The ECB is a major reason the Euro crisis is deepening

I notice that a speech made yesterday (November 8, 2011) in Berlin – Managing macroprudential and monetary policy – a challenge for central banks – by the President of the Deutsche Bundesbank, Jens Weidmann has excited the conservatives and revved them back into hyperinflationary mode. The problem is that the content that excited them the most is the familiar mainstream textbook obsession with budget deficits and inflation (through the even more obsessed German-lens). That means it is buttressed with misinformation about how monetary operations that accompany deficits actually work. It tells me that the European Central Bank which is the only institution in Europe that has the capacity to end the crisis is in fact a major reason the crisis is deepening.

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There is a great sense of denial in Europe

Over the last week or so I have been in Europe and talking to all sorts of people. In the streets the decay is clear and I am in a relatively rich part of Europe (Maastricht). Unsold properties are multiplying and the there are lots of shopping space vacant in the main centres. It is very apparent to me but when I ask people about this some express surprise – not having noticed it themselves. I concede that when you come here once a year you note the changes but the reality is fairly stark. If we put this anecdotal evidence together with the way in which the Euro bosses are behaving and the overall quality of the policy debate in Europe at present it is clear to me that there is a great sense of denial in Europe. Nowhere is this more apparent than in Germany. Their growth model has failed and must change. But it will be very difficult to achieve the sort of national awareness that will render that change possible. The Eurozone was always going to fall apart as a result of its basic design flaws from its inception. But the German strategy – which they consider to be a source of national pride – actually ensured that once the basic design flaws were exposed by the collapse of aggregate demand, things would be much worse than otherwise.

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Greece should default and exit the euro immediately

Regular readers will note that I have consistently advocated the abandonment of the Euro and especially the immediate exit of Greece, Spain, Portugal, Ireland and Italy to push things along. The basic design flaws in the ideologically-constructed monetary union were always going to bring it down. It wasn’t a matter of if but when. The when was always going to be the first major negative aggregate demand shock that the union experienced. Come 2008 we saw very starkly how quickly the region unravelled and now the situation is getting worse not better. Not many commentators agreed with me and most argued that with some tinkering and some harsh austerity the zone could rescue itself. The problem is basic though and has little to do with behaviour of the member states, although I will write tomorrow how the conduct of the Germans has exacerbated the crisis. It is clear that governments like Spain were more frugal than Germany’s government prior to the crisis and they now have 20 per cent unemployment and worse. As the crisis deepens though more commentators are now arguing for a Greek default and/or both default and exit. The sooner the southern states get out of the bind they are and free of the pernicious ideology of the EU/IMF/ECB troika the better. Tomorrow is not a day too soon.

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Europe continues to demonstrate it has no answers

Der Spiegel carried the story (May 6, 2011) – Greece Considers Exit from Euro Zone. I thought that if the story was true then Greek leadership must finally be coming to their senses. The reality is that the EMU bosses have once again stalled the judgement day and provided some soft relief for an economy that continues to deteriorate. Everyone knows what the problem is – the EMU doesn’t work and without a federal fiscal redistribution mechanism it will never be able to deliver prosperity. Every time an asymmetric demand shock hits the Eurozone, the weaker nations will fail. Trying to impose fiscal rules and austerity onto the EMU monetary system just makes matters worse. Greece should definitely leave the Eurozone. Life will be difficult then but the adjustment mechanisms that would then be available to the government (floating exchange rate and currency monopoly) are more people-friendly (capable of increasing jobs and income) than the way they are currently pursuing the problem (internal devaluation and demand contraction). Europe continues to demonstrate it has no answers worth considering.

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Europe is still pursuing the wrong goal

Europe has another … yes, yet another … solution. But we have to wait until June for it so be fully revealed. Meanwhile Portugal is about to go under. There are simmering stories emerging that the banking system in Europe is teetering despite there being silence on the viability of the banking system in Europe from the Euro bosses. Despite the decisions (or rather non-decisions) of the European Council last week – the intent is the same – fiscal consolidation including retrenchment of safety net benefits supplemented with further labour market deregulation which will further reduce living standards, especially for the poor. Their position is a denial of basic macroeconomic understanding and doesn’t address the inherent design flaws in the monetary union. I predict things will get worse. The political leaders in Europe have the wrong goal in mind (stubbornly saving the euro) and do not even have an effective solution to defend that goal, flawed as it is. The problem is that Europe is still pursuing the wrong goal.

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The Euro bosses ignore all the lessons

I was thinking about the recent European Council meeting today which was held in Brussels over the weekend. It is clear that the Eurozone bosses are choosing to ignore all the lessons that the current crisis has provided to them about the basic design flaws of their monetary system. They think the solution to their problems is to make it even harder for member governments to provide net spending to their economies at times of stress. They fail to articulate the most basic macroeconomic fact that confronts them – unemployment is rising across the zone and production generally is stagnant because there is not enough demand for sales of goods and services. If the private sector won’t provide that demand then the government sector has to given that they cannot rely on net exports to cure the deficiency. By deliberately restricting governments and effectively forcing them to engage in pro-cyclical fiscal responses the Euro bosses are not only prolonging the agony the citizens are facing but are also engaging in a self-defeating strategy. As we are seeing budget deficits are rising as austerity is imposed. The solution to the Eurozone problems is to disband the zone and restore individual currency sovereignty at the national level. It would be painful to do that but in the medium- to long-term it will be less painful than the trajectory they are following.

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Life in Europe – another day, another (futile) bailout

Last Wednesday (May 5, 2010) I wrote that Bailouts will not save the Eurozone in response to the miserable plan put forward to take the Greek government out of the bond markets for a period. Yesterday they announced a major ramping up of the credit line they are offering which is more characteristic of a fiscal rescue than anything else. However, it amounts to the blind leading the blind. The euro funds to finance the credit line are coming from the same countries that are in trouble. There are no new net financial euro assets entering the system as a consequence of this €750bn bailout plan and, ultimately, that is what is required to ease the recession and restore growth. The restoration of growth will also ease their budget issues. But this is Europe we are talking about. Despite the nice cars and bicycles they make, they are not a very decisive lot and their institutional structures are hamstrung by an arrogant sclerosis that pervades their polity and corporate world.

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Bailouts will not save the Eurozone

We are back onto Greece again today as the crisis deepens. Overnight Spain is appearing to be under bond market pressure and the Germans are calling for even harsher fiscal rules to be applied to keep member states “solvent”. The point is that none of the remedies being proposed will ultimately work. What is needed in the Eurozone is a major boost to aggregate demand. However, the policy direction is to further undermine spending in the member economies as austerity measures are being imposed throughout. This foolish reverence of the Stability and Growth Pact will worsen things. The problem in the EMU is that the basic design of its monetary system is flawed and the accompanying fiscal rules only accentuate those design flaws. None of the remedies being proposed by Euro leaders will work and the bailouts will not save the Eurozone. It has to fundamentally redesign its system or disband.

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The dysfunctional logic of the Eurozone and its downward spiral

A brief blog about the Eurozone today given I am travelling later on in the morning (Thursday, US time). Events in recent days are further exposing the absurd logic inherent in the design of the monetary system arrangements that the EMU member nations signed up for. The sovereign debt crisis that has so far be confined to Greece is now spreading to other member nations (Portugal and Spain). Further, the concerns over sovereign risk are now spreading into the commerical banking system and the logical extension of that are bank runs and a closure of the entire payments system. The reluctance to provide any EMU support for the beleagured Greece and the posturing by Germany is now being overtaken by these events in recent days. The initial “bailout” offer to Greece that took so long for the EMU bosses to make – given it rendered their claims to have constructed a stable sustainable monetary system absurd – now pales into insignificance. Much more support will be required and soon. But even that will not solve the structural flaws in their system. They would be better just abandoning it and maintaining political ties to stop them invading each other. After all, it was the tensions after the Second World War that have, in no small part, driven these flawed attempts at union anyway.

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Europe – bailout or exit?

First, devise a monetary union that is based on flawed notions of how the monetary system operates. Second, within that union invent nonsensical rules that give the system in general or member nations in particular the no capacity to deal with a damaging economic crisis. Third, allow countries within the union to game it to their own advantage at the expense of other member nations (for example, Germany – although the advantage was at the expense of German workers). Fourth, when a crisis hits elevate the nonsensical rules to the level of the sacrosanct and commit innocent citizens to years of unnecessary economic hardship. That is the level of sophistication that Europe has reached in 2010.

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Exiting the Euro?

In past blogs I have indicated that nations were mad entering the EMU and surrendering their fiscal sovereignty. This is especially so for the so-called peripheral nations (Spain, Portugal, Greece, Ireland, to some extent Italy) who have become basket cases in a system that prevents individual member’s from using fiscal policy to improve the circumstances of their citizens. Indeed it is a system that forces aggregate policy to act in a pro-cyclical manner for nations that are undergoing crisis – that is, the politicians have somehow managed to convince their populations that it is a credible position for them to use their policy power to make things worse rather than better. So policy which should reduce poverty and empower the youth of a nation with education and employment opportunities is now doing exactly the opposite. As I noted last week, one statistic is enough to tell you the EMU system is a failure – 53 per cent of Spanish youth are now unemployed! So can a nation exit the EMU? What would happen if it did? I had some thoughts on this today.

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Euro zone’s self-imposed meltdown

I have been looking into underemployment data for Europe today as part of a larger project which I will report on in due course. But whenever I am studying European data I think how stupid the European Monetary Union (EMU) is from a modern monetary theory (MMT) perspective. Then I read the Financial Times this afternoon and saw that Diverging deficits could fracture the eurozone and I thought there is some hope after all although that is not what the journalist was trying to convey. This is an opportune time to answer a lot of questions I get asked about the EMU. Does MMT principles apply there? Why not? Is this a better way of organising a monetary system? So if you are interested in those issues, please read on.

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More bad Euro data

As a brief follow up to yesterday, German labour force data came out yesterday (Tuesday) and reveal that unemployment rose sharply in December and the disgraceful barrier of a record 5 million unemployed is now highly likely in early 2005. In December there were 4.48 million unemployed or 10.8 per cent of the active population. This is the highest level since 1990 and the second highest level in the whole period since World War II.

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Euro zone madness continues

In the UK Financial Times article by Darryl Thomson, Dollar falls to fresh lows in thin festive trade posted December 24, the continued slide of the USD against the Euro is put down to “disappointing US economic data” (mostly sharp slowdown in new home sales). However, a so-called currency strategist claims it is the “deficits rather than the data which were weighing on investors minds”. The hoary old neo-liberal twin deficits attack on public spending is making a comeback.

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No blog post today – travelling all day

As the ballistic missiles between Iran and Qatar seem to have gone quiet for the time being I am making another attempt to get to Europe today for work commitments. Last week, my flights were cancelled due to the disruptions around Doha Airport. Anyway, fingers crossed. I will be back writing here again on Thursday, July 3, 2025. Here is some music to listen to while you are missing my posts (-:

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Australia – the inflation spike was transitory but central bankers hiked rates with only partial information

The Australian Bureau of Statistics (ABS) released the latest CPI data yesterday (June 26, 2025) – Monthly Consumer Price Index Indicator – for May 2025, which showed that the annual underlying inflation rate, which excludes volatile items continues to fall – from 2.4 per cent to 2.1 per cent. The trimmed mean rate (which the RBA monitors as part of the monetary policy deliberations) fell from 2.8 per cent to 2.4 per cent. All the measures that the ABS publish (including or excluding volatile items) are now well within the ABS’s inflation targetting range which is currently 2 to 3 per cent. What is now clear is that this inflationary episode was a transitory phenomenon and did not justify the heavy-handed way the central banks responded to it. On June 8, 2021, the UK Guardian published an Op Ed I wrote about inflation – Price rises should be short-lived – so let’s not resurrect inflation as a bogeyman. In that article, and in several other forums since – written, TV, radio, presentations at events – I articulated the narrative that the inflationary pressures were transitory and would abate without the need for interest rate increases or cut backs in net government spending. In the subsequent months, I received a lot of flack from fellow economists and those out in the Twitter-verse etc who sent me quotes from the likes of Larry Summers and other prominent main stream economists who claimed that interest rates would have to rise and government net spending cut to push up unemployment towards some conception they had of the NAIRU, where inflation would stabilise. I was also told that the emergence of the inflationary pressures signalled the death knell for Modern Monetary Theory (MMT) – the critics apparently had some idea that the pressures were caused by excessive government spending and slack monetary settings which demonstrated in their mind that this was proof that MMT policies were dangerous. The evidence is that this episode was nothing like the 1970s inflation.

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There will not be a fiscal crisis in Japan

The global financial press think they are finally on a winner (or should that be loser) when it comes to commentary about the Japanese economy. Over the last few years in the Covid-induced inflation, the Japanese inflation rate has now consolidated and it is safe to say that the era of deflation is over. Coupled with the government (and business) goal of driving faster nominal wages growth to provide some real gains to offset the long period of wage stagnation and real wage cuts, it is unlikely that Japan will return to the chronic deflation, which has defined the long period since the asset bubble collapsed in the early 1990s. It thus comes as no surprise that longer-term bond yields have risen somewhat. But apparently this spells major problems for the Japanese government. I disagree and this is why.

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The US dollar is losing importance in the global economy – but there is really nothing to see in that fact

Since we began the Modern Monetary Theory (MMT) project in the mid-1990s, many people have asserted (wrongly) that the analysis we developed only applies to the US because it is considered to be the reserve currency. That status, the story goes, means that it can run fiscal deficits with relative impunity because the rest of the world clamours for the currency, which means it can always, in the language of the story, ‘fund’ its deficits. The corollary is that other countries cannot enjoy this fiscal freedom because the bond markets will eventually stop funding the government deficits if they get ‘out of hand’. All of this is, of course, fiction. Recently, though, the US exchange rate has fallen to its lowest level in three years following the Trump chaos and there are various commentators predicting that the reserve status is under threat. Unlike previous periods of global uncertainty when investors increase their demand for US government debt instruments, the current period has been marked by a significant US Treasury bond liquidation (particularly longer-term assets) as the ‘Trump’ effect leads to irrational beliefs that the US government might default. This has also led to claims that the dominance of the US dollar in global trade and financial transactions is under threat. There are also claims the US government will find it increasingly difficult to ‘fund’ itself. The reality is different on all counts.

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The arms race again – Part 2

This is the second part of my thoughts on the current acceleration in military spending around the world. The first part – The arms race again – Part 1 (June 11, 2025) – focused on background and discussed the concept of ‘military Keynesianism’. In this Part 2, I am focusing more specifically on the recent proposals by the European Commission to increase military spending and compromise its social spending. The motivation came from an invitation I received from the Chair of the Finance Committee in the Irish Parliament to make a submission to inform a – Scrutiny process of EU legislative proposals – specifically to discuss proposals put forward by the European Council to increase spending on defence. The two-part blog post series will form the basis of my submission which will go to the Joint Committee on Finance, Public Expenditure, Public Service Reform and Digitalisation on Friday. In this Part, I focus specifically on the European dilemma.

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The arms race again – Part 1

The Chair of the Finance Committee in the Irish Parliament invited me to make a submission to inform a – Scrutiny process of EU legislative proposals – specifically to discuss proposals put forward by the European Council to increase spending on defence. This blog post and the next (tomorrow) will form the basis of my submission which will go to the Joint Committee on Finance, Public Expenditure, Public Service Reform and Digitalisation on Friday. The matter has relevance for all countries at the moment, given the increased appetite for ramping up military spending. Some have termed this a shift back to what has been called – Military Keynesianism – where governments respond to various perceived and perhaps imaginary new security threats by increasing defence spending. However, I caution against using that term in this context. During the immediate Post World War 2 period with the almost immediate onset of the – Cold War – nations used military spending as a growth strategy and the term military Keynesianism might have been apposite. These nation-building times also saw an expansion of the public sector, which supported expanding welfare states and an array of protections for workers (occupational safety, holiday and sick pay, etc). However, in the current neoliberal era, the increased appetite for extra military spending is being cast as a trade-off, where cuts to social and environmental protection spending and overseas aid are seen as the way to create fiscal space to allow the defence plans to be fulfilled. That trade-off is even more apparent in the context of the European Union, given that the vast majority of Member States no longer have their own currency and the funds available at the EU-level are limited. We will discuss that issue and more in this two-part series.

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