Three before their time: neuroscientists whose ideas were ignored by their contemporaries’, Experimental Brain Research, 192(3), January, 321-34.

Kazin, M. (2006) A Godly Hero: The Life of William Jennings Bryan, New York, Alfred A. Knopf.

Krugman, P. (2009) ‘How Did Economists Get It So Wrong?’, New York Times, September 2, 2009.

Kuhn, T.S. (1996) The Structure of Scientific Revolutions, Third Edition, Chicago, The University of Chicago Press.

Lakatos, I. (1970) ‘Falsification and the Methodology of Scientific Research Programmes’, in Lakatos, I. and Musgrave, A. (eds.) (1990) Criticism and the Growth of Knowledge, Cambridge, Cambridge University Press, 91-195.

Ludlow, N.P. (2005) ‘The Making of the CAP: Towards a Historical Analysis of the EU’s First Major Policy’, Contemporary European History, 14(3), August, 347-371.

Schiller, R.J. (2008) ‘Challenging the Crowd in Whispers, Not Shouts ‘, New York Times, November 2, 2008.

(c) Copyright 2014 Bill Mitchell. All Rights Reserved.

This Post Has 2 Comments

  1. This introduction is an interesting read in itself.
    I would be interested in buying your book when it is published.

  2. Hi Bill,

    “In the 1970s and 1970s, commentators used the term Eurosclerosis to describe the pattern of low economic growth and persistently high unemployment that the region was locked into. ”

    Should this read:
    “In the 1970s and 1980s, commentators used the term Eurosclerosis to describe the pattern of low economic growth and persistently high unemployment that the region was locked into.

    Cheers. and good luck with the book – it’s a very interesting read.

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