Friday lay day – The five presidents of the Eurozone remain firmly in denial

Its the Friday lay day blog again and I am in a rush. Under the smokescreen of all the Greek drama that has played out on the World stage over the last week the bosses of the Eurozone released their – Completing Europe’s Economic and Monetary Union – (June 22, 2015), aka the Five Presidents’ report. I read it this morning. And I am glad its Friday and I can keep to my promise of not writing much here and more elsewhere (book projects). Otherwise, the blog might have ended up full of the so-called expletives given the way these Euro Groupthink morons treat the citizens of Europe. Apparently, the euro is a big success! In the land of the fairies.

The Report authored by Jean-Claude Juncker (President of the European Commission), Donald Tusk (President of the European Council), Jeroen Dijsselbloem (President of the Eurogroup), Mario Draghi (President of the ECB), and Martin Schulz (President of the European Parliament) claims to:

… ‘develop concrete mechanisms for stronger economic policy coordination, convergence and solidarity’ and ‘to prepare next steps on better economic governance in the euro area’.

The opening paragraph sets the tone:

The euro is a successful and stable currency. It is shared by 19 EU Member States and more than 330 million citizens. It has provided its members with price stability and shielded them against external instability.

Which is so disengenous that you know the Groupthink levels are high.

The euro is a major failure. Millions who use it are now unemployed and in relative states of impoverishment.

One of the 19 nations states of the Eurozone is now the first advanced nation not to meet an IMF debt repayment deadline. It is a nation that is hovering on disaster after 7 years or so of grinding austerity in the name of defending this ‘successful’ currency.

Even in terms of price stability it is now facing the problem of deflation – instability is not always on the up (accelerating inflation) side.

The Five Presidents’ Report is the latest in several publications put out by the EU which outline how they will complete “Europe’s economic and monetary union”.

But don’t wait around for it. The three-stage plan doesn’t come to fruition until 2025. There will be at least another major economic shock before then.

After wading through all the literature on the creation of the current EMU – a literature that spanned 40 odd years – this document seems like déjà vu.

All the buzz words are there – “longer-term vision”, “deepening by doing”, “rule-based cooperation”, “structural convergence” (yeh – Greece becomes like Germany!) “commonly agreed benchmarks for convergence” and on and on.

The convergence farce leading up to the adoption of the common currency in the late 1990s should serve as a warning how setting strict economic and financial rules as the criteria never withstand the power of politics. The rules were flouted, cheated on, manipulated to get the political end. Not even Germany met the strict rules set down at that time.

Perhaps they need to call Goldman Sachs in again as Greece did to fudge the books to make it look as though there is convergence.

But by 2025 when “all the steps are fully in place, a deep and genuine EMU would provide a stable and prosperous place for all citizens of the EU Member States that share the single currency”.

We have read all this guff before. That is what they said after Maastricht in 1991.

The progress made since the Four President’s Report released in December 2012 (yes, the President of the European Parliament was added to the most recent one – a sort of sop to democracy no doubt), which outlined five areas in which changes were required, to be completed by 2014 has been glacial.

Arguably, advances have only been made in the area of banking. They outlined a plan for the “establishment of an effective Single Supervisory Mechanism (SSM) for the banking sector and the entry into force of the Capital Requirements Regulation and Directive (CRR/CRDIV)” and the “Setting up of the operational framework for direct bank recapitalisation through the European Stability Mechanism (ESM)”. There has been some progress here.

But in the area of fiscal policy little has been done.

In the Four Presidents’ Report we read that:

… the European Council in October 2012 asked to explore further mechanisms, including an appropriate fiscal capacity, for the euro area. It would support new functions which are not covered by the multiannual financial framework from which it is clearly separated.

There was also an “Economic rationale for such a fiscal capacity” presented along the lines that “In order to protect against negative fiscal externalities, it is important that fiscal risks are shared where economic adjustment mechanisms to country-specific shocks are less than perfect”.

“Options for the shock absorption function of the euro area fiscal capacity” were also discussed and included “an insurance-type system between euro area countries” and an “ability to borrow” at the euro-level by this “future fiscal capacity”.

They said that:

A euro area fiscal capacity could indeed offer an appropriate basis for common debt issuance without resorting to the mutualisation of sovereign debt.

Well no progress has been made on that and you won’t be surprised to know that in the latest Five Presidents’ Report all mention of the possible establishment of a federal fiscal capacity has disappeared. Any notion that there might be “common debt issuance” has been deleted with the regime change at the top of the European Commission.

Instead, they extol the virtues of the “‘Six-Pack’, the ‘Two-Pack’ and the Treaty on Stability, Coordination and Governance” (the fiscal compact), which they claim “have brought significant improvements to the framework for fiscal policies in the EMU”.

They claim that:

This new governance framework already provides for ample ex ante coordination of annual budgets of euro area Member States and enhances the surveillance of those experiencing financial difficulties.

The only concession is that they say “the current governance framework should be strengthened through the creation of an advisory European Fiscal Board.”

So a pack of neo-liberal economists will be created to “coordinate and complement the national fiscal councils that have been set up in the context of the EU Directive on budgetary frameworks. It would provide a public and independent assessment, at European level, of how budgets – and their execution – perform against the economic objectives and recommendations set out in the EU fiscal governance framework.”

And there is some talk of a “fiscal stabilisation function for the euro area” which might include the creation of an “automatic stabilisation” function “at the euro area level” to cushion large macroeconomic shocks. So this might include an euro-wide unemployment insurance scheme, which would add very little to the capacity of the Eurozone to promote stable growth with full employment.

Any such stabilisation function would “not lead to permanent transfers between countries or transfers in one direction only” (sop to Germany).

It “should neither undermine the incentives for sound fiscal policy-making at the national level, nor the incentives to address national structural weaknesses”.

And “it should not be an instrument for crisis management”.

In other words, it would not be a fiscal capacity that could insulate economies within the Eurozone that face negative asymmetric shocks at all.

In other words, by 2025, there will be no federal fiscal capacity established in the Eurozone and fiscal policy will remain tightly constrained by the Stability and Growth Pact and its additional components (Six, Two Packs etc).

As I have argued previously, the Stability and Growth Pact provides for neither stability nor growth. It is a recipe for on-going disaster in the Eurozone.

It is amazing that given the scale of the crisis which continues that the leadership still hasn’t worked out that the monetary union is largely unworkable in its current form and tinkering around the edges will not be sufficient.

Federal systems need fiscal and monetary policy to be aligned at the federal level and democracy requires that those policy tools be used by those who are responsible through the electoral process to the voters.

It is despairing to think of the “long-term vision” that these men have for their people.

Trapped in neo-liberal Groupthink and firmly in denial. That is modern European political leadership.

I did a radio interview yesterday and was asked whether Australia should be worried about the situation in Greece. I replied yes but only because it is a humanitarian disaster inflicted on a people by a neo-liberal ideology that is invariant to reality and the facts of its criminality.

The announcer wanted to talk about bank contagion. At the end of the interview he summarised by saying “so what you are saying is that these positions are all chosen and the ECB could write off the debt and fund some growth policies in Greece without any threat to its operations”. Me: Exactly.

Then we get this rubbish from a so-called progressive journalist (who is the UK Guardian’s economics journalist in Australia) on our national broadcaster’s Drum homepage (July 1, 2015) – Drum: Don’t worry, Australia isn’t facing a Greek tragedy.

A progressive writer should start of by pointing out (and explaining) to the readership that there is no valid comparison between Australia and Greece given that the former issues its own currency, sets its own interest rates and floats the currency freely on international markets and the latter has no such capacity and the opportunities that that capacity bestows.

A very simple distinction but crucial to understanding the evolution of national economies since the GFC began.

The Greek crisis, despite all the reactionary rubbish that is emerging about them being profligate, having too big a public sector, and having built up too much public debt as a consequence, is only all about them not having an independent currency and a floating exchange rate.

If the high public debt was the problem then Japan should have crashed years ago!

This whole comparative analysis is conducted in terms of how low Australia’s public debt ratio is and that it is only “forecast to rise 1.7 per cent of GDP this financial year and 0.7 per cent of GDP the year after”.

Then we learn that after deliberation by Standard & Poors, “Australia’s AAA credit rating was confirmed” and “the financial markets are certainly not too worried about Australia at the moment”.

And if those authorities are not enough we read that “certainly the IMF is not sending Greece-like warnings our way.”

Disgraceful analysis.

Australia is not Greece because it issues its own currency. Discussions of public debt ratios, ratings agencies, the IMF and the financial markets is irrelevant in the case of a currency issuer.

Music from Athens today

In the spirit of the week I thought some Greek reggae was a good idea.

This is from the Moca Revolutionaries, which is a cooperative of musicians in Greece who describe themselves as the “Jah children in Greece” who play the “the raw street sound of reggae in Greece”.

The particular track is from Exo – Kάποια Mέρα

There are no bouzoukis but there is still salvation in these beautiful sounds. I am sure the words have Oxi in there somewhere!

Blue Mountains Politics in the Pub – Saturday, July 4, 2015

I will be giving a presentation at the above event organised by the – Blue Mountains Union Council this coming Saturday.

You can view a promotional flyer here – HERE.

The event will coincide with the – Annual Winter Magic Festival – in Katoomba up in the Blue Mountains, west of Sydney.

The Festival usually attracts over 20,000 visitors.

The Politics in the Pub event will run from 14:30 until 16:30 on Saturday 4th July in the dining room of the Family Hotel, 15 Parke Street, Katoomba.

There is car parking at the rear of the pub, access via Cascade Street which runs parallel to Park St.

If you get sick of listening to MMT on a (hopefully sunny) Saturday afternoon, then you can attend a drumming workshop or some other event attached to the festival.

I hope to see a lot of people there.

Advertising: Special Discount available for my book to my blog readers

My new book – Eurozone Dystopia – Groupthink and Denial on a Grand Scale – is now published by Edward Elgar UK and available for sale.

Some relevant links to further information and availability:

1. Edward Elgar Catalogue Page

2. You can read – Chapter 1 – for free.

3. You can purchase the book in – Hard Back format – at Edward Elgar’s On-line Shop.

4. You can buy the book in – eBook format – at Google’s Store.

It is a long book (501 pages) and the full price for the hard-back edition is not cheap. The eBook version is very affordable.

I am able to offer a Special 35 per cent discount to readers to reduce the price of the Hard Back version of the book. This is the discount on the list price at Elgar of £110.

Please go to the – Elgar on-line shop and use the Discount Code VIP35.


Further pictures of back cover and full dust cover available here – Eurozone Dystopia – Groupthink and Denial on a Grand Scale – Early peek.

Saturday Quiz

The Saturday Quiz will be back again tomorrow. It will be of an appropriate order of difficulty (-:

That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.

This Post Has 15 Comments

  1. “….whether Australian’s should be worried about the situation…”

    That’s a grocer’s apostrophe, Bill ! 🙂

    But an excellent article as usual !

  2. The Independent report, while not exceptional, does mention Pyrford International’s assessment of the workability of the Eurozone, which is precisely what some of those designing it at the time thought — “‘Without political union, a common-currency bloc will never work in the long-run.’ It concludes robustly that ‘the euro is a piece of economic nonsense’ but acknowledges that there are few more acts in this tragedy still to come.” Exactly.

  3. Thanks again Bill and yes I am spreading the word.
    Today’s Euro is at $USD 1.109 which represents a 30.7% decline over 7 years from the high of $1.6018 in April 2008. The decline is even sharper from $USD 1.3992 in April 2014 with a 21% move over 14 months. It is clear that there has been a lack of confidence in the Eurozone for quite some time. The Euro appears to be heading to $USD 0.86 or another 22.5% decline from today’s price.

  4. Whatever I’ve read about the Greek situation in the last months, all I’ve been able to think about is the Monty Python sketch with the architect’s presentation, something like:

    “The tenants enter here, via the atrium, then proceed down the corridor, through the rotating knives …”
    “Excuse me!”
    “Did you say ‘rotating knives’?”
    “Rotating knives, yes.”

    and so on.

  5. Peter Kyparisses,

    I should be careful about publicly predicting future exchange rates. There’s no way, as far as I know, of making such speculation much better than guesswork. If you know differently, keep the method to yourself. That way you can make heaps of money!

    The euro, currently, is undervalued as far as Germany and Holland is concerned, but overvalued for economies such as Greece, Spain etc. So any reduction in the euro’s value will, as the EZ is currently structured, cause as many problems as it might solve. It doesn’t change the need to make the EZ a fully functioning fiscal transfer union.

  6. “It doesn’t change the need to make the EZ a fully functioning fiscal transfer union.”

    It doesn’t change the need to make the EZ cease to exist.


  7. To Peter Martin: Why don’t you do a show on the ABC with Bill and Steve Keen about MMT?

  8. So short story of the euro is that critics were right all along, even though silenced or outnumbered by those who wanted to believe in the project (federalists?)

    I think it is remarkable that when you look at eurozone gdp per capita and zoom out to look at long term trends, euro-area growth seems to have stopped when euro was adopted. There was some growth in ’05-’08, but that was due to unsustainable housing bubble. Gdp peaked in 2007 that is 8 years ago, and has been in declining trend ever since. And in the big picture, gdp per capita has moved sideways in the time of euro when in the ’60s, ’70s, ’80s and ’90s it was growing.

  9. The other thing being ignored is euro countries had to do austerity to meet euro “deficit” targets. Growth would have been higher otherwise.

  10. Personally I’m becoming resigned (though reluctantly) to the likelihood that the grand European project will before long end in failure, disillusion and fragmentation. It’s very hard to see how this is going to be avoided unless a complete change of direction – requiring a complete change of heart on the part of many people – were miraculously to come about.

    Looking back, it’s feasible to discern the seeds of dissolution as having been sown at the point when the European Coal and Steel Community took the first steps towards transforming itself from a purely trading arrangement into what was from its conception designed instead to become a full-blown political federation made up of the six core member-states. The transformation was consciously and deliberately engineered, inspired by the vision shared by Robert Schumann, Henri Spaak and Claude Monet, and aided and abetted by Konrad Adenauer (although opposed by his lieutenant Ludvig Erhardt, architect of the (West) German “economic miracle”, who pushed instead for no more than a common market with its door kept open for the entry of Britain – and others – in due course; Adenauer who was hell-bent on appeasing the French drive for hegemony over-ruled him and the grand project thereupon became unstoppable).

    Whilst such a federation might conceivably have been viable had it continued to be limited to the original Six, and might have evolved naturally into a complete fiscal and monetary union under democratic control (although that takes a considerable leap of faith, considering the severe tensions that were certain in any event to have arisen between France and a reunited Germany, not to mention Italy with its own internal dissentions and “profligate” tendencies), any wider extension was bound to be a step too far. It took almost ninety years, and a bloody civil war, to bring about a comparable degree of federation of the United States, and they were from the start far less culturally-diverse than the states which have ultimately come to comprise the enlarged European Union or even just the eurozone. To attempt it for societies as diverse as (for instance) Greece’s, Estonia’s and Hungary’s always was going to be a touch-and-go bodge-up at best. The ideal of creating a European Union, born out of the ashes of the latest and worst intra-european conflagration – the second such in the space of only thirty years), whilst noble in conception always was utopian and – in the eyes of many – has increasingly shown itself to have been misconceived, whereas Erhardt’s much more modest vision might have had the potential to become, within its pragmatic limits, a triumphant success.

    That’s history. But we’re all to some extent prisoners of our history and that goes – in spades – for the Five Presidents (what’s a collective noun for presidents, I wonder…the same as the one for ostriches presumably, but what is that?). But dedicated as their very existence is to the preservation of something that is palpably sinking under them, how else are they to behave? Difficult to see any other end than that the ship breaks-up and sinks, and then the task becomes to try to salvage something more serviceable from the wreckage.

    Pity though…

  11. David M,

    ” Why don’t you do a show on the ABC with Bill and Steve Keen about MMT?”

    I’d love to! There’s another Peter Martin who writes for the Melbourne Age who might be interested too. 🙂

  12. Why would we even want Steven Keen involved in anything to do with MMT ? No offense to Keen but just because he opposes orthodoxy that does not in anyway put him on the same team as Bill and MMT.

    Or am I missing something here ?

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