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Democracy in Europe requires Eurozone breakup

On December 21, 2015, there was an article on the Social Europe portal – A New Plan for Greece And Europe: A Defining Moment For European Social Democracy – which I found interesting, though very incomplete, given its title. In fact, the ‘New Plan’ is really a series of fairly general statements, which at times, are somewhat inconsistent if you extend them into the necessary detail that they imply. For example, one of their key observations is that within the European Union there is a “wide and growing gap between national control over budgets that people have voted for and the post-national governance imposed on them”. Which would suggest that the solution requires that there is an aligning of the fiscal responsibility and control at the level of the currency-issuing unit. However, there is no hint of that in their ‘Plan’. They talk about an “Enhanced respect for the fiscal sovereignty of Greece” but fail to articulate how that can occur within the common currency when the Greek government has no currency-issuing capacity. Of course, if we want to increase the fiscal sovereignty of any Eurozone nation, then the only sustainable way of doing that is for that nation to re-establish its own currency and exit the monetary union. However, this would appear contrary to their “pan-European” sentiments, which dominate their overall vision. In short, once again the bogey person of the pan-European appears to be taken as a given and then specific matters that might appear inconsistent with that old ‘social democratic’ obsession in Europe are glossed over.

Let’s be frank: there will never be a functional European-level federation where the fiscal responsibility coincides with the currency-issuing capacity of the single central bank and which seeks its policy mandate in broad elections with universal suffrage.

If there could be such a organisation, then the common currency could clearly work despite the differences in economic structure of the Eurozone Member States.

The newly created, and popularly elected federal fiscal authority would then be able to run deficits commensurate with the non-government spending gap and address asymmetries in spending across the regional space. The Member States would then become identical to US or Australian states and would rely heavily on the federal ‘government’ to ensure that living standards were more or less equalised across the federal space.

The necessity of this alignment was recognised by the early major studies into the viability of increased European integration, such as the Werner Committee in 1970 and the MacDougall Study Group in 1977. But it was ignored, for ideological reasons, by the Delors Committee in 1989 and the result was the Maastricht Treaty.

The – Report To that Council and the Commission on the realisation by stages of Economic and Monetary Union in the Community – (Werner Report) concluded that for EMU cohesion “transfers of responsibility from the national to the Community plane will be essential”.

Moreover, it stated that the:

… 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 current design of the Eurozone determines that the Member State governments are not ‘sovereign’ in the sense that they are forced to use a foreign currency and must issue debt to private bond markets in that foreign currency to fund any fiscal deficits.

Their fiscal positions must then take the full brunt of any economic downturn because there is no ‘federal’ counter stabilisation function. I disregard the small European-level transfers and bailout-type funds here. The former are too small and non-cyclical and the latter are so pernicious that they have the opposite effects to what is required.

The EMU is a federation without the most important component.

The Member State governments thus can run out of money and become insolvent if the bond markets decline to purchase their debt.

Among other things, this means the elected governments cannot guarantee the solvency of the banks that operate within their borders.

It is a basic characteristic of any monetary system that government can only create risk free liabilities if they are denominated in its own currency.

The fact that the political leaders chose this design was astounding given it stood no chance of withstanding a major event such as the GFC. The design of the Eurozone ensured it was a disaster waiting to happen.

The Social Europe article begins with the premise that “Europe has to move on from crisis management to political reconstruction”.

It acknowledges that the so-called “social democratic responses” to the crisis have been “largely weak and disappointing”. They observe that so-called progressive political parties have largely acquiesced “to austerity policies defined through the customary mix of market fundamentalism and national interest that emerges from the Frankfurt-Brussels-Berlin corridors”.

How do they explain this acquiescence? First, they claim there is “no democratic mandate for common fiscal policies … in the eurozone”. Second, they acknowledge “an idealistic commitment to the ‘European project'”.

I found the first point to be somewhat beguiling and their reasoning crops up continually when Labour-type parties explain their policy positions in terms of public opinion polling.

A senior Australian Labor Party minister arranged a meeting with me once (no names) and proceeded to lecture me on why the party had to maintain what he called ‘fiscal discipline’ (a.k.a. the myths about fiscal surpluses and public debt) and why this limited their ability to reduce unemployment and restore full employment.

It transpired that he was just channelling Western Sydney public opinion polls, which are the product of the Murdoch press. I mean that in the sense that the voters out there are bombarded with propaganda and lies in the print and electronic media about deficits and all the rest of, yet have no fundamental understanding of what any of it means.

I politely said to him – and I remember the shock on his face when I said it – haven’t you heard of leadership?

Political leaders are meant to lead, which means they are meant to formulate policy positions that they consider will advance the well-being of the citizens they aspire to represent, and then educate the public on why these are desirable initiatives.

In the neo-liberal era, politics has become one of mirroring the interests of capital, channelled through the right-wing (hysteria prone) press, and expressed through manipulated public opinion polls.

There clearly has been no “democratic mandate for common fiscal policies” in Europe because the Member States refused to allow their voters to determine the nature and the existence of the Eurozone. When Denmark conducted its referendum in 1992, the smug political elites were shocked when the majority voted against the proposed EMU treaty arrangements.

Then the so-called Socialist François Mitterrand also tried to garner public support for the treaty in September 1992. He was so blinded by the Eurozone, neo-liberal Groupthink that he called the popular vote when, in strict legal terms, he could have achieved ratification through the parliament.

The result was the so-called ‘petit oui’ – the yes vote just got over the line.

As a result, the political leaders in other nations decided to largely ignore any further voting embarrassments and moved on to the Treaty of Lisbon irregardless.

In other words, these so-called social democratic political leaders deliberately by-passed putting the design of the Eurozone, as laid out in the Maastricht Treaty, directly to the people. So it’s a bit rich to now say they have gone along with the pernicious and destructive now-liberal austerity because the people haven’t told them otherwise.

Second, when one talks with the educated Left in Europe, one always walks away with an ear full of ‘pan Europe’ – this glorious construct that, once completed, will rewrite the Continent’s history, do away with its sordid military past, create a new era of intellectual activity. And so it goes …

This idea of a unified Europe is so entrenched that, it is in some sense, as much a Groupthink trap, as neo-liberalism is for the political classes.

Groupthink always blinds the ‘members’ of the group to reality. This glorious ‘Europe’ that they are in the process of creating (they always talk about unfinished business (just read the Five Presidents’ Report, which was released on June 22, 2015) is a shambles.

The ‘European Project’ as a multinational organisational structure to deal with certain things that transcend the capacities of Member States – such as rule of law issues, climate change, immigration, etc – is a sound idea and a necessary initiative.

But what they have actually created by trying to force it to take on roles that they were not prepared to actually architecturally equip it to perform in any effective manner – is destructive and endangering the whole exercise.

The Social Europe article appears to recognise this – in some way at least:

The more we have succeeded in consolidating the current version of the European project the more Europe has become a continent of social despair, xenophobia and populism. The inevitable consequence is that social democracy is on the decline in most countries.

The Social Europe article notes that there is no “common crisis” in the Eurozone, which is one of those neo-liberal type narratives designed to abstract from the gains of the elites, either in material wealth or political power.

They say:

The winners know this all too well. Their very success in creating a dominant narrative of a shared, unsustainable debt burden is the formidable tool they use to dupe the electorate. It allows them to fatally depoliticise public debate and thereby pave the way for endless austerity; the very policy that allows the perpetuation of the dominance and excessive profits of the current elites.

In one sense, this is correct. In another sense, it ignores that the crisis is really the euro itself (the design of the system), which is certainly common.

Whenever the political leaders deploy TINA-type justifications for their behaviour the general population should immediately be suspicious.

The Social Europe article talks about “the false doctrine of unavoidable austerity”. It is clear that even within the fiscal rules under the Stability and Growth Pact there is more latitude for governments than Brussels is currently prepared to allow.

They have special dispensation clauses that allow for extraordinary circumstances within their own rules. How can it not be extraordinary for millions of workers to be unemployed after eight years of crisis?

How can it not be extraordinary for 25 per cent of the available Greek workforce to be mired in persistent unemployment with no relief in sight?

How can it not be extraordinary that after eight years real GDP levels are still below what they were in 2008?

As the Social Europe article says:

We must make clear to all that excessive market liberalism is a major reason for the social fragmentation and economic polarisation that gives the populist movements their base.

But it goes further than that and the authors appear reluctant to extend their argument to its logical end. It is the obsession with so-called market liberalism that created the aberrant design of the EMU in the first place.

The social fragmentation and economic polarisation is the manifestation of the dysfunctional nature of the monetary system. That is the root cause of the problem and even if the free-market zeal was moderated to some extent, that dysfunctional design would always be a barrier to prosperity.

As noted above there is some wriggle room within the current Treaty and its associated rules. But if you were to design it on principles where the role of government was to maximise the well-being of its citizens then there is no way you would have come up with the Eurozone.

The Social Europe article is also correct in rejecting the notion that has been popular among so-called progressive political parties for some years now that it better to form coalitions with the Right and wean them off austerity – it says that “this kind of thinking is leading European social democracy to its ruin”.

It reminded me of the quote by US President Lyndon Johnson (published in the New York Times, October 31, 1971) in relation to the FBI Director J. Edgar Hoover – “It’s probably better to have him inside the tent pissing out, than outside the tent pissing in”.

I often have conversations we politicians on the so-called Left and officials of progressive organisations like peak welfare groups and trade unions, who reliably tell me that they prefer to be inside the tent because it least, according to them, they have some conversation with those in power.

My reply to them is that when one scrutinises their behaviour inside the tent it’s hard not to come to the conclusion that they ultimately become co-opted by the very forces they seek to modify.

So, for example, peak welfare bodies hardly ever talk about job creation anymore. They go on relentlessly about the need for activation and training, using all the neo-liberal terminology – as if it is a universal and acceptable language for a progressive society to adopt.

The Social Europe article identifies four key areas where the progressive politics is exposed.

1. It claims that there is “a gap in politics between our core values and what is possible”. They cite previous struggles where idealistic aspirations (for example, universal suffrage) were pursued with vigour until the gap between the aspiration and the reality was closed.

I have some sympathy for this view but I don’t see much evidence of a uniform set of core values being articulated within the European context at present. There is a lot of talk about a “post-national framework”, but unlike the eight-hour day, which was specific and meaningful, what actually constitutes a ‘post-national framework’ or ‘pan-European social democratic’ movement is rather amorphous and riddled with internecine conflicts.

2. They claimed that the “deepest mistake in our response to the European crisis has been to postpone democracy”. Which brings us back to my opening statement that any notion of democracy has to correctly aligned the policy-making responsibilities with the currency-issuing capacity and those responsible for both should be elected through universal suffrage and accountable as such.

The Social Europe article says, that in this regard, that the “EU needs comprehensive reform”. It says that the treaty needs to be revised through referenda, which they acknowledge will “obviously, take several years”.

And what will millions of unemployed do in the meantime? Silence.

The chronic “it will take several years” behaviour of all of the European institutions is one of the reasons why it is in such a chronic state of dysfunction.

Personal hardship, grinding poverty, homelessness, and all the other pathologies that accompany the failure of the political process in Europe is a minute-by-minute endurance.

Trying to change the Treaty to fix the obvious design errors of the Eurozone is a pipe dream.

It reminds me of those so-called hardliners on the Left who criticise me for being a so-called ‘apologist’ for capitalism because I advocate a Job Guarantee, which they consider to be a palliative, at best. They spend their time plotting the glorious Revolution in between quaffing croissants and sipping latte, while doing a bit of on-line banking when their handsome salaries come in from their secure and interesting jobs.

There is no mention of the way in which the monetary union could be redesigned here. The authors talk about introducing “stringent control of the power of corporations, and robust, ecologically sound job creation and redistribution schemes”, which all sounds fantastic but imply, either restoring Member State currencies, or, establishing a federal fiscal authority as above.

The latter will not happen. So a progressive politics, in my view, has to articulate a European vision, where individual Member States have full currency sovereignty and their elected legislatures have full responsibility for policy, but co-operate through supra-national mechanisms on the wider issues, such as climate change.

3. The third problem facing progressive politicians is identified by the Social Europe article as “free trade” and the related multilateral agreements that have emerged which they argue, correctly in my view, undermine the rights of citizens in nation states.

In this regard they invoke the notion of “self-determination”, which they say “is at the heart of the modern quest for freedom” and requires “a society of citizens who can all effectively participate on equal terms in a living democracy”.

It is clear that the indecent haste in which these secret agreements have been stitched up, which guarantee corporations ridiculous power to usurp the rights of national states to determine policy, undermine democracy.

But equally, the self determination argument also applies to the right of the citizens to hold their elected representatives accountable for fiscal and monetary policy decisions. In the context of the Eurozone, this, once again, implies breakup or a creating a true federal fiscal capacity.

The authors a silent on those issues.

4. Finally, the Social Europe article correctly introduces “the ecological challenge” as a major narrative that progressive politicians and movements need to integrate into their policy aspirations. I will comment more about that in a later blog.

I dealt with the creation of a federal fiscal authority in great detail in my current book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015).

I concluded that the option is not politically or culturally tenable in Europe.

An essential requirement for an effective monetary system with multiple tiers of government is that the citizens have to be tolerant of intra-regional transfers of government spending and not insist on proportional participation in that spending.

The other side of this coin is that a particular region might enjoy less of the income it produces so that other regions can enjoy more income than they produce.

To achieve that tolerance there has to be a shared history, which leads to a common culture and identity. For example, are the citizens of Berlin, Germans or Europeans in the first instance? Language is an aspect of this, but not necessarily intrinsic.

In a successful federation such as Australia, people in the states of NSW and Victoria might occasionally complain that the smaller state of Tasmania gets a disproportionate amount of government assistance relative to its ‘tax base’.

However, there is no serious discussion that these federal transfers should stop or that the states with the weaker economies should be forced to endure a lower material standard of living than any other state.

Further, when there is a major dilemma facing one state (perhaps a natural disaster or a significant economic downturn), it is assumed, without question, that the federal government will offer financial assistance to the beleaguered state.

The point is that the citizens within an effective federal system have to share a common sense of purpose and togetherness to ensure that the monetary system works for all states/regions rather than those that have powerful economies.

That capacity and required tolerance is largely non-existent in the Eurozone, which is why talk of a fiscal union will be largely inconsequential.

An example of this political and cultural shortfall in Europe is the fact that politicians think it is appropriate to refer to large economies such as Spain and Italy as ‘peripheral’ nations.

The ‘core-periphery’ nomenclature came out of development economics, and the periphery referred to nations or regions which were underdeveloped or less developed, without basic infrastructure or human capital. Referring to rich civilisations such as Italy and Spain in this way indicates a deep malaise.

Moreover, it is not just the historical and cultural differences that are at odds with the idea of a fully integrated economic and political union.

For the federal fiscal authority to provide effective fiscal support for growth and prosperity in the Eurozone, a major paradigm shift in economic thinking is required.

When the old hatreds and suspicions in Europe combined with the emergence of neo-liberal economic thinking, the outcome was the Delors Report and the subsequent unworkable design of the Maastricht Treaty.

That mindset biases the Eurozone towards stagnation. A new way of economic thinking, which recognises the opportunities that a truly sovereign federal government has if it utilises its currency appropriately, is required.

If that way of thinking could emerge, then the design of the federal fiscal authority and its operational charter would follow easily.

The expectation would have to be, however, that there will be no paradigm shift in economic thinking forthcoming on a European wide scale, such is the grip that neo-liberalism has on the economics profession and the policy makers.

In that context, it will be easier for a single nation to exit and build a new culture of growth with a new economic policy making approach.


I think the reality that there will never be a properly constructed federal fiscal authority in the Eurozone has to be addressed head on by the progressive politicians before they will be able to make any headway in reducing the democratic deficit that has developed in Europe.

There has to be a recognition that breaking up the Eurozone is not the same thing as abandoning the ‘European Project’, where the latter should be redesigned conceptually to relate to issues that are better conducted on multi-lateral levels and benefit from geographic proximity.

In other words, some multi-lateral concerns are better off done through world organisations (for example, climate change). The European Project can represent the nations on that Continent.

But this ‘Project’ should never have been pushed to running a common currency. That was a step too far … and it needs to be taken back and sovereignty restored at the Member State (democratic) level.

I am in Los Angeles today and tomorrow doing some things at UCLA and up in Santa Barbara. I guess I will also do a lot of running along the beach paths around Santa Monica and Malibu, where I am staying. That is always a nice way to start the day!

Although, winter storms are descending on the region and torrential rain and snow (higher up in the hills nearby) are predicted.

That is enough for today!

(c) Copyright 2016 William Mitchell. All Rights Reserved.

This Post Has 16 Comments

  1. Let us have financial subsidiarity instead of monopolistic dominance, philosophical grace as in abundance instead of austerity and leadership instead of “finger in the wind” political half assery. Demon est deus inversus after all.

  2. The first country within the Eurozone that exits could show the way? It could demonstrate that the sky will not fall in by leaving and that in fact the majority of its citizens would eventually be much better off than now.

    Such an event would lay bare the poverty of the Neo liberal paradigm and could trigger the end of the Eurozone ?
    I may be too optimistic of course.

  3. Bill, are you by chance speaking in Santa Barabara? I am here as well and would enjoy any opportunity to listen in person.
    Happy and safe travels with this storm front moving through.

  4. Above all else, the Eurozone crisis signifies a crisis within neoclassical economics, which is beset with unresolved internal contradictions and straightjacketed by ideology. If the economists involved in setting up this monetary union had thought and behaved differently, then the current disastrous situation would not have developed.

  5. The “powers that be” within the ECB (have a look at e.g. Yves Mersch’s speeches), the EU Commission, the Eurogroup, in Germany and its satellites are not in the least (at least publicly) willing to concede that there’s anything structurally wrong with a stateless, supra-national currency.

    Right now, Greece’s creditors are imposing a major overhaul of its social security and old-age pension system such that pensions are reduced AND employer&employee contributions increased, while the central government’s contribution is reduced. With a banking system in deep trouble (despite repeated ‘re-capitalizations’ added to the ‘national debt’ of the Greek state) any net increase in the leveraging of the overall domestic private sector is highly unlikely. The government sector is obviously not going to be net contributing to Y, as it’s supposed to be producing primary surpluses (!!!). The RotW sector is likely to continue not proving a net injection of any significance to Greece’s Y (thank you glorious EU for those export sanctions to the Russian Federation, by the way!) And yet, in THIS setting, they’re forcing the rump-SYRIZA & ANEL government to further reduce domestic disposable income (purchasing power) and increase ‘labor costs’ (which are likely to result in a further drift toward casualization and the ‘graying’ of the market for labor-power), while actual compensation (wages) are being reduced and collective-bargaining is all but destroyed.

    The existing EU and Eurozone structures cannot be ‘democratically reformed’. Unless France (and Italy and Spain) somehow decide to call Germany’s bluff (the notion that the EU Commission and the Eurogroup and ECB are actually in charge is a joke) and unilaterally (and in concert) decide to run the required level of fiscal deficits to get their (and with theirs, the rest of the non-current-account-surplus-EZ-members’) economies to grow sufficiently, there will be no change. 🙁

  6. Really good analysis, Bill. That means I agree that the EU has no future as it exists today.
    I am observing even from way off to one side that the neoliberal paradigm is weakening, but slowly.
    Certainly spineless politicians today are incapable of taking real action. They all act like cowards unfortunately.

  7. “Political leaders are meant to lead, which means they are meant to formulate policy positions that they consider will advance the well-being of the citizens they aspire to represent, and then educate the public on why these are desirable initiatives.”

    This basically sums up the grotesque failure of Labour in the UK. They could have explained:

    1. How the banking system created an appalling series of housing bubbles by directing money towards the most unproductive and socially divisive part of the economy.

    2 How QE was a from of sovereign money creation but misdirected to create asset price rises. They failed to explain the smoke and mirrors operation that effectively proved that a currency issuer can create net assets.

    3. How austerity memes we’re lies (We’re living beyond our means’) despite QE proving the contrary.

    4. How ‘taxing’ the poor because of housing benefit was making the worst off pay for the banks’ asset bubble

    5. How the Tories were using a late 19th Century concept of unemployment being ‘voluntary’ (Marshallian)

    Had they done this and not cowered before the ‘toilet-paper’ press and cringed before the Overton Window, things might have been different.

  8. Bill,

    When you write: “An essential requirement for an effective monetary system with multiple tiers of government is that the citizens have to be tolerant of intra-regional transfers of government spending and not insist on proportional participation in that spending.”

    Is this the same/similar to Keynes’ idea of ‘Surplus recycling’ that Bretton Woods rejected? Varoufakis talks of the GSRM (General Surplus Recycling Mechanism) in his book ‘The Global Minotaur’.


  9. You’d think – 500 years after the Renaissance – that all these trivial details about running countries would be completely obvious. They are, of course, yet we’re stubbornly refusing to teach our own electorates even the rudiments of what we used to know, and continue to compile.

    5 minutes of pondering this and other social quagmires always leads directly to the same question: “Why the hell aren’t we educating and preparing our children and electorates for the challenges they face, instead of just throwing distracting, addictive consumer goods at them?”

    If you’re honest, you have answer the follow-on question: “What do our children and grandchildren NEED, in order to have a world which is safe for THEIR children and grandchildren to continue growing in?”

  10. Ulrich Speck has a piece in the Observer of 3 January entitled “We’ll miss you if Britain leaves the EU – and you’ll be diminished, too”. He concentrates primarily on the political problems the EU as a body has been encountering and how he sees the union going forward. He makes few comments about the Euro but he does say this, which is relevant to Bill’s argument: “The eurozone, the Schengen area and a joint foreign and security policy were set in place years ago, but only now are countries being forced to find joint answers to joint challenges. … The eurozone is better equipped to deal with crises, even if economists tell us that the system cannot work (according to the textbooks).” His tone throughout the article is one of optimism, contending that the internal conflicts might look ugly from the outside but that progress may come out of them. My feeling when reading this was that I was reading an idealistic account. Not much if anything was said about how these problems were going to be overcome but one felt that he felt that the alternative was too horrible to contemplate, a kind of TINA.

  11. “the internal conflicts might look ugly from the outside but that progress may come out of them. ”

    Economics is always full of this quasi Judeo-Christian salvationism where hideous sacrifices have to be made in order to arrive somewhere rather than a flexible response to problems AS THEY OCCUR.

    over 400,000 evictions in Spain and 3 Million outside the health-care system in Greece, mass exodus of youth from Portugal and Ireland are, presumably, tolerable to Speck because we’ll all be stronger for it IN THE END!

  12. It’s becoming obviously clear … no neoliberal agenda!

    [Bill edit: I deleted the video link – I didn’t want to promote the speech]

    What if the groupthink is in our/your perception of the left?

  13. @ Roger

    Precisely. Systemically, the rate of flow of total costs/prices will always tend to exceed the rate of flow of total individual incomes. This has been hidden by the false ideology of DSGE, the gone to seed as the inevitable mental result of a second gilded age and amazingly and contradictorily exacerbated by the refusal to deal with the monopoly powers and privileges of private Finance….even though its monopoly contradicts the very free market ideology the system is supposedly built upon.

    How frigging biased, stupid and dishonest can modern economists specifically be, and how disengaged can moderns be generally?

    IMO MMT/sovereign national money creation that observed the wisdom of financial subsidiartity/rational, technologically advanced infrastructure spending, Public Banking, and the two mechanisms of Social Credit could all be integrated into the new reformation of economic thinking everyone seems to want but the self interested elites sit by and plug their ears with their fingers whenever the subject arises.

    Behind and underlying all of the aforementioned movements and policies is a new cultural paradigm/zeitgeist of natural, psychological grace/graciousness/gracientialism. Graciousness, the wisdom mindset that follows from it and the consequent honesty and bravery to maintain it….must take root and with viral speed of dissemination rescue us from ignorance, apathy and self interested folly in an age of modern weaponry.

  14. You are in LA today? Please consider coming down to Orange County. The MMT message needs to be heard down this way too.

  15. It doesn’t work but we might all die before it breaks up. This is the way It always seems to go with grand ideas: the end goal justifies the little suffering.

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