The secret of 3% finally revealed<\/a> – says that a “former senior Budget Ministry official” in the Mitterrand government was asked to come up with the fiscal rules that would become the Stability and Growth Pact (SGP).<\/p>\nHe was quoted as being the “the inventor of the concept, endlessly repeated by all governments whether of the right or the left, that the public deficit should not exceed 3% of the national wealth”.<\/p>\n
Note that this reporting, itself, is misleading because as we learned in the quiz this week, wealth is a stock<\/strong> and GDP is a flow<\/strong> and the SGP budget deficit rule is specified in terms of 3 per cent of GDP (the size of the flow of national output and income in any given period).<\/p>\nAnyway, the French official had this to say when asked about the origins of the 3 per cent rule:<\/p>\n
\n\nWe came up with the 3% figure in less than an hour. It was a back of an envelope calculation, without any theoretical reflection. Mitterrand needed an easy rule that he could deploy in his discussions with ministers who kept coming into his office to demand money … We needed something simple. 3%? It was a good number that had stood the test of time, somewhat reminiscent of the Trinity.\n<\/p><\/blockquote>\n
Which is another example of the arbitrary rules and assessments – all part of an elaborate smokescreen or charade – to limit the capacity of government. There are countless highly paid officials in Brussels strutting around making all sorts of statements about the need for nations to cut welfare, wages, jobs and the like based on a rule that was just made up on the spot without any economic justification or authority.<\/p>\n
The ECFIN document basically addresses a number of what it terms to be “myths” about the austerity.<\/p>\n
The first myth:<\/p>\n
\nThere was irrational panic in the sovereign bond markets of vulnerable European countries, and this led to the imposition of unnecessary harsh consolidation.\n<\/p><\/blockquote>\n
The ECFIN authors claim that the panic was rational and use the Greek haircut to demonstrate why bond market fears were justified. I found that an extraordinary argument. The haircut was not a market event but a cynical strategy by the Troika to punish investors who had outlaid money in good faith.<\/p>\n
The fact is that the bond markets were themselves deluded by the apparent chimera of low risk in public Eurozone debt. But that is beside the point. The reason Greek debt became problematic lies in the essence of the flawed design of the monetary system, a design created and engineered by the EU and its “international partners”.<\/p>\n
The ECFIN authors then claim that the OMT (and SMP) conducted by the ECB has calmed the bond markets down. Of-course these interventions have calmed things down. They amount to fiscal actions of the currency issuer, which in a fiat-currency system would ensure that public debt issued is risk free. <\/p>\n
The ECFIN authors, however, say that the fact ECB has stabilised the bond markets:<\/p>\n
\n… cannot be read as evidence that significant fiscal adjustment was unwarranted.\n<\/p><\/blockquote>\n
Au contraire. Yes it does. It demonstrates that if the Eurozone had been designed to include a properly functioning federal fiscal capacity, which could provide fiscal transfers to the “state governments” in the system who were beset with negative asymmetric aggregate demand shocks, then there would be no sustained crisis at all in the Eurozone. Greece would been allowed to run larger deficits, than say other “member states” in recognition of the disproportionately larger hit to aggregate demand that it incurred in 2008 and 2009, and growth would have been immediately supported.<\/p>\n
All the talk of trade imbalances among the “states” would have been irrelevant. Further, vast discrepancies between the states in terms of wages and welfare rights would not have been tolerated. So there would be no singling out of Greece, Spain or Portugal etc. The Federal authority would use its currency-issuing capacity to ensure that all states were able to meet the spending gap that they faced.<\/p>\n
The ECB is sort of playing that role but in a totally perverse way. They are prepared to bail the banks out and hold bond yields down low but then insist of killing growth to ensure they have to keep bailing out banks and buying public debt. It is irrational in the extreme and the only explanation is one that is based on ideology. There is no economic credibility to their overall strategy.<\/p>\n
The ECFIN paper recognises that there are “higher multipliers in an environment of weak activity, lack of room for a supportive monetary policy, and tight financing constraints for private agents” – which means that the there is, in their words – “non-linearity in the growth cost of fiscal adjustment” – which in English means – fiscal austerity is highly damaging to growth and employment and impacts almost immediately in a negative way on both.<\/p>\n
They also hint that any policy strategy should allow for a “sequencing of public and private deleveraging for getting out of a balance-sheet recession” – which means in English – when the private sector has over-borrowed and is now intent on saving there is no scope for public sector austerity.<\/p>\n
In fact, public deficits are required to support the private deleveraging process via aggregate demand support. For the private sector to increase its saving overall, there must be economic growth and that has to be supported with public deficits.<\/p>\n
So two real world reasons why austerity is bad.<\/p>\n
Not to be daunted, the ECFIN paper say we have be “treading a fine line however”. What line is that exactly?<\/p>\n
Well if government don’t tear the heart out of their economies now they might trigger “market expectations of a sovereign default and a liquidity crisis”. Ho hum. Didn’t they previously recognise that the ECB was a bulwark against that possibility? Yes, they did.<\/p>\n
So how can the market rule when any central bank is stronger and can set yields at whatever level they like and play the bond markets out of the game? Answer: the markets can never be more powerful than a central bank in this situation.<\/p>\n
What else defines this “fine line”?<\/p>\n
Apparently, “basic arithmetic”. That is something I can understand. So their argument goes like this. Huge adjustments are required in deficit positions in the “medium-term”. So:<\/p>\n
\n… spreading out consolidation over several years in broadly equal instalments will translate in not-insignificant fiscal effort from the beginning.\n<\/p><\/blockquote>\n
Plain arithmetic – allocating a whole over some sub periods.<\/p>\n
But the issue is the question of the need for consolidation in the first place. That is apparently a consensus. Who between? The EU, the IMF, the OECD and the ECB. And, presumably, all the lackey economists who get paid huge amounts of consulting income from Brussels to do their bidding.<\/p>\n
The ECFIN paper claims that the EU has been mindful of these issues and that:<\/p>\n
\n… fiscal policies under the E(M)U framework have struck a balance between these conflicting considerations.\n<\/p><\/blockquote>\n
How so? Well they used fiscal stimulus in 2009\/10 and then:<\/p>\n
\n… it was agreed that the initial fiscal relaxation should be followed by fiscal retrenchment to stabilise and reduce debts\n<\/p><\/blockquote>\n
And so the austerity began. But this mindless mechanical approach – we do zis today and zat tomorrow – is seemingly context free. Haven’t these Eurocrat sycophants looked at the data that this agreed policy has created?<\/p>\n
Haven’t they seen that unemployment continues to rise across the zone and each month a new record high is reached? Haven’t they worked out what 60 per cent youth unemployment (which is being approached in some countries) means for the future? Haven’t they realised that they have created<\/strong> a DEPRESSION in southern Europe?<\/p>\nThe third allegation they consider is that the “Commission follows an inflexible approach”. Apparently, the EC is eminently flexible. Not only has it forced nations to obey by its inflexible fiscal rules but:<\/p>\n
\n… a key aspect of the flexible approach we have adopted has recently been to make more explicit the focus on structural targets, rather than just the overall deficit of a country.\n<\/p><\/blockquote>\n
That is, not to be content with creating a depression they are now being more explicit about which conditions of work, pensions, etc are to be cut. How flexible of them!<\/p>\n
And under the SGP the EC will not immediately enact the moronic “excessive deficit” rules, which include fines and sanctions. But we are told that:<\/p>\n
\nMissing the nominal targets does not expose the country concerned to an escalation of the excessive deficit procedure, including the possibility of financial sanctions, if the structural effort (specified in the recommendation in terms of changes in the cyclically-adjusted balance net of one-off and temporary measures) has been delivered. Rather in these cases the country would receive an extension of the deadline for correcting its excessive deficit. The absolutely key point here is that we have not, and will not, pursue dogmatic targets for the reduction of the headline fiscal deficit, irrespective of the circumstances a country finds itself in.\n<\/p><\/blockquote>\n
The absolutely key point is that the EC enforces these pro-cyclical strategies in the first place which force nations to miss these arbitrary targets. Damaging growth and then saying to a nation that you won’t be fined if you damage growth a bit more is highly flexible. Wouldn’t you say?<\/p>\n
The fourth allegation they address is that “Fiscal consolidation is not politically or socially sustainable”. They recognise that there are severe strains on social cohesion in some nations as a result of the policy framework being pursued.<\/p>\n
But they claim they have “spread the costs across the population” – which is a lie. They are, in fact, concentrating the costs on the unemployed, pensioners and public employees. Businesses then become collateral damage.<\/p>\n
They claim that they are making cuts “without weighing on aggregate demand in the short-run” but complete that sentence with “although not all consolidation can go this route in practice”. Which is an extraordinary thing to say. The data shouts out that they are liars. There has been massage short-term damage to aggregate demand – which is why unemployment rises each month.<\/p>\n
The audacity of the Troika is extraordinary. They know that their policies are causing massive real damage. But they still nuance and massage their message with these sorts of statements. The oft-used “growth friendly austerity” is another way they try to convince us that underneath all the carnage is a very friendly growth-orientated policy.<\/p>\n
The reality is that fiscal austerity kills growth – almost outright.<\/p>\n
The final allegation they address is that “The Commission’s approach is one-sided. It puts all the burden of adjustment on debtor countries”. They respond by saying that:<\/p>\n
\nFor vulnerable countries of the euro area that face a large external sustainability gap, external growth is the only sustainable way to grow out of their debts.\n<\/p><\/blockquote>\n
This is straight from the IMF. Export-led growth will win the day. But if all nations are engaging in fiscal austerity including many of the Zone’s trading partners, how will that strategy work?<\/p>\n
Please read my blog – Fiscal austerity – the newest fallacy of composition<\/a> – for more discussion on this point.<\/p>\nThe ECFIN authors, after 6 pages of self-praise conclude that perhaps there is a case for “the potential attraction of a “fiscal capacity” at the central level, in the form of a stabilisation instrument”.<\/p>\n
But, of-course, this would be used to maintain “a credible rule-based framework” (that is, deny the basic reason why a federal capacity is needed in a federated monetary system).<\/p>\n
And, equally, of-course, “such a tool should only be considered in the longer term in the context of full fiscal and economic union”. So several years of conferences and meetings in Brussels – with plenty of well-catered for lunches and lots of European wines for the EC elites who pontificate on these matters while they hire their bureaucrat economists to write self-aggrandising rubbish like this paper.<\/p>\n
Conclusion<\/strong><\/p>\nLots of distractions today. <\/p>\n
Cyprus should vote to exit the Eurozone immediately and reject the oppressive hand of the Troika. Send E-mail to the Opposition party in Cyprus immediately urging them to resist the neo-liberal bluff and to take their nation back into the world of currency sovereignty where individual savings are respected and governments have the latitude to pursue public purpose and counter major aggregate demand shocks.<\/p>\n
That is enough for today!<\/p>\n
(c) Copyright 2013 Bill Mitchell. All Rights Reserved. <\/p>\n","protected":false},"excerpt":{"rendered":"
Cyprus is a small country of some 839 thousand people. It joined the Eurozone on January 1, 2008. That decision sealed its fate. Now the Troika are making it pay for that mistake, one that the Troika lured it into making. Such is the way of the Eurozone. The elites set the system up to…<\/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-23094","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\/23094","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=23094"}],"version-history":[{"count":0,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts\/23094\/revisions"}],"wp:attachment":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=23094"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=23094"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=23094"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
![\"\"](\"https:\/\/billmitchell.org\/blog\/wp-content\/uploads\/2013\/03\/Cyprus_bank_run_March_18_2013.jpg\" "\\"Cyprus_bank_run_March_18_2013\\"")
<\/a><\/p>\n