The transitory view of the current inflation episode is getting more support from the evidence.…
German Ministry of Finance’s anti-Europe proposal
Recently, I wrote a blog – Who is responsible for the Eurozone crisis? The simple answer: It is not Germany! – where I contended that Germany was not to blame for the Eurozone crisis. I also wrote that while Germany was not responsible, single-handedly, for the creation of the dysfunctional monetary union, its politicians were surely complicit in making the crisis deeper and longer than it otherwise could have been given the circumstances. A few weeks ago, I read an article in the Italian news (December 15, 2015) – Il piano tedesco su debito e aiuti Ue (The German plan for debt and EU aid) – which I intended to comment on when time permitted. I note that the author, one Carlo Bastasin, is also associated with the American Brookings institution, and that organisation published in English-language version of the article – Mr. Schäuble’s ultimate weapon: The restructuring of European public debts – on the same day, which makes it easier for more people to read. With Germany now the dominant economic and political force in Europe, bullying other nations to support pernicious policies in southern Europe, their latest plan demonstrates clearly that their conception of European integration bears no resemblance to a structure that might allow the common currency to function effectively in the interests of European citizens.
The article essentially summarises a leaked document – “a letter sent at the end of November by the Ministry of Finance to the heads of the Finance and Budget Committee of the German Parliament”.
The letter outlines the German Finance Minister’s plan to create:
… an automatic mechanism for sovereign debt-restructuring … designed to prevent any form of risk-sharing between euro-area countries and to confine the costs of fiscal and financial instability primarily within the more fragile countries.
The plan has the following elements:
1. An automatic mechanism would be established to cut through all the political argy bargy that has surrounded the Greek crisis.
2. As soon as “a country asks for help through the European Stability Mechanism (the ad hoc fund established in 2012), for whichever reason, sovereign bond maturities will automatically be lengthened, reducing the market value of those bonds and causing severe losses for all bondholders.”
3. Eurozone government bonds would become even more “riskier assets” than they are already.
4. The “proposal by the German government” would scrap “the regulatory exception for sovereign bonds that allows banks to hold them without hoarding capital reserves to cover eventual losses”. In other words, commercial banks in Europe would “turn away from investing in government bonds”. It is claimed that this would encourage them to “engage more intensely with the real economy” and “Economic efficiency across the euro area should increase”.
The German plan is clearly designed to force nations to limit the amount of debt they issue. In turn, given the fact that the Member States do not issue their own currency and have to do raise taxes or borrow in order to spend, the proposal is designed to restrict the capacity of Eurozone governments to run fiscal deficits.
Reflecting on the current crisis, there is an on-going denial as to what occurred in 2009 as the fiscal deficits across the Eurozone increased.
As I demonstrated in my current book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale – a significant part of the deficit response was due to the cyclical impacts on spending and taxation as a result of the collapse of non-government spending.
This response of the so-called automatic stabilisers was sufficient in many cases to push the fiscal balances beyond the 3 per cent limit allowed for under the Stability and Growth Pact (SGP). It goes without saying that the imposition of fiscal austerity in those circumstances was an absurdity.
The last thing a responsible government should do is attempt to reduce its own fiscal balance when the automatic stabilisers are pushing the deficit up as a result of a slowdown in economic activity in the non-government sector and a rise in mass unemployment.
Germany led the charge in berating governments to obey the SGP, even though in 2003 it had itself, failed to meet the requirements due to an entrenched recession. The hypocrisy displayed by the current German government in this respect was quite something else.
The German Minister of Finance seems to think the placing even further restrictions on the Member States capacity will in some way protect the Eurozone from having to bail out particular Member States who can no longer fund themselves in euros.
What the proposal effectively means is that when the nation experiences a significant reduction in non-government sector spending, whether it be from a reduction in household consumption expenditure, a fall in private capital formation, or a decrease in net exports (from the export-side), it would virtually immediately encounter difficulties in accessing private bond markets virtually immediately.
There would be little incentive for private bond investors to take on paper from a government that was facing rising deficits due to the automatic stabilisers with little prospect of being able to use any discretionary fiscal stimulus to offset the decline in non-government spending.
A recession would become almost guaranteed, the deficit would worsen as the tax revenue collapsed further, and the government would be forced to default on its outstanding euro liabilities. The only way out would be exit.
In other words, the logical extension of the German proposal is that nations, which find themselves mired in recession, would exit.
The Brookings author’s contention is that it is probable that the German scheme would increase the frailty of the Eurozone in the event of a further crisis.
Ultimately, rather than exerting sound discipline on some member states, the new regime could widen bond rate differentials and make debt convergence simply unattainable, increasing the probability of a euro-area break-up.
It is quite clear that the German proposal wants to further limit any flexibility that Member States have in meeting an economic emergency.
The Brookings author notes that:
… Berlin wants to prevent each country from invoking flexibility clauses. In particular, the Italian request for flexibility showed marked weakness on the Commission’s part during negotiations … EU Commission President Juncker was forced to choose between authorizing incumbent governments to widen their deficits for a myriad of reasons, and fostering anti-European populist movements that want to scupper the entire monetary union. This precise weakness in the coordination of centralized budgetary policies has convinced the German authorities to call for decentralized risks and depoliticized controls.
The rise of extreme populist movements in Europe (particularly those on the Right) has been fostered by the failure of the monetary system to protect citizens against mass unemployment and increasing poverty.
It is a testament to policy failure rather than any so-called flexibility, which has, in an ad hoc manner, helped in a small way to prevent the Eurozone crisis from becoming an outright human disaster.
For example, the willingness of the European Central Bank to introduce the Securities Markets Program in 2010 save the Eurozone from collapse. Germany opposed that program at the time.
The flexibility that the Italian and French governments have sought in recent months, while a ‘red rag to the bull’ for the Germans, is in fact, not sufficient to redress the mass unemployment and restore economic growth.
The problem with the German proposal is that it runs counter to any notions of further political and economic integration within Europe.
The only way the Eurozone can effectively function is if a federal fiscal capacity is established and is given enough flexibility to spend sufficient amounts to offset non-government spending gaps. Whether it be allowed to issue debt, which would be the joint responsibility of all Member States is another question.
Modern Monetary Theory (MMT) tells us that once the fiscal capacity is aligned with the currency-issuing capacity then there is no need for they government to continue to issue debt. Simple accounting transactions between the central bank and the treasury can facilitate government spending without any recourse to issuing debt.
That is a defining feature of a currency-issuing government, which floats its exchange rate.
The fact that the German proposal further sequesters any ‘federal’ agency from providing necessary fiscal resources to struggling Member States is the antithesis of where the Eurozone should be heading if it wants to maintain the common currency and allow the Member States to advance the well-being of their citizens.
The German proposal is tantamount to encouraging exit as the only viable option for most of the Member States.
That should come as no surprise given the German history of gaming the system to suit itself.
Even before the creation of the common currency, the mercantile policies of the German government and the support given to German industry via Bundesbank manipulation of the exchange rate was to the detriment of France, Italy and other EEC states.
To maintain the fixed exchange rate systems that they had agreed to required symmetrical intervention from the existing Member States’ central banks. The Bundesbank failed to act symmetrically when German trade surpluses were overwhelming and putting upward pressures on the German mark and downward pressures on the French franc and the Italian lira, among other Member State currencies.
The Bundesbank fear of inflation prevented it selling sufficient German marks in return for other currencies, which meant that the fixed exchange rate systems before the Eurozone were always under threat and the trade deficit nations will always under pressure to deliberately maintain elevated levels of unemployment and domestic recession.
This proposal is just another expression of the failure to understand what a responsible role for Germany in Europe means. The current crop of German politicians do not seem to have learned from history.
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.
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This Post Has 17 Comments
Excellent analysis of how power, profit, and austere control are the current ruling paradigms of economics , national governments and the larger “global reach” corporations. These paltry and woefully insufficient ideas and philosophy are precisely what is at the heart of our monetary and economic problems, and what a new philosophy and paradigm of Grace in all of its natural conceptual aspects and specifically in economic policies reflecting its aspect of monetary Gifting would balance. No need for everyone to “get balanced” beforehand. Paradigms and zeitgeists mold individuals’ thinking, and if we had Gifting as the primary one even more than the 90% of us who find purpose even under an onerous system would undoubtedly do the same.
Germany has been little more than a monumental problem for Europe since the unification of the German states under Bismarck 150 years ago. So the current crop of German politicians are no exceptions to the rule. What is it in the cultural or even the genetic makeup of a nation which enables such abysmal stupidity?
Could we be so lucky that Germany succeeds in forcing a wholesale “exit”. Then we would see the exit from the stage of those abominations,the EMU and the EU.
I like to read your blog and I have learned a lot. But your blog is very hard to read. That is because the rows of words are to long. The text is to wide on the screen. If you read Paul Krugmans blog you see what I mean. His blog has much shorter rows of text.
“In other words, the logical extension of the German proposal is that nations, which find themselves mired in recession, would exit.”
Or they would depopulate, which is the actual intent of the EU design. Those who are unemployed have to wander the continent in search of a job. All the small countries have to become like Ireland – perennial suppliers of cheap labour to their more prosperous neighbours.
I see nothing in the agenda of the europhile left that looks to change the design, which either means they don’t understand that is the design, or they don’t care about the people their beliefs displace.
Couch-surfing while taking part in the gig-economy might sound fun for a while, but it is hardly consistent with bringing up children.
Germany is not out of the woods with trade. It can be seen through this article to be the most vulnerable nation in the EU. By beggaring their customers as well as deflation elsewhere they will bleed more than most countries:
[Bill edited out a link to a site he does not wish to promote in any way]
“At the World Economic Forum in Davos, 2013, she started to say that Europe nowadays has only 7% of the global population and produces only 25% of the global GDP, but that it spends almost 50% of the global social expenditure. The solution to the economic ills of the continent only can consist in raising its competitiveness. Since then, this comparison has become a central element in major speeches. The international financial press has widely commented on her thesis, with the Economist saying that:
If Mrs Merkel’s vision is pragmatic, so too is her plan for implementing it. It can be boiled down to three statistics, a few charts and some facts on an A4 sheet of paper. The three figures are 7%, 25% and 50%. Mrs Merkel never tires of saying that Europe has 7% of the world’s population, 25% of its GDP and 50% of its social spending. If the region is to prosper in competition with emerging countries, it cannot continue to be so generous.
She produces graphs of unit labour costs […] at EU meetings in much the same way that the late Margaret Thatcher used to pull passages from Friedrich Hayek’s “Road to Serfdom” from her handbag.
The Financial Times commented:
Although Ms Merkel stopped short of suggesting that a ceiling on social spending might be one yardstick for measuring competitiveness, she hinted as much in the light of soaring social spending in the face of an ageing population.”
We are in 1939. We are waiting for the new blitzkrieg to be started by Merkel/Shauble. People think problems will hit someone else and they will be caught totally unprepared. They will be pushed into sealed wagons asking themselves “what’s happening? Is there a party somewhere?”. Like Poland in 1939 Greece has been humiliated and occupied in 2015. Next one will be Italy, my country, which has been betrayed and sold by people that will be paid with a shot in the neck by Germans (they hate betrayers). Hoping that Marine Le Pen can help breaking EU/Euro is too little and too late, and does not take into account for the fact that also France has its Vichy people. For the third time in 100 years Germany is trying again to dominate Europe by mean of extreme violence. We can only hope that in the end they will be also defeated for the third time.
Germany’s euro policy may be disastrous for Europe in the long-term, but it wins votes in German domestic politics. The latter is what matters for German domestic politicians like Merkel and Schäuble.
Imagine if the governer of California was de facto in charge of the dollar.
A federal currency without a federal government. What a farce.
Sorry, Bill about my link. I saw it as a separate consultant writing about the issue which appeared in the forum you don’t want to give credit to [someone touting for business]. I hadn’t seen it anywhere else yet it seemed worth quoting.
I don’t know how to work around such conflicts. I too don’t wish to promote such sites, but they do have insights of value.
As someone said: History may not repeat, but it severely rhymes. You are correct that Europe is being set up for the same machinations and blunders that started WW II. It actually doesn’t matter who is to blame so much (as Bill has pointed out there is plenty of blame to go around), and the irony is that many of the actors were in certain ways actually practicing the traditional virtues of thrift and industriousness….but monetary austerity and financial self interest were allowed to corrupt such virtues so that they ended up not serving either the national economies or the individuals within them. IMO the only safe way out of this predicament is an ascension of the philosophy underlying and dominating economics so that aligned policies can bring its current ruling business model, Private Finance (and some of its allied corporate behemoths), back to the positive and constructive community of other business models.
talking about traditional virtues of thrift and industriousness, may i point you to a very classic masterpiece in Russian literature, The Gambler by F. Dostoevsky (http://www.operatoday.com/documents/The_Gambler.pdf); there you will find a clear description of “the German method of growing rich” (For a minimal context you can start at page 24, “I think that roulette was devised specially for Russians”).
The current ruling business model is imposed by those who are the strongest: they self-define themselves as a model of virtue that all the other countries should follow, and their policy is “no mercy”.
The only pacific solution would require Germany to lower their commercial surplus both by increasing salaries for their workers (but they are encouraging syrian refugees to enter their country with the main goal of further lowering those salaries) and by importing goods and services from EU periphery (but they have just started another currency war by ordering ECB – surprise! Guess who drives decisions of the “Independent Central Bank”? – to devaluate the Euro so they can export even more).
In a few words, “beggar thy neighbor” is their way of life; they are obtusely sawing off the branch they’re sitting on, and we are under the tree.
Their hubris will be punished with our nemesis, and I think this is very wrong.
As “The Who” wrote in “Tommy”, they are fiddling about, but we’re not gonna take it.
“The German mind has a talent for making no mistakes but the very greatest.”
I won’t dispute much or any of that, but Wisdom is the only responsible course regardless of the difficulties.
By the way I read the Dostoevsky piece and having the last name of Hummel it dovetails perfectly and quite accurately with the mindset of my own German-American upbringing. Something I have spent a goodly amount of my adult life internally overcoming. I think a third integrated alternative to the Russian and German Duality would be the best. (And no, that alternative is not the French perspective. 🙂
I agree totally with you that the Napoleonic or De Gaulle way to French “Grandeur” is not the answer.
Please do not laugh at me, but the Italian model based on very fine grained network of small and medium businesses, robust family savings is something we should preserve, instead of destroying it in favour of concentration which is creating “too big to fail” monsters led by more than morally suable people.
Absolutely agree with your analysis, sadly though I think it not so much a Germanic problem as international Neo-Liberalism, here in Britain the madness continues at pace, even to the extreme of selling off our nationalised industries to other foreign nationalised industries; under the pretext that the private sector is more efficient.
Still Anglo Saxon mania might be at fault there.
What has been clear to me since I have looked into the causes of the crash, is that this is a transfer of wealth and power upwards and bears no relation to sound economics.
These two documents tell the story of when it all started and the background to the conservative take over and control of democracy. The first shows so called research carried out on behalf of Nicholas Ridley, later to become a cabinet minister in Thatcher’s government. Clearly the language dresses up a power grab as the essential components of bringing economic order into play. Which it does not, and reduces the capacity of the economy to survive, we lost 25% of our manufacturing base within the space of two years as a result, and Thatcher proclaiming “if it isn’t hurting it isn’t working.”
Such is the madness of people like this: This document was produced 2 years before they entered government: http://fc95d419f4478b3b6e5f-3f71d0fe2b653c4f00f32175760e96e7.r87.cf1.rackcdn.com/FABEA1F4BFA64CB398DFA20D8B8B6C98.pdf
The next document is the infamous Margaret Thatcher’s secret 1982 cabinet papers, 2the longer term options,” it describes in detail how they would privatise the state, transferring schools, industries and our NHS into the private sector. She also lied by denying this document ever existed at the time, it was released under the government thirty year rule in 2012, protecting this deceitful politician from proper democratic scrutiny. An absolute abuse of power.
In order to view this document, you must click where it says SHOW IMAGE.
What these two documents prove is how this agenda has progressed from the 1970s aided and abetted by the new Neo-Liberal right, that act without any compassion or interest in the well being of people, and the way in which the denigrate the weak and vulnerable as though they were societies problem, not the victims of their policies. Just how Merkel describe the Greek people as lazy and profligate.
In my view these are very nasty people, who don’t care, but are very aware and react hostilely when you point that fact out.
Yes. I agree. The duo Reagan/Thatcher pushed the world toward total insanity. TINA is the only method used to rule the world. From what we saw from Italy, Mrs Thatcher made more damages than Nero, literally burning an entire nation to the only advantage of very few Shylock-minded people. UK has been transformed into the biggest money laundry platform in the world, and money have started to come out of money. This is the rentier’s dream made true.
Sadly this (https://goo.gl/TkxZCh) is the only hope left for us earners before corporate America and corporate Europe take all of us back in dark middle age.