British House of Lords inquiry into the Bank of England’s performance is a confusing array of contrary notions
On November 27, 2023, the Economic Affairs Committee of the British House of Lords completed…
Today’s blog post is a draft for another deadline I have this week, this time writing for a European publication on the state of affairs in the Eurozone. I have four major pieces of work to finalise this week so, as in yesterday, I am using this time to progress those goals. For many regular readers it will be nothing new. But, putting the arguments together in this way might just provide some different angles for people who haven’t thought about things in this way before. Regular transmission will resume on Thursday (probably).
Tomorrow morning (early for me) and tonight (European time), I am presenting a seminar on the ‘The Eurozone and its Current Political and Economic Crisis’ – for the Helle Panke organisation in Berlin.
You can register via this link – Information.
The seminar will held on Tuesday, July 14 at 21:00 Berlin time (Wednesday, July 15 at 5:00 Melbourne time) and run for around 90 minutes with questions.
A brief description of the talk is as follows:
The Eurozone was the product of a long struggle by neoliberals to reconfigure European states in order to redistribute income away from workers. Now the Union finds itself in its second major crisis within a decade. Not only has it entered a major recession, but Britain, one of the largest EU economies, is threatening with a hard Brexit. There is neither political nor economic unity within the EU, which is being glossed over by mainstream media. Bill Mitchell analyses the current crisis, its impact, and what lies in store for EU citizens.
Thanks to Mathew Rose and the Halle Panke team for their help in making this possible. I would rather be in Berlin doing the presentation in person but given current circumstances this is the next best thing.
While the material that follows is written for a major European publication, I will obviously traverse this terrain in my talk.
Governments all around the world are now caught in an ideological bind of their own making. This is no more apparent than among the 19 Member States of the Economic and Monetary Union.
For several decades now, governments courted the prognostications of mainstream economists who preached the religious message of austerity. Like all snake-oil evangelists their purpose was to enrich a few and undermine the fortunes of the many.
Economists told their political masters that fiscal deficits are dangerous and likely to trigger accelerating inflation.
They claimed that government borrowing would not only drive up interest rates and undermine productive investment opportunities by private firms, but, would also enslave the future generations – the ‘grand kids’ – with onerous tax obligations as they were forced to ‘pay the debt back’.
Morality themes overlaid the predictions – the boomers wrecking their children’s futures. Living beyond our means. Profligacy. And the rest of it.
When Japan ran against the tide after their momentous commercial property market collapse in 1991, the same economists regularly predicted the government would slide into insolvency as the bond markets lost confidence as the deficits rose.
Then the Bank of Japan started its journey accumulating increasing proportions of Japanese government debt, the predictions morphed towards impending hyperinflation.
The IMF started to berate governments about the need for ‘growth friendly austerity’. People were bullied into believing that if the government hacks into spending, growth will follow.
The abandonment of the cardinal rule of macroeconomics – the first thing you learn – that spending equals output equals income and drives employment – was justified through an elaborate chicanery – so-called Ricardian Equivalence notions – that basically say if the government cuts its deficit, people think their future taxes will be lower and so they don’t have to save as much now to pay for the future obligations. Thus, freed from the fear of higher taxes, they will go on a spending frenzy now, which offsets the public spending cuts. All good!
Except the theory fails to explain reality. The evidence supports the exact opposite dynamic, which is unsurprising.
Why would people start spending up big as their jobs were disappearing? Why would firms start investment in new productive capital as they turned off machines and left equipment idle because their sales were drying up?
These notions expose the idiocy of mainstream economics. It is dressed up in fancy terms like ‘optimal micro founded principles’ or ‘infinitely lived maximising agents’ and they write long equations (which proper mathematicians tend to laugh at), but at the core is a rotten set of interrelated lies.
A set of propositions that bear no application to how the real world economic institutions work.
A critic once said that mainstream economics is all about ‘counting the number of angels on the top of a pinhead’.
None of the substantive predictions provided by mainstream economists have come to fruition. But the austerity that was driven by these faulty predictions created stagnation and millions of people went without work as a result.
The ‘trickle down’ redistribution of national income towards profits and higher income earners just increased inequality and poverty rates.
Interest rates continued to fall and now governments are borrowing at negative interest rates over long horizons despite holding much larger debt piles.
Inflation has been lower or in decline.
Public infrastructure is degraded.
The Global Financial Crisis, created in part by the deregulation and a lack of government oversight that economists had pressured governments to adopt, exacerbated the problems caused by neoliberalism.
In the aftermath, nations have endured elevated unemployment and underemployment, stagnant wages growth, rising inequality, tepid economic growth rates, failing public infrastructure.
After decades of running policy along these lines, nations around the world thus entered the pandemic in various states of bad shape.
We will be wiser of its causes in due course but the evidence is mounting that our disregard for the natural environment that we plunder for material gain will be a prominent explanation.
But the social and economic consequences are obvious and have forced governments to dramatically alter course with respect to fiscal and monetary policy.
The dissonance this has created, given the ideological views they held going into the crisis, is massive.
It is now obvious that Capitalism is on life support and the public sector and fiscal policy is the only thing keeping it from death’s door.
As a result, governments, with the neoliberalism infestation firmly embedded in their DNA, are now shifting uncomfortably, as they are forced to abandon their ‘sound finance’ precepts as millions of jobs disappear and the degraded health systems become the last line of defense against the deadly virus.
While politicians initially talked about a V-shaped episode, a brief hibernation followed by a robust return to ‘normality’, it is now obvious as ‘second waves’ hit, that much larger fiscal support will have to be provided for the decade or more ahead to nurse the economies through this disaster.
In other words, everything these governments have been telling us up until now has been turned on its head.
And the progressive political parties have also been left in no-person’s land. They also embraced the neoliberal mantras fed to them by the mainstream economists, and, in doing so, have so alienated their core constituents, that they are in decline in most nations.
Some traditional progressive parties are now unelectable as a consequence of their dallying with the neoliberal devil.
How this tension within government plays out will determine our futures.
Nowhere better exemplifies this tension than the Eurozone, which is the most advanced expression of neoliberalism that we have.
The politicians of the 1980s, aided and abetted by mainstream economics, created a monstrosity in the form of the currency union.
All the prior studies of potential economic and monetary integration in Europe like the 1970 Werner Report and the 1977 MacDougall Report had concluded that the only viable architecture for a common currency would require a substantial ‘federal’ fiscal capacity, legitimised politically, by a properly constituted federal parliament.
MacDouggall intimated that there would be little prospect of such an architecture being agreed upon, given the historical and cultural differences within Europe, particularly expressed by the long-standing Franco-German rivalry.
However, as neoliberalism emerged in the 1970s and became dominant in the 1980s, the agenda changed, and Jacques Delors, infested with Monetarist zeal, was able to push through a proposal that completely disregarded all the wisdom that had gone before him that had worked against a common currency.
When the European nations sanctioned the Maastricht Treaty, the fortunes for Europe turned for the worst.
They agreed on a dysfunctional architecture that no working federal system, such as Australia, the US, and Canada, had ever contemplated.
And because they left the fiscal capacity at the Member State level, the historical enmities and suspicions, particularly the north-south divisions, then led them to introduce unworkable fiscal rules that put that capacity in a straitjacket and left the nations exposed to global economic fluctuations.
Further the currency issuer, the European Central Bank, was also constrained by Treaty restrictions on government bail outs.
The GFC demonstrated how unworkable the system was.
While the European Commission held, more or less, tightly to their enforcement of the fiscal rules, although that enforcement was applied selectively, the ECB embarked on a strategy of ‘funding’ Member States (except Greece) deficits through the back door using the cover of quantitative easing and liquidity operations.
It was a charade. Everyone knows that the ECB was buying government debt in multiples more than was necessary to manage liquidity in the markets. Everyone knew they were keeping the government bond spreads low so that Member State governments could remain solvent.
The bond markets knew they could safely buy the bonds that were being issued by governments facing adverse economic circumstances and off-load them off to the ECB in the secondary market at a tidy profit.
And so Italy avoided insolvency in 2012, as did other Member State governments subsequently.
But it was nudge-nudge, wink-wink stuff.
The ECB was violating the terms of the Treaties – despite a European Court of Justice saying otherwise – to keep the system afloat.
In other words, the only way the common currency survived the GFC was through the unlawful conduct of its main monetary institution. And the elites looked the other way because they knew if the Treaty was strictly applied then the system would collapse.
This tension is now being pushed to further extremes.
Europe has several challenges all of which go to the heart of the existence of its institutional arrangements:
1. The pandemic.
3. Poland (and Hungary).
The reelection of Andrzej Duda directly challenges the authority of the European Commission and it remains to be seen how that plays out. The Commission has already been seriously compromised by human rights abuses in the east of its ‘realm’ and looked the other way. How long it can do that as the new government in Poland ups the ante will be the question.
Brexit will clearly damage the European economy despite all the posturing to the contrary by Michel Barnier and his cohort in Europe and the Remainers in Britain.
The departure of Britain favours that nation and leaves a huge hole in the European economy. Barnier’s bluff has not worked and more and more people are working that out. We will see how that pans out in the coming years.
But it is the pandemic that threatens the architecture of Europe the most.
This time, the European Commission has been forced to relax the fiscal rules to allow Member States to salvage something from the devastation the virus has wrought. So, for a time, the tyranny of the Excessive Deficit Mechanism is being held in abeyance, and, the way is clear for Member States to spend up.
The evidence from the March-quarter national accounts shows that while the declines in GDP “were the sharpest declines observed since time series started in 1995” only the build up of inventories contributed to growth.
In other words, in a period where the private sectors of the Member States were in melt down as a result of the lockdowns and it was obvious that GDP would take a huge hit, the sector that could have stepped in to the breach – I rephrase – should have stepped in to support employment and incomes – was absent.
So, even though the fiscal rules have been relaxed, governments appear to be reluctant to increase their spending, so hard-wired is the austerity mentality.
But the scale of the downturn will cause fiscal deficits to rise well beyond the thresholds allowed for under the Stability and Growth Pact.
Which raises the question.
How long will the European Commission wait before they start reasserting the neoliberal line and push Member States into austerity consolidation under the aegis of the Excessive Deficit Mechanism?
And then we have the ECB, which has been buying large quantities of government bonds for years under its various Public Asset Purchasing Programs, and, lets say it as it is, funding the Member State deficits and keeping them solvent.
As a result of the pandemic, it introduced an additional bond buying program – the Pandemic emergency purchase programme (PEPP) – which has seen it purchase billions and violate proportionality expressed in the capital keys (the nations’ individual contribution to ECB capital).
I am not criticising the ECB for doing that. They know there is no choice. Either fund the deficits or allow nations to go broke and see the disintegration of the common currency.
The point is that the scale of this crisis is so large that the fiscal rules cannot be reimposed and the ECB cannot taper its PEPP or other purchasing programs.
And these initiatives are not delivering prosperity. Their function is to stop insolvency. That is the priority of the European monetary system – to defend the interests of capital at the obvious expense of workers.
The Eurozone architecture can never deliver sustainable and widespread prosperity. It can keep nations solvent but that is all. And it has to either disregard or defy the legal structure of the arrangements to achieve that.
It is a system that survives because the key institutions break the law!
The tension, now, is that this sort of law-breaking, life-support will have to endure for years. How long can the patience of the neoliberal elites endure?
When will they start demanding a renewed bout of fiscal austerity? How long will they let government debt levels rise? How long will the ECB continue to buy unlimited quantities of debt from government and the corporate sector?
These sorts of questions, in general, are providing tension for all governments. But they are especially relevant for Europe because it went further than most into the neoliberal gutter.
It is clear we are amidst a paradigm shift in macroeconomic thinking as Modern Monetary Theory (MMT) exposes the fallacies of the mainstream approach. As that shift continues to gather pace, the prospect of a return to neoliberal policies becomes less likely.
And that means the architecture of the Eurozone becomes unjustifiable and nations will see the benefits of breaking free and achieving a greater degree of self-reliance without the fear of flying squads of mindless European Commission technocrats descending on their treasuries bullying them into cutting spending that helps the most disadvantaged.
That is my draft.
I will edit it down later tonight to meet the requirements of the publication.
That is enough for today!
(c) Copyright 2020 William Mitchell. All Rights Reserved.