Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
When the GFC emerged and confirmed what Modern Monetary Theory (MMT) proponents had been predicting for more than a decade, I initially thought that this might be the ‘paradigm-shift’ line in the sand with respect to economic theory and policy. The OPEC oil price hikes in the 1970s provided the ‘space’ for Monetarism to usurp Keynesian thinking – not as a triumph of evidence and facts but as an ideological shift in thinking. The ideological battle had been going on for three decades in the academy but the oil crises exposed policy flaws in the Keynesian orthodoxy that were exploited by the Monetarists to allow them to reintroduce ideas (and policies) that had been completely discredited during the Great Depression of the 1930s. In the same that the dominant paradigm collapsed in the 1970s, I thought the GFC would so destroy the public credibility of Monetarism’s latest iteration, which we call neo-liberalism, that we could find intellectual space to restore rigor to economic policy and the way economics was taught in the universities. I even thought that the pragmatic and dramatically successful use of fiscal stimulus in most advanced countries would provide the empirical reinforcement necessary to repudiate and expunge neo-liberalism forever. I was wrong. But what the GFC has achieved as neo-liberalism hangs onto the reigns of power in policy making circles is a major breakdown of the so-called ‘European Project’. The creation of ‘Europe’, which was conceived after World War 2 as a means to maintain peace and create prosperity among previously hostile nations, was a major human achievement in the C20th. That vision is now in tatters as the neo-liberals, blinkered by their own Groupthink, steadily dismantle the meaning and application of that great Post WW2 experiment. Jean Monnet and Robert Schuman would be turning over in their graves to see what their ‘Project’ has become under the domination of Wolfgang Schäuble and his lackeys in the Eurogroup. So we might see the demise of neo-liberalism after all as it destroys the grand European political project
Jean Monnet, the French statesman who fought hard against the Nazis during World War 2 and became French Planning Minister (1947-1952), “responsible for organising France’s reconstruction”, was a major intellectual force in the what we now call European integration.
His daily challenges in trying to put the French economy back into working order after the Nazi devastation led to him suggesting to the French politician Robert Schuman (who later would become the inaugural President of the European Parliament) that the French and German coal and steel industries should integrate.
Schuman’s famous May 9, 1950 – Declaration – in the Salon de l’Horloge of the French Foreign Ministry (Quai d’Orsay) which set out the plans to establish the European Coal and Steel Community.
The ECSC involving France, West Germany, Italy, the Netherlands, Belgium and Luxembourg) would “pool coal and steel production” as part of a striving for world peace.
World peace cannot be safeguarded without the making of creative efforts proportionate to the dangers which threaten it … Europe will not be made all at once, or according to a single plan. It will be built through concrete achievements which first create a de facto solidarity. The coming together of the nations of Europe requires the elimination of the age-old opposition of France and Germany …
The pooling of coal and steel production should immediately provide for the setting up of common foundations for economic development as a first step in the federation of Europe, and will change the destinies of those regions which have long been devoted to the manufacture of munitions of war, of which they have been the most constant victims …
By pooling basic production and by instituting a new High Authority, whose decisions will bind France, Germany and other member countries, this proposal will lead to the realization of the first concrete foundation of a European federation indispensable to the preservation of peace …
It was a grand plan. A plan for political security, economic prosperity all overseen by strengthened democratic institutions.
The so-called ‘High Authority’ to oversee the ECSC was composed of Member State nominees (in varying proportions) and met for the first time on August 10, 1952. Jean Monnet was the President.
The ECSC was the beginnings of the ‘Common Market’, which was later the core model of integration adopted by the European Economic Community.
Monnet and Schuman thought big and thought that a ‘European Union’ would end the long history of wars, border and religious conflicts.
They didn’t want to repeat the mistakes of the victors in the First World War, which ended in the Versailles treaty disasters.
The French embrace of the creation of European level institutions was more about ensuring Germany would never again go to war with them than any grand desire for a supranational entity.
In 1950, the Planning Office, under Monnet’s directorship, published the final draft of the proposal to establish the European Coal and Steel Community (French Planning Office, 1950).
The draft said, “The French government proposes immediate action on one limited but decisive point”. The reference to a limited step was significant. The proposal indicated that:
… the ‘solidarity in production thus established will make it plain that any war between France and Germany becomes not merely unthinkable, but materially impossible.
Monnet clearly considered the ‘common market’ to mean prosperity for all rather than a painful process where nations would race-to-the-bottom to undermine the working conditions of their population. People not corporations were at the front of his vision.
At the heart of his early thoughts on European integration was a conceptualisation of democracy. In working through how the so-called ‘Common Assembly’ (which became the European Commission), would work, Monnet understood that there had to be a democratic mandate.
On June 20, 1953, for instance, he said during a speech over the “Debates in the Common Assembly – Session of 20 June 1953 Address concerning the ECSC levy” that for the “Assembly” to interact effectively with the High Authority (which ran the ECSC) that permanent structures would be necessary:
… as this was essential to bring our institutions to life, a process in which, by necessity, this new European Parliament must play an essential part.
This was 8 years before the European Parliament was formally constituted as such.
He wanted the ‘Common Assembly’ to be autonomous and reflect the democratic forces within the new ‘Europe’.
But above all, Monnet wanted to stop any further German martial ambitions.
The next major step to integration came with the introduction of the Common Agricultural Policy (CAP) in 1962. In my book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale – I analyse the CAP in some detail.
For our purposes here, the introduction of the CAP locked the European nations into a mindset that required them to maintain fixed exchange rates (for administrative ease), which proved mostly an impossible task.
It meant that the export strength of Germany came to the fore and the other nations were forced to run compromised domestic economic policies (higher than desirable interest rates, tighter fiscal positions, higher unemployment) to maintain the parities.
This on-going crisis-ridden system fed directly into the final design of the Eurozone and the tensions that are now apparent were already obvious in the 1960s as the nations tried to maintain the CAP.
When the discussions about furthering European Integration and creating a common currency became more advanced at the Hague Summit in 1969 it was clear that a democratic oversight of such a venture was to be central.
At this stage the European Commission was not all powerful. For example, France and Germany realigned their exchange rates in
The resulting Werner Report (released in March 1970) outlined a staged plan to a common currency. Again, I discuss it in detail in my recent book.
For here, the important insight is that the Werner Plan was designed to “to determine the elements that are indispensable to the existence of a complete economic and monetary union”.
Among other things, the Werner Report said that:
… only the global balance of payments of the Community vis à vis the outside world is of any importance. Equilibrium within the Community would be realized at this stage in the same way as within a nation’s frontiers, thanks to the mobility of the factors of production and financial transfers by the public and private sectors.
The conceptualisation of the newly created economic and monetary union as a new ‘nation’ where the member countries effectively become states of a federation was clearly thought elemental. That conceptualisation did not emerge around two decades later in the Treaty of Maastricht.
The Report was clear that national fiscal policy would not be responsible for addressing asymmetric development.
There was an extremely powerful statement in the Report (pp. 12-13), which echoes today:
The centre of decision for economic policy will exercise independently, in accordance with the Community interest, a decisive influence over the general economic policy of the Community. In view of the fact that the role of the Community budget as an economic instrument will be insufficient, the Community’s centre of decision must be in a position to influence the national budgets, especially as regards the level and the direction of the balances and the methods for financing the deficits or utilizing the surpluses.
… transfer to the Community level of the powers exercised hitherto by national authorities will go hand-in-hand with the transfer of a corresponding Parliamentary responsibility from the national plane to that of the Community. The centre of decision of economic policy will be politically responsible to a European Parliament.
The Parliament would be elected on the basis of universal suffrage thereby recognising that economic policy should be democratically determined and those responsible for the policy should be held accountable to the will of the people.
There was no hint that this level of intervention would be the domain of officials centred in Brussels who would do deals with unaccountable bodies such as the IMF that would result in millions of Europeans being made unemployed, which is the norm in Europe today.
The later MacDougall Report (1977) reinforced the need for a central fiscal authority and the responsibility of a European Parliament for the decisions taken by that authority.
A close reading of the MacDougall Report will leave one wondering why the Eurozone was ever created. The major issues they highlighted were clearly still relevant in the 1990s as the European political elites rammed through their ill thought out plan for a single currency.
The Report concluded that:
It is most unlikely that the Community will be anything like so fully integrated in the field of public finance for many years to come as the existing economic unions we have studied.
In other words, after a detailed study of the realities in Europe in the late 1970s, the team concluded that the desirable structure for an effective economic and monetary union would not be present in Europe for the foreseeable future.
Certainly, by the time Delors came to report in 1989, the necessary conditions for such integration had not materialised.
Indeed, the factors that, according to the MacDougall panel of ‘experts’ in 1977, rendered monetary union “impracticable”, were subsequently built in to the Maastricht Treaty.
The early visions of a united Europe were thus built on a fear of authoritarian rule and breaches of democracy that had become manifest when Hitler set off on his disastrous venture in the 1930s.
The narrative that is now being widely circulated in different forms by different commentators and analysts is that the Greek debacle in the last few weeks is a denial of those visions for democracy and inclusion.
Instead, authoritarianism has returned to Europe, with, unfortunately, Germany at the centre of the bullies, contempuous of raw democratic voice and reducing governance to the administration and enforcement of some technical criteria (fiscal rules etc), which the early integrationists knew could not work.
The Eurogroup (Finance Ministers and Central Bank officials, with Madame Lagarde seemingly a permanent guest) is an unelected cabal.
A recent legal opinion suggests that (Source):
The Eurogroup is an informal group. Thus it is not bound by Treaties or written regulations. While unanimity is conventionally adhered to, the Eurogroup President is not bound to explicit rules.’ I let the reader comment on this remarkable statement.
Authoritarian regimes place arbitrary rule to use Irish commentator Fintan O’Toole’s words at the centre of their dealings.
Formal rules hinder dictators.
The Eurogroup runs economic policy in Europe now and is unelected, unaccountable, and has not requirement for transparency.
It is the anathema of how the pioneers of integration imagined the ‘European Project’ to unfold.
The pioneers considered the ‘European Project’ would benefit all nations as living standards converged as the nations came together through the European Parliament to ensure that all interests were served.
No particular nation was to dominate.
Fintan O’Toole’s column (July 14, 2015) – Tormenting Greece is about sending a message that we are now in a new EU – outlines the way that the European Union has been destroyed by the recent events.
He says that “whole notion” of a “closer union” was built on “three conditions”:
1. “the process of European integration was consensual – each member state would pool more and more of its sovereignty because it freely chose to do so.”
2. “these incremental steps were, to use the terms applied to monetary union in the Maastricht treaty, ‘irreversible’ and ‘irrevocable’ – once they were taken, there could be no going back.”
3. “unspoken but completely understood, was that Germany would restrain itself, accepting, in return for the immense gift of a new beginning that its fellow European countries had given it, that it must refrain from ever trying to be top dog again”.
He considers the way that Greece has been treated in recent weeks “torched” these “fundamental conditions”.
It is hard to disagree with him.
Greece has become a colony of Europe and the IMF. Technocrats will now be allowed to march into Greeek ministries and demand access to documents and strategic intelligence.
Remember, these characters are likely to be jumped-up graduates of some deeply flawed mainstream economics program who have little judgement, poor knowledge and an advanced sense of their own technical skills.
Psychologists have concluded that mainstream economists display the same sort of antipathy towards their fellow citizen as sociopaths. Their students are prone to inheriting this cruel view of humanity.
Greece will also have to submit its legislation to the Troika editors for their approval. Since when has a democratic nation had to do that?
Former Guardian German commentator David Gow wrote on July 17, 2015 – Germany Undoes 70 Years Of European Policy – that the:
2008 crisis and its aftermath have dismantled much of that hard-won legacy. Germany has become self-satisfied and complacent about its economic prowess, its export record, its “black zero” budget balance, and, not least, its “reforms” – mainly labour market changes introduced by a social democrat Chancellor, Gerhard Schröder, that led to several years of declining living standards for workers and record corporate profits and boardroom salaries. It now is trying to impose this model on the rest of the Eurozone – including its long-standing French “partners,” objects of derision for their unreformed statism, on the other side of the Rhine. Am deutschen Wesen soll Europa genesen is certainly making an unwelcome come-back. As is the self-preening “stability anchor” mantra intoned by successive Bundesbank presidents from Pöhl to Weidmann.
The ‘ugly German’ or to use Delors own framing the “German question” is back – centre-stage in Europe – and it bodes poorly.
Dow concluded that:
Stupidly, its political class, including unforgivably Social Democrat leaders, is undoing seven decades of foreign policy – and, what’s worse, of rebuilding the country’s image in the world.
The article by Cédric Durand (July 16, 2015) – The End of Europe – is also worth consideration.
There have been many similar articles in recent days – all expressing the view that the ‘European Project’ as envisaged after the Second World War is dead and a new, ugly, German-dominated, anti-people Europe has emerged which will disintegrate into a new period of political and economic turmoil.
The folly of Groupthink.
On a related issue, the former Greek Finance Minister wrote an Op Ed in the German Die Zeit (July 15, 2015) – Zu Schäubles Plan gehörte es, Griechenland fallen zu lassen.
He put an English-language version on his own site – Dr Schäuble’s Plan for Europe: Do Europeans approve?.
In the English-language version he wrote that:
The Eurozone’s faulty foundations revealed themselves first in Greece, before the crisis spread elsewhere …
While Greece has been an important ideological experiment the faulty foundations were revealed long before the actual GFC manifested and go to the heart of how the ‘European Project’ has destroyed itself.
Even as early as July 4, 1991, the European Commission issued a Communication to the European Council – Resuming Progress Towards Convergence of Economic Policies and Performances in the Community – in which they which expressed the concerns that it had for the lack of progress towards economic convergence, given that Stage II of the transition to economic and monetary union was “‘only two and a half years away”.
The Commission identified “worrying set-backs” among some countries in terms of rising fiscal deficits in the face of an acknowledged “less favourable economic situation”.
What they were finding almost immediately was that the fiscal rules envisaged under the Stability and Growth Pact (SGP) were not suitable for the swings in the economic cycle that European economies encountered and the impact those fluctuations had, via the automatic stabilisers, on the fiscal outcomes of the Member States.
The Groupthink that has destroyed Greece in recent years was well advanced in 1991.
The Commission, extraordinarily, claimed that it was appropriate for Member States to enact harsh fiscal cutbacks in the recessed environment of 1991 because:
… the policies required to strengthen growth fundamentals are also those necessary to improve convergence.
This is an early statement of the ‘fiscal contraction expansion’ mantra that has been at the forefront of the imposition of fiscal austerity during the current crisis.
The fault lines in the monetary union thus were evident even before the Maastricht Treaty was signed. The austerity mindset was established by the Delors Report in 1989 and the denial has only intensified since that time.
The wheels had starting falling off back then.
On October 25, 1991, the President of the European Council Wim Kok appeared before the European Parliament in Strasbourg.
It was reported in – European Parliament, Rapid Information Note, SP (91) 2669, 21-25 October 1991 Plenary Session – that
Maastricht … was just seven weeks away …
The emphasis was in relation to the major issues that were still unresolved including final agreements on the reference values for the binding fiscal rules and the mechanisms that would curtail the yet to be specified excessive budgetary deficits.
Even the single currency was not yet unanimously accepted.
Further, there was no agreement as to how an unelected and politically independent European Central Bank would be consistent with democratic ideals.
In that regard, there “was no consensus among Member States over executive decisions and the role of the European Parliament”.
Delors, who also appeared at the same session, muddied the waters by urging the discussion not to adopt a “solely arithmetical appreciation of deficits”.
In other words, universally binding numerical rules would unlikely be in the public interest – he knew it and wanted to cloud that reality over. The flawed design was visible to anyone who wanted to look.
But the denial was intense because the Eurozone was an ideological invention rather than a serious attempt to bring prosperity to the people of Europe.
I could go into more detail but the point is made.
The faulty foundations were also visible long before the currency was even introduced as the nations struggled to meet the so-called convergence criteria before ‘Stage III’ of the transition were finalised.
At the time, no-one believed that Italy much less Greece would meet the criteria. If Dr Dr Schäuble was aiming to get rid of Greece, then his predecessor Theodore Waigel was clearly against Italy being part of the original deal.
His 1995 submission which led to the final design of the SGP was targetted at Italy. To satisfy the Meister Waigel, Italy put in a draconian fiscal package of spending cuts and tax increases in 1998 which led Waigel to declare:
Italy has achieved remarkable success
He forgot to mention that the unemployment rate was already above 11 per cent and continued rising during that year as a result of the austerity.
It was obvious that the fiscal rules would entrench higher than necessary unemployment.
I could also mention the ratification farce – where citizens essentially were precluded from actually voting for the creation of the common currency after disastrous referendum votes in Denmark and France in 1992.
The ratification process did not provide positive reinforcement for the political manoeuvres that had ensued since the Delors Plan was released in 1989. There was uncertainty, dissent and in retrospect, a sense of foreboding of what was to come.
Then came the 1992/93 monetary crisis which should have stopped the whole venture in its tracks. This was the Black September and related meltdowns in the fixed exchange rate mechanism which demonstrated the sheer idiocy of trying to stitch all these nations together in a common currency arrangement.
With the tensions rising in 1992, the Germans once again demonstrated their destructive capacity in terms of that European Project (that has been for all to see in the current period).
The Bundesbank pushed up interest rates on 16 July 1992 because of its concern for rising inflation associated with the reunification. This had the effect of further reinforcing the view that the mark was undervalued.
This was especially the case given that US interest rates had been cut on 2 July 1992 as America battled to avoid recession. The obvious happened.
International currency speculators sold the US dollar, the lira and the pound and shifted massive volumes of funds into the mark.
By pushing interest rates up in Germany, the Bundesbank demonstrated it was more concerned about its own monetary conditions irrespective of their overall impacts on Europe’s exchange rate mechanism.
It was the leading currency and the strongest trading economy and thus it had to take leadership in helping the other currencies retain their agreed values in the European Monetary System.
To help the French franc and the Italian lira etc, the Bundesbank would have to sell marks. It selfishly allowed its own inflation obsessions to dominate and the EMS became highly unstable – again!
The Bundesbank decisions were particularly problematic for Germany’s neighbours because they faced recession and unemployment was already high. The increased German interest rates forced them to increase their own interest rates beyond the levels deemed prudent given their domestic circumstances.
Monetary policy was locked into ensuring the exchange rates were stable and higher unemployment was the casualty.
The increasing political backlash to the high unemployment raised further doubts in the financial markets as to the commitment by policy makers to maintaining the ‘no realignment’ policy.
We knew even then that the common currency model proposed in the Maastricht Treaty which would be dominated by Germany would fail – back then.
The September 1992 currency crisis clearly reinforced that view. Only the British were sensible enough to pull out of the madness – floating their currency and restating their currency sovereignty. The foolish decision of John Major and his Foreign Secretary Douglas Hurd to push Britain into the ERM was reversed.
The 1992-93 crisis demonstrated that the system of fixed exchange rates or even tightly linked exchange rates between economies that were disparate in structure and performance would always fail with mobile capital.
After that crisis was swept under the carpet, the next disaster was the convergence process which descended into farce as the Germans had to fudge the books to get close to the unrealistic criteria.
Despite Theo Waigel’s constant warning that in 1995 that each country proposing to go to Stage III had to be in “strict compliance with words of the Maastricht criteria”, by 1997 France, Germany and Spain had deficits above 3 per cent and could not really appeal to the special circumstances clauses as a way out.
Further, the public debt ratios in Germany and Spain were above the 60 per cent threshold and had been increasing since 1995.
By contrast, although Italy’s public debt ratio was well in excess of the criteria, it had been falling. Further, Belgium was in a similar situation to Italy. Tactically, Germany could not isolate Italy without pleading some special case for Belgium, which of course it attempted without success.
It became obvious that Germany itself might not meet the deficit and public debt thresholds laid out in the convergence criteria and internal dissent within Germany was rising.
Waigel’s response was exemplified by his claim that:
I have never nailed myself on the cross of 3 percent. When I said in the past ‘3 per cent means 3 per cent’ I did not necessarily mean 3.0 per cent’
This was astounding gall.
It was also later revealed that Germany had been pulling the same sort of accounting tricks that it has accused the ‘southern’ nations of adopting to fraudulently satisfy the criteria.
The convergence farce demonstrated that the final decision on who would enter the EMU would be political and the convergence criteria were really a smokescreen, a sort of delusional security blanket designed to placate the German public and the conservatives elsewhere that the process was disciplined and sustainable.
There was no economic logic, just a set of arbitrary numbers grabbed out of the air, which were then backfilled with a series of spurious ‘economic’ reports that claimed to represent these numbers as ‘economic knowledge’.
They were never that. They were always just ideological statements about the Monetarist disdain for government activity.
And then we need never forget the 2003 fiscal crisis where the SGP criteria were shown to be incapable of consistency with prosperity. And, Germany was at the centre of the rule breakers then!
In 2003, Germany was one of the first nations to transgress the SGP rules. Its partner in crime was France. What followed was astounding, especially when we consider how Germany has played it tough with its smaller, more fragile EMU partners in the current crisis.
By 2002, Germany was heading into recession and its deficits were rising well above the 3 per cent rule limits.
It was ordered to reduce the deficits but defied the Commission because it new that any further slowdown in the German economy would generate a larger deficit because unemployment would continue to rise.
Germany (and France) was in breach of the rules by the end of 2002 and was now caught up in the trap it had set for Italy, Greece and other ‘suspect’ nations.
The German economy further contracted in 2003 and the fiscal balance rose to 4.2 per cent of GDP up from 3.8 per cent in 2002.
After months of Commission rulings and demands that it reduce its deficit, the matter came to a head when the Council defied the Commission’s recommendations that the response of both the French and German governments to their earlier demands was inadequate under the terms of the Treaty and that further action under the EDP be triggered and a much tighter frame required for resolution.
The Finance Ministers (who advised the Council on these matters) decided under German pressure to ignore the recommedations.
The Eurozone as envisaged effectively ended at that point.
The matter went to the European Court of Justice as the Commission sought redress against Germany and France. But the real politic was that the rules were bent then changed in favour of Germany and the Groupthink pushed the disaster down the road a bit.
Then the GFC struck and we know what happened then.
So Greece is just one step along the path of this disastrously designed system. The neo-liberals claim now that there is no alternative (TINA) but Britain knew all along there was – retain currency sovereignty.
Once the Eurozone nations surrendered that and didn’t follow the wisdom of Werner they were done. Greece didn’t expose the flaws – it has just endured the worst of them.
The extent to which the neo-liberal Groupthink has contained the debate is evidenced by the BBC News Report (July 13, 2015) – Greece ‘back in serious recession’ despite rescue.
In relation to the hideous further austerity that will now be inflicted on Greece, an economist from the so-called progressive Levy Institute in the US, who is working as the ‘Alternate Minister for Combatting Unemployment’ in the Syriza Government, was quoted as saying that:
Mr Tsipras had no choice but to capitulate in the face of pressure from creditors, led by Germany, because the alternative was the complete collapse of the banks, and the meltdown of the economy.
Which is just apologist rubbish (per my Tweet yesterday).
The TINA mentality is how the Groupthink corners any political leaders who might think outside the mob rule.
Of course there was an alternative and if Syriza had have shown leadership consistent with its mandate to end austerity it would have discussed with the Greek people the benefits of exit.
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That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.