{"id":19194,"date":"2012-04-27T19:06:37","date_gmt":"2012-04-27T09:06:37","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=19194"},"modified":"2012-04-27T19:06:37","modified_gmt":"2012-04-27T09:06:37","slug":"are-the-euro-bosses-going-all-growth-on-us","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=19194","title":{"rendered":"Are the Euro bosses going all growth on us?"},"content":{"rendered":"

\t\t\t\tI am still in Darwin today and have limited time to write. It seems, however, that the Euro bosses have gone all growth on us. For non-English speakers – going all growth on us – is terrible slang meaning are they becoming enamoured with the idea that growth is important. Apparently, austerity is “so yesterday”, if not “last week” and the mantra is now about “growth compacts”. Forget the fiscal compact which most of the EU states have signed up for which if realised will drive their economies into the ground so harsh are the proposed rules on budgets and public debt. Now there is a growth compact proposal – which Mario has suggested Europe follows. Angie is right in behind him – has Madame Austerity – has gone all growth on us too?. It has been a bad week for the Troika (IMF, ECB, EU) – what with the UK now officially in a double-dip due to the deliberate strategy of its government (emulating the EMU) and across the Channel, the impending success of Fran\u00e7ois Hollande is now becoming obvious. Merkoz will now have to morph into Mollande. And while on “olland”, the Dutch government also collapsed as a direct result of the backlash over the fiscal austerity. Apparently, the likely new French president is not particularly keen to join the fiscal austerity conga line although all his public statements to date would suggest he is committed to the SGP principles. So what is this all about? Are the Euro bosses going “all growth on us”? Answer: there will be no “growth compact” other than in the title of some EU Summit paper. The growth spin is mounting but the EU elites remain firmly wedded to doing everything they can to undermine growth.
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\nThe UK Guardian even thinks the Euro bosses are “going all growth on us”. In the article (April 25, 2012) – To the left: a likely new direction for France and Germany<\/a> – we read that:<\/p>\n

\nQuite suddenly, there is talk of change in the eurozone’s economic strategy and, in particular, of the need for urgent action by the European Union to reverse the downward spiral of negative growth and rising unemployment.\n<\/p><\/blockquote>\n

Bloomberg News reported (April 26, 2012) – Hollande Says He Disagrees With Draghi’s Method for Growth<\/a> – that Fran\u00e7ois Hollande considered “Draghi’s comments yesterday were a step in the right direction”. But he also said that the French government would still want to negotiate changes to the fiscal compact.<\/p>\n

The likely next French President said of Draghi’s call for a “growth compact” that:<\/p>\n

\nThere is a very big change in the mindset … He has realized that we can’t reach deficit-reduction targets and debt control if there isn’t growth so he is talking about a growth pact.\n<\/p><\/blockquote>\n

But he also said that a French Socialist government would spend more but tax more while still meeting the SGP fiscal targets.<\/p>\n

What he clearly doesn’t understand is that the European economies need more fiscal stimulus overall which means the deficits need to increase. His strategy of reducing the French deficit but redistributing the burden of the fiscal austerity (for example, by taxing high income earners more) will have no hope of providing a net stimulus to French aggregate demand.<\/p>\n

He also doesn’t understand what Draghi and the other EU bosses were meaning when they said there needs to be a growth compact to supplement the anti-growth fiscal compact.<\/p>\n

On April 25, 2012, ECB boss Mario Draghi appeared before the European Parliament’s Economic and Monetary Affairs<\/a> – and called for a “plan to boost growth in the Eurozone” because the ECB were disappointed that its monetary policy efforts “were not having as rapid an effect as first hoped”.<\/p>\n

He told the EU Parliament that:<\/p>\n

\nWe’ve had a fiscal compact … What is most present in my mind now is to have a growth compact. I think that’s what we have to have. … This was anticipated by the “six pack” … We now need to go back and have a ‘growth compact …\n<\/p><\/blockquote>\n

In a speech the following day (April 26, 2012) – Welcome remarks at the ECB-EC conference on financial integration and stability<\/a> – the ECB boss said that:<\/p>\n

\nWhere economic governance is concerned, new crisis resolution instruments have been created … A key milestone in this respect is also the adoption of the “six-pack”. Let me take this opportunity to warmly thank the Commission for the work that has been done in these areas through difficult times in the last years.\n<\/p><\/blockquote>\n

The “Six-Pack”, which I considered in this recent blog – The left – entranced by the fiscal austerity mantra sold to them by the conservatives<\/a> – provides no crisis resolution capacity to the Eurozone. The reality is that by further restricting the fiscal response capacity of member governments the fiscal compact promises to hasten crisis and make any aggregate demand shock deeper and longer.<\/p>\n

In the current circumstances, where private spending is flat and\/or in decline, the fiscal compact ensures that recession or stagnation becomes entrenched.<\/p>\n

Draghi also didn’t provide any detailed elaboration to the EU Parliament on what a growth compact might involve.<\/p>\n

Bloomberg News reported (April 25, 2102) – Draghi Softens Tone on Inflation, Calls for Growth Compact<\/a> – that <\/p>\n

\nDraghi, whose call for a fiscal compact to toughen budget rules was adopted by European Union leaders, today urged them to take similar steps to foster growth\n<\/p><\/blockquote>\n

He said that “(g)rowth should be supported by foreign demand, the very low short-term interest rates as well as our non-standard measures” even though he was surprised the standard and non-standard measures deployed by the central bank had not broken the downward real growth spiral. It is an astounding admission for a central banker to express “disappoint” that monetary policy is such a weak policy when it comes to manipulating aggregate demand.<\/p>\n

The whole neo-liberal macroeconomic edifice is constructed on the erroneous claim that fiscal policy is ultimately useless and should be avoided (it only adds public debt and inflation) and that the major aggregate demand management initiatives should be left to monetary policy.<\/p>\n

The reliance on monetary policy (low interest rates, quantitative easing, and the loans to banks) has allowed the crisis to worsen. The response of aggregate demand to these measures is clearly weak and lagged. This recession has demonstrated just how effective fiscal policy has been to stimulate growth (as some nations adopted significant fiscal stimulus packages early in the recession) and also, unfortunately, to undermine growth as nations have moved into a fiscal austerity mindset.<\/p>\n

The difference between Europe and the US is mostly down to the fact that the latter national government has maintained fiscal stimulus for longer and is yet to engage in substantial fiscal cuts (although its idiot politicians are doing what they can to get on the fiscal austerity bandwagon).<\/p>\n

In relation to a fiscal and growth compact, are you starting to shift uncomfortably in your chair as you try to piece together what all this means. In December 2012, Draghi was extolling the virtues of austerity (that is, the fiscal compact) – a few months later he urges the EU leaders to “take similar steps to foster growth”.<\/p>\n

Does that mean he wants to abandon the fiscal compact because it quite obviously prevents growth under most circumstances?<\/p>\n

German Chancellor certainly doesn’t think that is what he meant. Apparently, German Chancellor Angela Merkel (Angie to those who know her!) backed Draghi’s call for a growth compact telling a Berlin conference that growth as well as fiscal austerity was need in Europe to end the crisis.<\/p>\n

The Financial Times reported (April 25, 2012) – Draghi calls for Europe ‘growth compact’<\/a> – quoted Merkel as saying:<\/p>\n

\nWe need growth in the form of sustainable initiatives, not simply economic stimulus programmes that just increase government debt …\n<\/p><\/blockquote>\n

She also apparently told her Christian Democrat party that “Sustainable fiscal policy … is a necessary but not sufficient method of overcoming the crisis because we also need growth”.<\/p>\n

First, I wouldn’t use the word sustainable to describe the imposition of fiscal austerity on nations that are no where near to full employment and have no inflation risk. Fiscal austerity in the current European environment is fiscal vandalism.<\/p>\n

It is clear that sustainable fiscal policy is a necessary condition for growth. But from a Modern Monetary Theory (MMT) perspective, the meaning of “sustainability” is not even remotely similar to the concept that the Troika, the OECD and most mainstream economists employ.<\/p>\n

Please read my blogs – Fiscal sustainability 101 – Part 1<\/a> – Fiscal sustainability 101 – Part 2<\/a> – Fiscal sustainability 101 – Part 3<\/a> – for more detailed elaboration of the concept.<\/p>\n

But you start to get the picture.<\/p>\n

Dr Merkel also said:<\/p>\n

\nWe need growth in the form of sustainable initiatives, not stimulus programmes which would increase debt, but growth in the form of structural reform …\n<\/p><\/blockquote>\n

And there you have it. They are not talking about growth at all. They are talking about supply-side measures to undermine the working conditions of wage and salary earners because they consider the problem in the Eurozone to be a lack of competitiveness driven by excessive costs which undermines the export potential of these nations.<\/p>\n

However, if all nations are imposing austerity then there is little hope that a single nation can “internally deflate” their way to export growth. That strategy is failing at present – noting that German’s own exports are in decline and its manufacturing powerhouse is going backwards at present as austerity kills growth everywhere.<\/p>\n

Please read my blog – Fiscal austerity – the newest fallacy of composition<\/a> – for more discussion on this point.<\/p>\n

Further, the reason the Euro elites are advocating internal devaluation (that is, harsh cuts in wages and salaries for workers) is that they have a system where exchange rate adjustment (the normal way in which external variations in real unit labour costs are mediated) is precluded by design.<\/p>\n

The flawed design of the EMU and the imposition of the SGP (and now the fiscal compact) leaves on one adjustment mechanism – scorching domestic wages.<\/p>\n

The Troika and all the other neo-liberal hangers-on (such as the OECD etc) all preach the virtues of internal devaluation and have been forecasting massive boosts to export growth for several years now in nations that push the interntal develauation the fastest.<\/p>\n

But the problem with these so-called structural adjustment programs is that they don’t even guarantee that international competitiveness improves, quite apart from what they do for equity.<\/p>\n

The real exchange rate (R) is typically used as an indicator of international competitive. It is defined as:<\/p>\n

R = (e.Pw\/P)<\/p>\n

where P is the domestic price level specified in $A, and Pw is the foreign price level specified in foreign currency units, say $US and e<\/em> is the nominal exchange rate.<\/p>\n

There are also non-price dimensions to competitiveness, including quality and reliability of supply, which are assumed to be constant, when considering movements in the real exchange rate.<\/p>\n

This Bank of Japan<\/a> explanation of the real effective exchange rate is informative.<\/p>\n

The nominal exchange rate is the number of units of one currency that can be purchased with one unit of another currency. There are two ways in which we can quote a bi-lateral exchange rate but I typically use the following convention (for example, expressed as the relationship between the $A and the $US) – e<\/em> is the amount of $A which is required to buy one unit of the foreign currency.<\/p>\n

To understand whether a nation’s goods are becoming more or less competitive with respect to goods and services produced overseas we need to know about;<\/p>\n