{"id":14017,"date":"2011-03-31T15:44:58","date_gmt":"2011-03-31T04:44:58","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=14017"},"modified":"2011-03-31T15:44:58","modified_gmt":"2011-03-31T04:44:58","slug":"europe-is-still-pursuing-the-wrong-goal","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=14017","title":{"rendered":"Europe is still pursuing the wrong goal"},"content":{"rendered":"

\t\t\t\tEurope 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.
\n
\nBy way of introduction, I note that the European Central Bank (ECB) has developed some propaganda tools in the best traditions of their location. They are calling them Educational Games<\/a>. I proved to be an exemplary manager – I immediately cut the interest rate to zero and got unemployment down to zero (what no frictions?) and then looked for some fiscal instruments to keep inflation in check and found that the “educational game” didn’t provide any fiscal policy capacity.<\/p>\n

So how it is educational to deny the existence of the most important tool governments have to regulate aggregate demand – and hence employment and inflation? I would call it ideological brainwashing.<\/p>\n

The following graphic is the headline report the “game” produced to describe the inflation record of my administration as central bank boss. By 2018 inflation was soaring. Hardly surprising if you prevent a government from using fiscal policy. <\/p>\n

\"\"<\/a><\/p>\n

<\/div>\n

Readers might be interested to know I am developing a similar game based on MMT principles. That game will include both arms of macroeconomic policy in the interests of education. But like all these “educational models” the results you get are predictable – the model is pre-configured. But unlike the ECB game our model will have empirical content – that is the equations will be conditioned by what the real world looks like and behaves like rather than the numerical world that comes from the application of abstract (and erroneous) macroeconomics textbooks.<\/p>\n

But the bias in the ECB game is broadly symptomatic of why Europe is in such a mess now and on the brink of further collapse.<\/p>\n

Last year, the European Council’s Summit<\/a> (March 25-26, 2010) outlined “a new strategy for jobs and growth”. That didn’t last long.<\/p>\n

At this year’s Council meeting (March 22-25) they came up with these conclusions<\/a>. The shift in emphasis is a reflection of how bad things have gone since last year in the Eurozone.<\/p>\n

They plan to “lay the ground for smart, sustainable, socially inclusive and job-creating growth”. So what happened to last year’s “new strategy for jobs and growth”. It wil<\/p>\n

In the conclusions of this year’s meeting you get an inkling of why their strategy is failing:<\/p>\n

\nWithin the new framework of the European semester, the European Council endorsed the priorities for fiscal consolidation and structural reform.1 It underscored the need to give priority to restoring sound budgets and fiscal sustainability, reducing unemployment throughlabour market reforms and making new efforts to enhance growth. All Member States will translate these priorities into concrete measures to be included in their Stability or Convergence Programmes and National Reform Programmes. On this basis, the Commission will present its proposals for country-specific opinions and recommendations in good time for their adoption before the June European Council.\n<\/p><\/blockquote>\n

You learn that the austerity approach – what we might call the denial of macroeconomic realities is very much in the minds of the political leaders in Europe. They think that by cutting public spending at a time when private spending is weak and likely to nosedive that there will be the growth in aggregate spending necessary to stimulate jobs growth.<\/p>\n

But it gets worse than that – they think that the jobs problem is microeconomic in nature – that is, sourced in wage costs relative to productivity.<\/p>\n

You also learn – and tellingly so – that they are not going to do anything until June anyway … European political leaders are the experts at saying everything and doing nothing – and when they do act it is because they are forced to by a crisis hammering at the front doors of their parliaments.<\/p>\n

In the UK Guardian article (March 29, 2011) – Europe needs its own IMF<\/a> – there is an argument outlined that the German construction of the crisis in the Eurozone – the “lack of budgetary rigour and low productivity of Mediterranean countries” is false.<\/p>\n

The Spanish writer says that this falsity meant that :<\/p>\n

\n… attention is diverted from the real causes of the crisis, namely the European Central Bank (ECB) following in the footsteps of the American Federal Reserve, maintaining low interest rates that generate property market bubbles, and the ease with which the private banks (Spanish, German, French and others) financed the property boom throughout the eurozone. The Spanish experience shows that these ideas don’t work.\n<\/p><\/blockquote>\n

The article, is in some senses, a defence of Spain, which has been vilified for having lazy, siesta-liking workers who like to spend too much. The author provides some interesting economic data to show that “Spain entered the monetary union having complied with the Maastricht requirements. Germany and France didn’t”; that “Spanish sovereign debt was, and continues to be, the lowest of the large European countries in terms of percentage of the GDP”; that “the productivity by those in work in Spain was actually higher than the eurozone average for the years 1981-1990 and 2001-10”; and that “the annual growth rate of Spanish exports averaged 6.1% between 1997 and 2010: rather more than Germany’s 5.3%”.<\/p>\n

All interesting and good to counter some of the more pernicious dogma that comes from Germany and elsewhere – but largely irrelevant.<\/p>\n

The reason that the bond markets are “attacking” Spain, as they have attacked Greece, Ireland, and more recently Portugal is because the Spanish government is exposed to insolvency as a result of ceding its currency issuing monopoly to the ECB.<\/p>\n

The reason the Spanish “government has had to respond with the most severe package of measures in recent decades: tax increases” is not because its deficit was too high relative to the other aggregates in that nation (private domestic and external balances) but because the European political leaders have a totally distorted view of what macroeconomic management is about – exemplified by the ECB “educational game”.<\/p>\n

It is clear that when a nation that has no currency sovereignty is hit with a major negative demand shock<\/p>\n

I am not absolving the Spanish government or any of the EMU member state governments of being delinquent in their regulatory duties as the property developers and financial engineers (banks mainly) set about creating the house of cards that collapsed. Clearly that is the coincident cause of the crisis.<\/p>\n

But the subsequent inability to respond to the crisis in a satisfactory manner – and instead be forced to scorch the domestic economic landscape – is the consequence of the fatal design flaws that were evident (and deliberately so) in the creation of the monetary union.<\/p>\n

I have written extensively about these flaws previously. Please read my blog – Doomed from the start<\/a> – for an example. You might also like to explore the other blogs posted under the Eurozone category<\/a> of my blog.<\/p>\n

The basis point is that when a number of states (countries) cede their currency issuing monopoly to a federal level (in this case, the ECB) (which also means they, in effect, agree to operate under a fixed exchange rate regime) and cede their monetary policy to a federal-level central bank, the ways of adjusting to a negative demand shock (private spending collapse) become severely limited.<\/p>\n

For a normal sovereign nation operating as a federation, such as the US and Australia, the states (California, New South Wales etc) are secure (relatively so) in the face of such a shock because it is understood that the national government is acting in the interests of all states and will engage in fiscal transfers where appropriate to attend to “state” problems arising from the recession.<\/p>\n

Further, the automatic stabilisers that are built into fiscal policy – that is, the taxation revenue and the welfare and other payments that vary with economic activity – provide the safety floor below which aggregate demand will not fall as private spending declines. Public net spending automatically increases, even if the fiscal policy stance of the government of the day is restrictive. The expansion of public spending provides some relief.<\/p>\n

The automatic stabilisers in different nations will vary in the extent to which they provide that relief – and that responsiveness is governed by the design of the tax and transfer systems.<\/p>\n

Further, the floor that the automatic stabilisers put in place might not be very satisfactory from the perspective of avoiding large rises in unemployment – and then there is a need for discretionary fiscal intervention. But they do prevent things from spiralling out of control.<\/p>\n

Not so in Europe. They have designed a system that deliberately imposes pro-cyclical fiscal policy changes on their economies in the form of austerity packages. By design, the push for austerity is a deliberate attempt to negate the operation of the automatic safeguards.<\/p>\n

The political leaders – reaffirmed in the European Council meeting’s conclusions last week – have deliberately imposed a system of fiscal consolidation onto the member states which means that fiscal policy is now reinforcing the negative demand shock coming from the private sector rather than countering it – which is how a responsible government would act.<\/p>\n

It is ironical that all the mainstream macroeconomic textbooks criticise the use of fiscal policy exactly because they accuse it of being pro-cyclical. In this context, they claim that political issues, implementation lags etc lead to the net spending injection being “too late” and reinforcing a recovering private sector demand. In other words, it is alleged that fiscal policy starts working when it is too late (the emergency is over) and only reinforces the inflation risk arising from the recovery.<\/p>\n

While empirical evidence for that allegation is mixed and mostly non-conclusive, I find it amazing that the mainstream economists advising the Euro bosses can keep a straight face when pushing the politicians to implement exactly what they claim is mis-use of fiscal policy.<\/p>\n

It seems that when pro-cyclical fiscal policy is causing job losses and poverty it is fine for the mainstream, but when it is driving growth it is not. That should tell you a lot I think.<\/p>\n

But the lack of a fiscal reallocation mechanism in the EMU (save the ad hoc<\/em> interventions by the ECB at present – which is holding the system together) is the real problem and is pushing the Eurozone ever closer to collapse – which might take the form of major debt defaults from some of the member states.<\/p>\n

The Guardian writer (the Spaniard) agrees that there are fatal design flaws in the EMU:<\/p>\n

\nThe response to the crisis by the most powerful countries in the eurozone has been totally inadequate, above all due to Germany’s reluctance to help out the countries most affected by the crisis, keeping its citizens convinced that such actions would be rewarding irresponsible southerners at the cost of the “virtuous” north.<\/p>\n

Successive German governments have not been able to explain to their citizens that the creation of the euro constitutes an excellent deal for the country, a deal by means of which their exports have grown from 24% of GDP in 1995 to 46% in 2010 while those of France, Italy and Spain have stayed level at 26%. Therefore, when sheer common sense dictates the need to strengthen the stability fund, it has had to be adorned with lessons and “penalties”.<\/p>\n

The creation of the monetary union did not address the fact that imbalances between such varied economies would need some entity similar to the International Monetary Fund. Created in 1944 at Bretton Woods, the IMF combined the intellects of Keynes and White with the generosity of the US, and provided a mechanism that granted loans at bearable interest rates to help countries in difficulties without introducing Germanic penalty concepts.\n<\/p><\/blockquote>\n

So, in effect, he is advocating a “fiscal” capacity at the federal level.<\/p>\n

But that doesn’t overcome the problem that the fixed exchange rate system imposes. It just would mean that the member states would have some independence from bond markets in extreme situations – which is no gain at all. And the IMF is not the exemplar of “easy” money. It would be likely that the “loans” would come with a major sting (as is evident now) which doesn’t really allow the member states to enjoy fiscal autonomy.<\/p>\n

Further, the Bretton Woods system collapsed because it was unworkable. The nations with external deficits were always facing domestic recession (because they had to run tight domestic policies to ensure they didn’t destabilise their parity and run out of foreign reserves). This design problem became politically unviable.<\/p>\n

So the introduction of the rescue fund will not overcome the design flaws in the EMU. Further ECB “fiscal” operations – which are really dislocating, temporarily, the member states from the bond markets – will help – but making these a permanent feature of the monetary union is unlikely because it would demonstrate that the system as designed is unworkable.<\/p>\n

The Eurozone bosses resist any notion that they might have got it wrong! Their stubbornness is impoverishing millions.<\/p>\n

I have more sympathy with the view expressed in this Bloomberg article (March 30, 2011) – Losing Euro in Defaults Brings No Threat to EU<\/a>.<\/p>\n

The writer notes that such a proposition:<\/p>\n

\n… will be objected that the euro has to be preserved to keep the European Union together. That will certainly be the standard line from the Brussels- based elite during the next few years.\n<\/p><\/blockquote>\n

The Euro bosses have a vested interest in preserving their position at the top and the perks that accompany that position.<\/p>\n

The Bloomberg article makes the essential point that is forgotten when the Euro bosses claim that “(w)e must save the euro to save the European Union”:<\/p>\n

\nThe European Union and the euro are not the same thing … Breaking up the euro will not break up the EU. It will change its character, but it needn’t be the end of the EU — just a particular version of it.\n<\/p><\/blockquote>\n

Yes, a particularly dysfunction version of the political union at that. One that imposes grief on its most disadvantaged citizens and prevents their elected representatives from being able to use the policy tools
\n that are available to sovereign governments to help alleviate economic stress.<\/p>\n

If I was to design a system that was doomed to fail and in the process imposed massive damage on the citizenry my design would stray too far from the system the Brussels-elite came up with.<\/p>\n

The Bloomberg article conlcudes:<\/p>\n

\nBy any reasonable measure, the single currency has been a failure. It hasn’t made the economies of Europe converge: If anything, they have moved further apart over the past decade. It hasn’t promoted growth, except of the most unsustainable and unbalanced kind: crazy credit booms in Spain and Ireland, reckless public spending in Greece and massive, pointless trade surpluses in Germany.<\/p>\n

Nor has it shielded its members from financial instability: In fact, the euro has created instability, visiting a wholly self-made crisis on the European continent. It is a cause of instability, not a cure for it.<\/p>\n

Looking forward, there are years of terrible austerity for the high-deficit countries, accompanied by big cuts in living standards and rates of unemployment that will make it virtually impossible for an entire generation of Greeks, Irish or Spanish to build careers for themselves.<\/p>\n

In Germany, the Netherlands and France, there will be simmering resentments over the bailouts. Years of “Bild” front pages shrieking about lazy Greeks living well on German taxes will take an inevitable toll on what was until now the most pro- European of countries. Does that strengthen the EU? It doesn’t sound like it.\n<\/p><\/blockquote>\n

I agree with this assessment. The question is how long it will take before all the voters realise it – in the ways that they might seek to understrand things – and then social and political instability of the sort we are seeing in the Middle East at present become the norm rather than the exception.<\/p>\n

Hanging on to a failed system – from my outsider viewpoint – exemplifies the disconnect between the political elites and the people in Europe. That sort of disconnect, in the absence of military enforcement, cannot last for long.<\/p>\n

While the Bloomberg article says that the “most rational option would be competing currencies … re-creating the deutsche mark, the franc, the lira and so on” (which I agree – including the PUNT) – but then advocates keeping the Euro as “a financial currency” which might comeback as the core currency in some nations.<\/p>\n

I do not advocate that and in another blog some day I will outline why (time has overtaken me today!).<\/p>\n

More evidence from the UK<\/strong><\/p>\n

In Britain’s case, their response is just plain lunacy.<\/p>\n

In the UK Guardian (March 29, 2011) – Real household disposable income falls for the first time in 30 years<\/a> – we read that:<\/p>\n

\nBritons’ take-home pay fell for the first time in three decades … the total income of Britain’s working and unemployed populations after taxes and adjusted for inflation – dropped by 0.8% in 2010, according to the Office for National Statistics (ONS).<\/p>\n

The figures also showed that the decline is likely to accelerate to about 2.0% this year and flatten in 2012 as the biggest public spending cuts since the second world war begin in earnest.\n<\/p><\/blockquote>\n

The Guardian reminds us of number 1 hit from The Specials – Ghost Town<\/a> – which rose to the top of the charts “the last time Britain’s real household disposable income fell”:<\/p>\n

\nGovernment leaving youth on the shelf
\nThis place, is coming like a ghost town
\nNo job to be found in this country
\nCan’t go on no more
\nThe people getting angry\n<\/p><\/blockquote>\n

More of that to come.<\/p>\n

On the topic of reminiscent songs … Portugal is about to go under – and they have very bitter memories of the IMF interventions in 1977 and again in 1983. The 1982 song – FMI – all 20 odd minutes of it – by Portugal’s Jos\u00e9 M\u00e1rio Branco<\/a> – was a scathing attack on the IMF and its intervention which blighted the early hopes for a democracy that had just escaped 48 years of oppressive military rule. The IMF reprised its destructive intervention in Portugal in 1983. You can listen to it via YouTube – FMI Part 1<\/a> – FMI Part 2<\/a> (but is in Portuguese. The English lyrics are too long to post here but are interesting.<\/p>\n

Conclusion<\/strong><\/p>\n

I am still in transit and have little time again today to write. So …<\/p>\n

That is enough for today!<\/p>\n","protected":false},"excerpt":{"rendered":"

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…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[55],"tags":[],"class_list":["post-14017","post","type-post","status-publish","format-standard","hentry","category-eurozone","entry","no-media"],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts\/14017","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=14017"}],"version-history":[{"count":0,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts\/14017\/revisions"}],"wp:attachment":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=14017"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=14017"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=14017"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}