Last Wednesday (November 22, 2023), the Tory government in Britain released their fiscal update known…
While the Brexit shambles wound on in London, with the Prime Minister being walloped one day by her own party, and then the next given a victory, courtesy of some Labour Party bungling (the no-confidence motion), across the Channel things have been turning markedly sour. While the Europhile Left hold Europe dear to their hearts, the reality is that their dreamworld is falling apart. This is not only because of the incompetence of its polity but also because of the deliberate strategies of the polity to privilege ideology over economic reality. But if the Europeans continue down their ideological path, there mightn’t be much to exit from for the British. Late last week (January 14, 2019), Eurostat published their latest output data – Industrial production down by 1.7% in euro area – which as the title indicates is not good. Once again, the fiscally-starved Eurozone is trailing behind a sinking EU28. Over the 12 months to November 2018, industrial production in the Eurozone fell by 3.3 per cent and by 2.2 per cent in the EU28. The declines are across all product categories – capital goods, energy, durable consumer goods, intermediate goods and non-durable consumer goods. What we understand from this is that the policy makers in the European Union deliberately choose to subjugate economic prosperity and the well-being of people (jobs, incomes, savings, etc) to maintain an adherence to an ideology that purposely redistributes real resources and incomes to the top end of the distribution and provides lucrative paths for European Commission executives to move between these ‘political’ roles into highly paid banking and related jobs. It is neoliberal central, in other words, and is beyond reform.
On January 13, 2019, French President Emmanuel Macron penned a – Lettre aux Français to his “Chères Françaises, Chers Français, Mes chers compatriotse”.
All very stirring I am sure.
But pure neoliberalism and denial.
UNder the guise of launching a “great national debate” about the “great questions of the future”, Macron, instead reasserted the mindless logic of the European Union, which the Gilets Jaunes are rebelling over.
The logic is simple when the Government is using a foreign currency (the euro).
Taxes are required to ‘finance’ public services.
Tax … makes it possible to pay to the most fragile social benefits but also to finance some big future projects, our research, our culture, or to maintain our infrastructures. It is also the tax that pays the interest on the very important debt that our country has incurred over time.
And you immediately realise how skewed the logic has become.
In the past, even those economists who fail to understand the role of taxes in a fiat monetary system would acknowledge that tax revenue should cover recurrent spending (including debt servicing) and debt-issuance should cover capital expenditure.
This is the only way (using their logic) that intergenerational equity can be achieved by matching burden with benefit.
This logic says that it is grossly unfair to impose tax burdens on the current generation to fund long-lived public infrastructure assets that future generations will also gain benefit from.
Macron’s logic doesn’t even acknowledge that and, instead, proposes a much more radical ‘taxes’ pay for everything.
He continues in his letter to argue that tax relief for lower income groups to help improve the growing inequity in France are impossible “without lowering the overall level of our public spending”.
In other words, the idea that a fiscal deficit can be used to achieve social purpose is banned. That is pure European Union ideology being imposed.
He also proposes that ‘savings’ could be made by cutting the scope and layers of government.
Environmental sustainability is also cast in a ‘finance model’ – how can we afford an “ecological transition”?
The whole exercise is a smokescreen – talking about grand visions of democracy and citizenship – but all shackled in the day-to-day reality that the Gilets know only too well – the stifling straitjacket of European Union austerity.
Which is once again manifesting in the declining economic activity in the major economies.
The Eurostat data is very disturbing.
Eurostat report that:
In November 2018 compared with October 2018, seasonally adjusted industrial production fell by 1.7% in the euro area (EA19) and by 1.3% in the EU28 …
In November 2018 compared with November 2017, industrial production fell by 3.3% in the euro area and by 2.2% in the EU28.
The following graph shows the evolution of Industrial Production (indexed to 100 at the peak month April 2008) for the EU28 (blue) and the Eurozone Member States (orange) from January 2000 to November 2018.
The pattern is interesting.
The early years were marked by recessions in Germany and France (which led the European Commission to change the Stability and Growth Pact rules to suit these two nations, something they refused to do later for Greece).
The frenetic period of growth leading up to the GFC was driven by the construction sector as Germany financial surpluses found their way into the periphery of Europe.
Then the rapid crash, which was initially met with rising fiscal deficits and a V-shape cyclical pattern (standard recession profile).
But that recovery in 2009-10, which followed the US recovery path closely (for the same reasons – fiscal support) was too much for the European Commission ideologues who saw their ‘fiscal rules’ being violated.
The relevant question that should have been asked was how could have they devised such ridiculous and unworkable rules that did not allow for sufficient flexibility in the face of an economic crisis.
But the denial was massive and the technocrats then enforced austerity and activity fell again and this time the recovery is slow and weak and anything by V-shaped.
The departure from the V-shape is because potential output has also been damaged by the austerity.
As the authorities demanded reductions in fiscal deficits and forced a second recession, capital formation expenditure collapsed.
Capital formation not only adds to current spending but also adds to the supply-side potential of the economy. Firms will not invest if the outlook is poor and they can service current expected demand (sales) with the productive capacity already in place.
So as a consequence, the sharp drop in capital formation across Europe, has led to a decline in potential GDP.
Here is the same period graphed but focussing on the major Eurozone economies: Germany, France, Italy and Spain. This allows us to see the dominance of Germany in the overall evolution of the Eurozone industrial production index and how poorly performed the other major economies have been.
Germany caught up in the period after reunification by imposing ‘internal devaluation’ starting inn 2003 (Hartz). This strategy deliberately gamed their Eurozone partners by shifting trade competitiveness in favour of Germany and dramatically undermining the export capacity of the other Eurozone nations.
Clearly, the crash affected all four economies to a similar degree:
1. Germany went from peak 100 in April 2008 to a trough of 76.4 in April 2009.
2. France went from peak 100 in April 2008 to a trough of 81.6 in May 2009.
3. Italy went from peak 100 in April 2008 to a trough of 73.8 in March 2009.
4. Spain went from peak 100 in April 2008 to a trough of 76.9 in March 2009.
But Germany recovered more quickly while the other three nations have languished.
By November 2018:
1. The German industrial production index stood at 100.7 (in other words about what it was at the onset of the crisis).
2. France, 88.5 – hardly any recovery from the trough and a loss of 11.5 per cent since April 2008.
3. Italy, 79.7 – – hardly any recovery from the trough and a loss of 20.3 per cent since April 2008.
4. Spain, 78.2 – hardly any recovery from the trough and a loss of 21.8 per cent since April 2008.
These are massive losses in national income for these Member States and they are amplified through the Eurozone otherwise known as the Austerityzone.
My conclusion that the European Commission deliberately prioritises neoliberal ideology over economic well-being of the Member States was reinforced by the Business Insider article (January 14, 2019) – Europe has made a political decision to go into recession.
Note they use the term “political” while I prefer the term ‘ideological’ – but the intent is the same.
The article says that the Eurostat data is “horrible … for November … It looks like Europe is heading into recession”.
They provide this graphic (taken from a private consulting report) which shows the moving average industrial production performance for the large Eurozone states.
The decline back into negative growth is clear.
But more telling is their assessment (drawn from two separate sources – proprietary research services) that:
The tragedy is that the contraction is being helped along by a deliberate political choice made by Europe’s own governments: Their effort to rein in deficit spending, to cut fiscal stimulus, and to balance their budgets in the 10-year aftermath of the 2008 financial crisis. “Austerity,” as it’s known, has shrunk the potential size of the European economy and retarded its ability to grow again. And now that the manufacturing sectors of Italy, France and Germany are all stagnating or shrinking, austerity is hurting their ability to pull out of the dip …
In both studies, the analysts concluded that Europe inflicted on itself permanently lower actual GDP growth, following the crisis.
I read a lot of Tweets etc from those hanging onto the Europhile dream that the European Union is not a neoliberal construct.
They even claim that it serves as a bulwark against neoliberal excesses.
Well if the relative conservative think tanks such as The Institute of International Finance and Oxford Economics (whose work the Business Insider is summarising) conclude that the fiscal rules are deliberately prioritised even if that means a permanent reduction in growth, employment, income and prosperity, then it is hard to defend that Europhile position.
Yes, I know the next response.
Dear Bill, the European Union is not the Eurozone.
No it is not but the rules are the same and the intent of the European Commission is that everyone would be using the common currency. Only some political hiccups (Denmark’s rejection of the Treaty referendum, and Margaret Thatcher’s understanding that currency sovereignty is crucial) prevented the 19 being much closer to 28.
The common currency is a project of the European Union not something separate.
The Eurozone is just the most advanced implementation of the neoliberal, corporatist, anti-democratic structure that the European Union has evolved into.
The days of the European Union caring about workers and their rights and social well-being are long gone.
They are steadily chipping away at the legislative structures that earlier incarnation of the Union had created so that all policy conforms with its neoliberal masterpiece – the Single Market.
The BI article reports that the Oxford Economics study found that:
Since 2008, Europe lost economic activity the equivalent of Spain’s entire GDP … Spain’s GDP is about $US1.3 trillion and the country employs about 19 million people, to give you an idea of just how much is “missing.” While it is not directly the case that there would be an extra 19 million jobs in Europe if governments here had been more fiscally supportive, that is nonetheless the scale of the issue we’re talking about.
The cause of these losses goes right to the architecture of monetary union and the way the European Commission enforces it:
… they proceeded cautiously on government spending and didn’t cut taxes, to balance government books … The result was less money sloshing around in Europe – and lowered economic growth … Contractionary fiscal policy at the height of the crisis contributed to this enduring decline in both actual and potential output …
And the familiar refrain:
By lowering GDP permanently, fiscal consolidation increased the long-run debt burden rather than reducing it (as was the aim) …
In an BI earlier article by the same BI journalist (November 29. 2018) – Austerity has measurably damaged Europe: here is the statistical evidence – summarises the Institute of International Finance findings.
The key point is that:
For conservatives, fiscal “austerity” was the answer – limiting debt, deficits, and consequently government spending, in order to put the economy on a sound basis for future growth.
The left, by contrast, argued that fiscal spending was the solution – using the government to supply the investment money that disappeared in the private markets during the crash, thus priming the pump (but at the risk of funding it with more debt).
We now know, categorically, which view is correct, even though Modern Monetary Theory (MMT) is a more sophisticated version of this representation of the “left” here, given that the last qualification “at the risk of funding it with more debt” is a non-sequitur.
But there is no nuance at all in the conclusion that those who opposed the stimulative fiscal activism were part of the problem.
That includes: most academic macroeconomists, the IMF, the World Bank, the OECD – most of whom have subsequently tried to reinvent themselves as supporting some stimulus etc or using terms such as “growth friendly austerity” (which of-course doesn’t exist).
What these BI articles are highlighting is the essential stupidity of macroeconomic policy conduct in this neoliberal era that the core MMT group have been exposing for more than 25 years.
It is good that the mainstream media is starting to catch on – but, what took them so long!
So there you have it.
A deliberate choice to subjugate economic prosperity and the well-being of people (jobs, incomes, savings, etc) to an adherence to an ideology that purposely redistributes real resources and incomes to the top end of the distribution and provides lucrative paths for European Commission executives to move between these ‘political’ roles into highly paid banking and related jobs.
A total neoliberal disgrace in other words.
Which then leads one to question the sanity of the Europhile Left who dream on about reforming this nightmare.
And I noted last night a Tweet from one of those attention-seeking characters feigning outrage that Thomas Fazi and I would dare advocate Britain leaving the European Union and demanding my core MMT colleagues answer his question as to whether they supported our position.
It drew no response. I urge all those interested in MMT to ignore these facile attempts to create controversy and divide-and-conquer.
MMT is on a roll at present and awareness of our work is growing and seeping into the mainstream media as these BI articles attest.
Those economists left behind (like this attention-seeker) are feeling a bit lost and stupid. Ignore them.
Call for financial assistance to make the MMT University project a reality
I am in the process of setting up a 501(c)(3) organisation under US law, which will serve as a funding vehicle for the MMT Education project – MMT University – that I hope to launch early-to-mid 2019.
For equity reasons, I plan to offer all the tuition and material (bar the texts) for free to ensure everyone can participate irrespective of personal financial circumstance.
Even if I was to charge some fees the project would need additional financial support to ensure it will be sustainable.
So to make it work I am currently seeking sponsors for this venture.
The 501(c)(3) funding structure means you can contribute to the not-for-profit organisation (which will be at arm’s length to the not-for-profit educational venture) in the knowledge that your support will not be publicly known.
Alternatively, if you wish to have your support for the venture publicly acknowledged there will information presented on the Home Page of the MMT University to acknowledge that funding.
To ensure the project has longevity I am hoping to obtain some long-term support proposals.
At present, I estimate I will need about $A150k per year.
Note that most of these funds will support an administrative support staff (1 person fractional), data charges, and video editing and design staff (as needed).
I will personally take no payment for the work I am putting into the project nor will other key Modern Monetary Theory (MMT) academics, who have agreed to help in the educational program.
So I cannot do this without sufficient support. My research group does not have the financial capacity to support this venture.
I also do not wish to place advertisements on my blog posts.
You will be contributing to a progressive venture.
Please E-mail me if you can help.
I have some funding pledges already but I am not near the target yet.
That is enough for today!
(c) Copyright 2019 William Mitchell. All Rights Reserved.