Eurozone 2020. Don’t mention the War!

I guess I cannot avoid commenting on the European Commission’s recently released (February 5, 2020) – Economic governance review – which, allegedly, “seeks to assess how effective the economic surveillance framework has been in achieving three key objectives: ensuring sustainable government finances and economic growth, as well as avoiding macroeconomic imbalances; … promoting convergence in Member States’ economic performance.” The short answer is that the framework has failed on all fronts. The Member State fiscal situations are always mostly teetering on the edge of insolvency and only the ECB has been bailing them out; macroeconomic imbalances that really matter, such as the on-going illegal German external surpluses persist, and divergence is the Eurozone norm. Why? Another simple answer: because the architecture of the currency union is deeply flawed and biases the economies to crisis and makes them vulnerable, in an existential sense, to fluctuations in global activity. Why would they have done that? Answer: the triumph of neoliberal ideology over reason.

In this age of PC, I imagine some out there will pass negative judgement on the following video.

But it establishes where the title of today’s blog post came from and provides a tangential clue to modern day problems in the Eurozone.

And, yes, when I watched it again after many years I still laughed.

Comedy is a bit like that – operating a little below the PC veneer.

The official line

As in all these EU spin exercises, we read that:

… the single currency … is one of Europe’s most significant and tangible achievements … [which] … provides a basis for our economies to become more integrated with a view to supporting greater stability and prosperity

Except it hasn’t done that at all.

Why is France in chaos, riven with social protests, if all is well?

Here is convergence in action.

It shows real GDP indexes (March 2008 = 100) for four Eurozone nations up to the September-quarter 2019 (latest data).

Germany and France are in a different world compared to Italy and Greece, the latter who are still operating with economies below the size they entered the GFC with.

Italy is 5 per cent smaller and Greece is 22.3 per cent smaller.

No convergence is likely.

Upon that score, the monetary union fails.

Further, the Eurozone inflation rate is nowhere near the ECB’S price stability target, despite the massive build up of government bonds on the ECB’s balance sheet, all in the name of trying to push the inflation up to that price stability target.

So the framework fails in that respect as well.

Please read my blog posts (among others):

1. ECB confirms monetary policy has run its course – Part 1 (September 17, 2019).

2. ECB confirms monetary policy has run its course – Part 2 (September 18, 2019).

The European Commission then claim that the “unique” design of the EMU reflected the need to prevent “free-riding behaviour leading to excessive government deficits and debt levels”, which just is another way of saying none of the original entrants trusted each other nor shared a deep commitment to the joint exercise.

The Germans, in particular, were really forced into allowing Italy into the union, because if they had have rejected them on the failure to meet the public debt thresholds during the so-called ‘convergence process’, they would also have had to reject entry to Belgium, which was impossible.

I covered that in detail in my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015).

But the Commission goes the next step … too far:

This, in turn, would threaten price stability and might ultimately force the central bank to use monetary policy to finance budget deficits.

Which is where Basil Fawlty would have had a field day!

In my 2015 book, I clearly trace the way the ECB saved several Member States from insolvency in 2010, when it introduced the Securities Markets Program (SMB), which evolved into the current QE interventions.

The build up of public debt on the ECB’s balance sheet is, in, ‘look the other way’ language, claimed to reflect normal liquidity operations.

But the reality is that the ECB has been funding “budget deficits” throughout the Eurozone for years and breaking the spirit of the Treaty.

Yes, the purchases have been in the secondary bond markets, which then leads to the denialists claiming there is no ‘direct’ financing going on.

Tell that to the dealers in the primary markets who know they can offload debt at a handy capital gain to the ECB.

Smoke and mirrors is the expression!

Hence the title of the post ‘Don’t mention the War’!

So, now the Commission is seeking as part of “a new political cycle … to assess the effectiveness of the current framework for economic and fiscal surveillance …”

They recognise that the “economic context has materially evolved” since the Stability and Growth Pact was supplemented by the Fiscal Compact (the “six-pack and two-pack” changes which accentuated the austerity).

They admit that the EMU is stuck in a weak growth state with low interest rates, but, refuse to acknowledge that it was the SGP and the subsequent changes that have made it virtually impossible for the union to perform in any other way.

They further acknowledge that a climate response “will require significant additional private and public investment over a sustained period of time.”

But then the logic fails.

1. Debt sustainability remains a focus because the Member States all face credit risk because they don’t use their own currency.

2. The risk is acute in the EMU because “governments with very different debt levels share the same currency and the central bank cannot act as a lender of last resort to governments”.

3. But monetary policy is now ineffective so expansionary fiscal policy has to be considered.

4. But because the Member States use a foreign currency the bond markets become involved and we are back to debt sustainability concerns.

5. And climate risks need big funding.

That is my 5-point impossibility structure – that is the Eurozone.

As long as they restrict national government deficits to austerity levels, the mess will continue and they will not be able to respond properly to the climate challenge.

In terms of the debt sustainability discussion, the Commission tries to make virtue that debt-to-GDP levels in most Eurozone nations are “far below that of the US or Japan”.

And they presumably write that sort of stuff with a straight face!

The monetary systems of Japan and the US are not comparable to the EMU, where no national government has currency sovereignty.

It is just a vacuous comparison.

And there is no acknowledgement that the “fiscal consolidation” that they revere has been directly responsible for the stagnating growth and zero interest rates (not to mention the negative long-term bond yields in some nations) that they document.

No connection is drawn.

Don’t mention the war!

Further, they acknowledge that despite earlier claiming the euro was about convergence, the reality is that public debt levels “remain around or (well) above 100% of GDP in some others, accounting for a large share of euro area GDP” and only “around half of the Member States” are below the 60 per cent threshold specified by the SGP.

And debt ratios “continued to rise”, which has “increased divergences between debt levels in the EU”.

Growth rates have diverged.

Debt levels have diverged.

Deficit outcomes have diverged “despite favourable economic outcomes”.

Unemployment rates have diverged.

And so on.

But then the analysis shows how much the whole governence, surveillance and enforcement structure surrounding the fiscal rules has failed:

Nonetheless, Member States’ fiscal policies have remained largely pro-cyclical … remained largely pro-cyclical during the crisis as consolidation took place in a context of heightened market pressure at a moment of very low growth or even contraction in economic activity …

This contributed to the weak economic and employment performance in that period, even if it aimed at bringing public finances on a sustainable path and at regaining market confidence.

Which means that fiscal policy was forced by dint of the reliance on private bond markets (due to the surrender of currency sovereignty) to make the consequences of the private spending collapse worse than would have been the case if the Member States had not have surrendered their currency.

This fact is a basis denouncement of the whole architecture and surrounding rules enforcement of the Eurozone.

It is why I have always believed the system would fail to deliver prosperity.

It is why there is an in-built bias to austerity and stagnation.

It is why it should be dissolved.

It is a system that prioritises the rule outcomes over attainment of human potential.

It requires human suffering to appease bond markets.

In nations which issue their own currency, the bond markets have to work within the terms set by the government.

In the Eurozone, the bond markets drive governments.

The European Commission is also forced to admit that:

… the current fiscal framework did not prevent a decline in the level of public investment during periods of fiscal consolidation, nor did it make public finances more growth-friendly.

And the UN Special Rapporteur (2014-2020) on Extreme Poverty and Human Rights, Philip Alston has just released his evaluation of – Spain – (February 7, 2019), which was compiled during a visit between January 27, 2020 and February 7, 2020.

I will consider that in detail another day but the summary results are terrible and an absolute condemnation of the Eurozone system:

1. “Spain is utterly failing people in poverty, whose situation now ranks among the worst in the EU”.

2. “The post-recession recovery has left many behind, with economic policies benefiting corporations and the wealthy, while less privileged groups suffer fragmented public services that were severely curtailed after 2008 and never restored.”

3. “26.1 percent of people in Spain, and 29.5 percent of children, were at risk of poverty or social exclusion in 2018.”

4. “Deep widespread poverty and high unemployment, a housing crisis of stunning proportions, a completely inadequate social protection system that leaves large numbers of people in poverty by design, a segregated and increasingly anachronistic education system, a fiscal system that provides far more benefits to the wealthy than the poor, and an entrenched bureaucratic mentality in many parts of the government that values formalistic procedures over the well-being of people.”

5. “companies are paying half as much in taxes as they did before the crisis despite strong profits.”

6. “Neighborhoods of concentrated poverty where families raise children with a dearth of state services, health clinics, employment centers, security, paved roads or even legal electricity.”

7. “Poverty is ultimately a political choice, and governments can, if they wish, opt to overcome it.”



Have the EU boffins been down to some of the Spanish villages where the UN visit found “far worse conditions than a refugee camp”.

I doubt it. Brussels is too comfy for that lot.

All they can say is that:

… the six-pack and two-pack reform … have strengthened the framework for economic surveillance in the EU and euro area and guided Member States in achieving their economic and fiscal policy objectives … The strengthened surveillance framework has also fostered convergence in the economic performance of Member States …

Anyone who does not condemn this charade should question their own values.

The progressive response – disappointing to say the least

The best the “Socialists and Democrats in the European Parliament” can come up with is that the review provides “a much-needed opportunity for improving the EU’s fiscal rules by introducing a Golden Rule for sustainable investments.” (Source).

One European Parliamentarian said that:

The European Green Deal has the potential to transform Europe into a sustainable and inclusive society. To make our Green Deal ambitions a reality, we must now put significant money behind it. According to Commission estimates, an additional 260 billion Euros is needed every year to meet our Paris Climate goals. It is high time we up-date our budget rules to enable member states to invest in a good future for all.

I do not disagree with the sentiment or the focus on environmental sustainability.

The problem is that while the intention is sound, the reasoning remains flawed as long as the Member States use a foreign currency.

Further, it is disappointing that the so-called progressive forces in European politics are content to operate within the flawed monetary architecture of the EMU and adopt a position that the only change required is to introduce a ‘golden rule’, without, seemingly, understanding its drawbacks.

The talk of ‘golden rules’ goes back years. It is hardly an innovative suggestion and just exemplifies the crippingly slow speed at which debates in the EU unfold.

Golden Rules are often proposed by economists who want to appear progressive, but, ultimately, still work within the so-called orthodox ‘government budget constraint framework’, which falsely asserts that spending by a currency-issuing government is financially constrained.

These economists, however, do argue that in some cases, it is more fruitful to concentrate on stimulating economic growth, than it is to cut government deficits.

In this regard, they argue that public borrowing should be use to ‘finance’ capital expenditures and deficits incurred as a result of such investment in public infrastructure and other public works, are tolerated as long as they ‘pay for themselves’ through rates of return on infrastructure, for example.

The latter point has then dove-tailed into the ‘user pays’ mentality, where essential public infrastructure is provided at escalating charges as part of the fiction that the government is like a business and has to receive a commercial return on what should be seen as delivering social returns.

The ‘Golden Rule’, typically specifies that the recurrent fiscal balance should be zero and the capital account (investment) can be in deficit and covered with borrowing.

Some proponents also restrict such investments to times when interest ratesa are low, further adding to the fiction by claiming this makes government investment cheaper.

Of course, the ‘cost’ of the investment is embodied in the real resources that are consumed in the process of the policy execution.

For a given project, that ‘cost’ is invariant to the yields that might be offered on public debt.

The ‘Golden Rule’ was already recognised by the classical economists in their discussions of public finance. So even within an orthodox public finance model, their is some flexibility for fiscal deficits as long as they reflect spending that will ‘pay for itself’ through rates of return on infrastructure, for example.

Without such a ‘rule’, the application of the European fiscal rules, biases public investment expenditure toward being pro-cyclical – cutting spending when non-government activity is declining – to meet pre-conceived fiscal balance targets.

This is because in political terms, it is much easier to cut capital expenditure than it is to cut current expenditure, the latter being more directly noticeable for voters on a daily basis (pensions etc).

But the cuts to public capital expenditure not only undermine current economic activity and pushes up unemployment, but, also undermines the future growth potential by slowing the rate of capital accumulation.

It also reduces private investment opportunities, which typical leverage off well-built and maintained public infrastructure.

Responsible fiscal policy requires that stimulus/contraction cycles be counter-cyclical – to offset non-government spending fluctuations in either direction.

So within the neo-liberal fiscal conservatism, the introduction of a ‘Golden Rule’ might remove the bias against public investment.

Proponents of the Golden Rule also appeal to its equity advantages whereby the public expenditure is steadily financed over time as the debt is repaid, which means there is a better matching of who receives the benefits from the services flowing from the infrastructure and who pays for it.

Both arguments, within the flawed overall logic, are reasonable.

But, once we grasp the essentials of Modern Monetary Theory (MMT), then we know that this claimed matching of costs and benefits overtime is somewhat misleading.

The true ‘cost’ of providing public infrastructure is not the flow of financial outlays (including interest payments) over time but the real resources that are deployed to construct and maintain the infrastructure.

For most projects, the cost is mostly incurred upfront in the construction phase, which means the current or near generations still end up bearing most of the costs.

However, there are many problems with the concept of the ‘Golden Rule’.

When we get into demarcation issues as to what should be classified as net investment spending, the ‘Golden Rule’ essentially breaks down.

While the split between current and capital is normally defined as some time period in which the benefits of the spending are exhausted (less than or more than 12 months usually), it is more sensible to think of capital expenditure as that which improves the potential productive capacity of the economy.

A progressive approach should conceive of productivity much more broadly than the narrow concept that mainstream economists deploy.

Productivity is not just the contribution an input makes to the private profit bottom line.

In this context, one could make a strong case to include much of the recurrent spending on health, education, research and development along with spending on bridges, transport and other physical capital as capital items.

For example, the public investment in the education of its population delivers massive social and private returns over the person’s lifetime. These returns are not exhausted within 12 months.

If education and health expenditure on teachers and nurses and libraries and books, for example, are considered as current spending, then the ‘Golden Rule’ biases total public spending against it in favour of ‘building bridges’, which might be a poor use of the society’s real resources.

The bias towards physical infrastructure and financial assets is reflected in what governments put in their so-called financial statements – specifically their balance sheets or statements of financial position.

I explain that point in detail in this blog post – The non-austerity British Labour party and reality – Part 2 (September 29, 2015).

The point is that current definitions of capital items would bias the application of the ‘Golden Rule’ to be too restrictive in terms of advancing general well-being.

The other major problem with this idea in relation to the Eurozone Member States, is that they would remain dependent on private bond markets to fund the deficits arising from the investment in public infrastructure.

All 19 Member States carry credit risk as a result of using a foreign currency. In that sense, they are vulnerable to shifts in bond market sentiment, which could choke their capacity, relative to revenue, to continue servicing the debt obligations and provide first-class public services.

Imagine in a recession as taxation revenue declines, the recurrent fiscal position becomes stretched and austerity would be invoked to bring the two fiscal sides back into balance.

This would undermine grow th even further and increase the risk that the government would be unable to meet it debt obligations.

And then the crisis deepens.



Nothing since the GFC has convinced me that the EMU can be reformed in any meaningful way to resolve the inherent flaws in its architecture, which reflect the neoliberal bias which set the system up in the first place.

The propaganda machine from Brussels continues to pump out these elaborate technical discussion documents that essentially mean more of the same.

And as the UN Special Rapporteur noted the Eurozone maintains a “fiscal system that provides far more benefits to the wealthy than the poor”.

That is why it was designed in this way and why the elites will not broach any serious reform.

Why should they? They are doing very well out of the disaster.

It should be dissolved. And nations such as Italy and Spain which are unable to provide for their own citizens in any reasonable way should unilaterally leave and restore their own currencies.

As soon as possible.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.

This Post Has 17 Comments

  1. Dear Bill

    I’m afraid I have to ask you to desist from “telling it as it is” about the EU; especially about the EU’s barefaced lying to its citizens.

    Reading blogs like this is endangering my health. I can feel my blood-pressure rising as I become steadily more and more enraged. There’s no other word for it than pure rage.

    Blogs like this should carry a Health Warning:- “members of the public are hereby warned that they read this blog at their own risk; the author accepts no liability for any damage to their sanity or harm to their coronary arteries which may result from reading it.”

    Josef Goebbels would have been envious of the EU technocracy’s stunning virtuosity in the deployment of “the big lie” – surpassing even, in its insidious suavity, his own and his boss’s performances.

    Anyone who gives this rubbish even the minutest credence deserves all that’s coming to them.

  2. Bill, you neglected to mention Poland and Hungary who are very pissed off, fronted by people we perhaps should not really like (and I don’t). I am thinking of Orban and Morawiecki, the latter supposedly an economist and historian. There is also a building groundswell of rejection of neoliberalism, at least in terms of austerity, in certain sectors of the EU population. However, as with all things EU, no tsunami yet. Maybe never, but I am somewhat optimistic. The speed of change in the EU does not surprise me, as it happens also in the US in certain circumstances. Slower in some and quicker in others. Though the former is more common than the latter.

    It is worth noting that the EU establishment has seemingly learned nothing from history, as today’s circumstances leading to social unrest are not unlike those of around a hundred years ago, which culminated, in 1933, in a kind of victory for the critics and captitulation by the establishment. Then, as now, a resistance to change. We certainly don’t need this history to repeat itself in any respect.

  3. @Robert, yes it does make me angry too, but I read past the Euro stuff. There’s so much stimulating analysis here. I shall have to read again to pick out the bits I need to retain. I’ve only been reading this blog for a year. Lots to catch up on.

  4. i am not an economist, i am not educated really, hated school… but i an of average intelligence. it feel like i am missing out on something really important when i cannot understand these things. is there any possibility of remembering us, the great unwashed, when these blogs or pieces of information are published. just a very simple conclusion or anything you have got the time to do would be appreciated. i know you are busy and important and once you reach these heights it is difficult to communicate with people such as i. i can understand that, but i need to understand the basics of what you all take for granted

    just saying, no point in communicating anything if not the way that you, yoirself see it….but communication is the key

    many regards and thanks
    margaret chorley

  5. Why is France in chaos, riven with social protests, if all is well?

    And by the way, I think our (UK) mainstream media must be doing its best to help keep the show on the road, because we hear or see very little of the chaos in France from that source. For that we have to go to “alternative” media sources (accused of being “fake news” when it does not suit the powers that be).

  6. Dear Margaret. I have an economics degree and I have to concentrate hard sometimes to fully understand Bill’s blogs. I suggest that you read someone less academic. I’m not aware of a blog which does this though. We don’t want you to be put off. Reclaiming the State is very readable and I would recommend that.

  7. Margaret, you may be doing yourself a disservice. However, I understand your dilemma. Not all Bill’s blog posts are alike. One that you may find more accessible is one he wrote in November of 2013. It is entitled “How to discuss Modern Monetary Theory”. I recommend that you scroll down until you come to the first table. There you will find a direct comparison of the mainstream neoliberal position and the MMT position. Each cell of the table is straightforward. I hope you will find it reasonably accessible. Interpretation of the table is: every cell in the neoliberal position column says something about the national economic system that is false, while every cell in the MMT column says something true about how the national economic system works. MMT is about national economics, not the economics of firms and households, which are very different. The second table builds on the first. I hope this helps.

  8. Margaret, I just remembered an article that I think is relatively straightforward and hopefully useful for you and deals with a subject I didn’t mention; and it is Beardley Ruml’s “Taxes for Revenue are Obsolete” published in American Affairs in January 1946. It was written during the interwar period when the national economic system is like it is today. In the article, Ruml sets out in stark form what functions taxes perform, and government spending is not one of them.

    So, if someone asks, How are you gong to pay for it?, this shows that they are either being deliberately misleading or do not understand how the national economic system works. As Ruml understood, the national government, unlike individual states such as New York or UK councils, the national government has no financial constraints, though it does face resource contraints like people or materials. If you search for the title, you should obtain the pdf.

  9. “Poverty is ultimately a political choice, and governments can, if they wish, opt to overcome it,” and so has Bill been saying for a long, long time. The original Golden Rule, laid out in many religious traditions, would summon all governments to overcome poverty. What gives economists the temerity to create a new Golden Rule that complicates or inhibits this simple application of the original rule, doing unto others what you would have done to you–in this case, being lifted out of crippling poverty? What would a developed society look like if it operated according to the original Golden Rule? Edward Bellamy’s compelling explorations of this question can be found in his two most popular novels (freely accessible on the web): “Looking Backward” and “Equality.” Though written toward the close of the 19th Century, these works are even more relevant and revealing in the second Gilded Age than they were in the first.

  10. Margaret, the following is a 1-paragraph description of a national economy that I believe conveys the fundamental essence of what Bill is saying. I hope I’m not being incorrect or misleading in trying to boil this down into something short but logically consistent.

    GDP is the measure of our productive economy. GDP is the sum of household, business and government spending (and likewise the income of those sectors equals that spending because all spending is another’s income). Our economy depends on household spending (2/3 of GDP). That spending is limited by household income (which comes only from those three sectors). Business provides that income to the extent demand (business opportunity) exists, and government provides the rest (by way of bookkeeping entries to household bank accounts). All that’s important to the economy is maintaining this flow, and with a fiat currency (whose value, by definition, depends ONLY on currency-users perception), there are no limits other than that perception.

  11. France is well into strife this year. The Austerity is causing systematic collapse from top to bottom. You see this from the unemployment rate (conceals large underemployment and hidden unemployment), then the over-qualification of the workforce sitting on jobs they have to keep because there is not ladder to move up, the stagnant wages, people in technical backgrounds that would otherwise pay well are in distress too.
    To illustrate this point ‘workforce is in protest from top to bottom’. You know things are bad when doctors protest in mass resignation about 1200 across France:

  12. Learning MMT:
    I like, but MMT is a small part of what they write about. If you try to read it all it could take more time than you have.
    Brian Romanchuk at is writing a description of MMT aimed at a more general public, you might see what you can use in his blog. finished an 8-part series on the history of paper money, which is also fiat money, which is the money that MMT is concerned with.
    And even though bill is very busy, a solid question here will get answers from the commenters.

  13. Margaret. This blogs addresses many points. I always go to the end, the conclusion and skip many parts that reference minute data. But you’re right, sometimes the blogs and informative and even entertaining. L. Randall has a nice book or two that serve as an introduction. Check out the primer on the web site NEP, New Economic Perspectives. Read what they have there. I think the fundamentals of MMT are straight forward, though it will require a different perspective.

  14. Hi Margaret. I can understand what you are saying. I had no desire to be an economist. All I wanted was to understand how the money system worked. Bill does help with that. Listen first to his, say, 6 minute YouTube clips. Over and over again. Then graduate to slightly longer YouTube clips and listen to those again and again. Don’t listen to anybody else because you will get confused. It has taken me years to understand it. It needn’t but MMT was very very new in those days. Why Bill? Well I am 81 now and I lived in a time where a government looked after its people and now it doesn’t. I just couldn’t understand why. But now Bill is virtually main stream. Just keep an open mind and don’t let anything cloud in the way.

  15. It’s a shame Neil Wilson deleted his internet presence. I found his MMT writings to be very readable and understandable for non-economically-qualified minds like mine.

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