Bill Mitchell-en Chaos in Europe and the flawed monetary system1.
(a) Europaren arazoa: akatsez betetako sistema monetarioa2
(b) Euroguneako disfuntzioak bere horretan dirau3
(c) Alemaniako errenten desberdintasunak4
Mitchell-ek dioenez, “Why hasn’t the ECB withdrawn liquidity to German banks (as it did to Greece in June 2015), for deliberately breaching the rules of the Eurozone?”
(d) Euroaren etorkizuna kolokan5
(e) Mitchell-en liburua eta euroak irauteko bidea: benetako sistema federala eratzea6
(f) Europako benetako egoera7
(g) Amestutako eta benetako Europa: Eurexit, irtenbide gisa8
(h) Eichengreen eta Wyplosz-en Minimal conditions for the survival of the euro delakoa eta Mitchell-ek egindako kritikak: EBZ-ren funtzionamendua eta Alemania9; banku politika desastre hutsa10; bonoen afera konpondu gabe11, eta zor publikoaren kontua12
Alderantziz, EBZ-k uste du interes negatiboekin eta QE-rekin (quantitative easing) nahikoa dela bere rola betetzeko13.
Alemanen erantzuna argia bezain negargarria da14. Bi bide proposatu zituzten:
(i) Zergak handitzea, gastuen mozketa eta egiturazko erreformak15, eta
(ii) Defiziten eza langabezia handiagoarekin eta zor publikoaren metaketarekin16
Mitchell-en hitzez,
“This more or less summarises the German position. It is an unsustainable model for Eurozone survival”
Ondorio garbiak:
(i) The Eurozone will only continue to survive as long as democratic rights are suppressed and the ECB blackmails Member State government who want to break out of the austerity model.
(ii) The stagnation and social dislocation that will follow cannot be a model for a stable society in any Member State.
Beraz?
2 Ingelesez: “… if a society deliberately denies a particular generation of the chance to gain employment and, instead, vilifies them as lazy, wanton individuals then it is easy to see why those characters will conclude that society has nothing to offer. In Europe where these manifestations are becoming increasingly obvious, the flawed monetary system is at the heart of the problem. It has failed categorically and the fall out of that failure is multi-dimensional.
3 Ingelesez: “I would hold that the dysfunction of the Eurozone reflects a Western ideology that has … created economic chaos for an increasing number of disadvantaged people around the world. (…) The crisis, which began in 2008, is not really gone away in the Eurozone. The latest Job Vacancy data from Eurostat show that vacancy rates remained depressed in most Member States.”
4 Ingelesez: “Even the IMF has now acknowledged that point. (Ikus Japonia eta NMF (aka IMF)) According to the German Socio-Economic Panel (SOEP), which is a wide-ranging representative longitudinal study of private households, located at the German Institute for Economic Research, DIW Berlin, income inequality in Germany has risen sharply since it joined the Eurozone.
While the poorest 10 per cent of income earners in Germany achieved 15 per cent gains in their annual median incomes between 1997 and 2008, the richest 10 per cent enjoyed gains of 28 per cent.
The Hartz reforms and the export imperatives were an important part of this rising inequality. A substantial redistribution of income is required within Germany if domestic spending is to increase.
The conclusion arrived at after assessing all the indicators, etc, is that the Eurozone as a monetary system has categorically failed.”
5 Ingelesez: “On March 14, 2016, Barry Eichengreen and Charles Wyplosz outlined their – Minimal conditions for the survival of the euro.
At the outset, they reject the mainstream narrative, which sees the creation of a political union to complement the economic union as the way forward.
They believe that political integration, if possible at all, will take much longer than the “timeframe relevant for the euro’s survival” will permit.
They assess that “The euro’s existential crisis is likely to be resolved one way or the other long before that political destination is reached.” Mitchell-ek: My own research would agree with this assessment.”
6 Ingelesez: “In my current book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015) – I outlined several ways in which the Eurozone could survive.
One such way would be to create a truly federal system such as we have in Australia or we find in the United States.
The main policy arms and capacities of the federal government (that is, the Treasury and central banking functions) are aligned at the correct level, which means that the elected national government has legislative authority over the central bank.
The national government, thus, always has the financial capacity to redress asymmetric spending shocks across the regional space that it governs.”
7 Ingelesez: “There really is no ‘Europe’. The first decade of the EMU saw the Member States growing apart despite all the analysis in the 1990s that the monetary union would lead to economic convergence.
(…)
Essentially, at present, the German fiscal ideology, which is extreme to be sure, is dominant. But as Eichengreen and Wyplosz note in their article “EU member states have profoundly different preferences with regard to fiscal policy”.
The EU Member States have vastly different attitudes to social policy, cultural policy and other things which influences their attitudes to what they expect from their national governments.
Under the single currency, these differences are suppressed by the iron laws laid down by Germany. As a consequence, mass unemployment and social instability has been a result in many Member States.”
8 Ingelesez: “There will be no political union that will be sufficient to redress the dramatic design flaws that the Maastricht Treaty engendered.
As a result, I remain an advocate for an orderly dismantling of the monetary union and the restoration of national currency sovereignty at the Member State level.
As I outlined in my Eurozone book, if Brussels cannot agree to such a reform process (…), then the citizens within individual Member States should demand their governments unilaterally exit the disastrous system. I provided a template for such a strategy in the book.”
9 Ingelesez: “… In the latter instances, the ECB acted more like a blackmailer than a responsible central bank.
The Germans will, however, never agree to the ECB acting as a true central bank and backing the required fiscal positions of the Member States.”
10 Ingelesez: “… the recent bank policy is a disaster.
Germany forced the other Member States to avoid creating a pooled bank guarantee system. At the same time, the Member States, given they have no currency-issuing capacity are unable to bailout their own banks if needed.
In other words, there are no real safeguards in place to avoid a major banking collapse. A simple ‘federal’ guarantee scheme would have been sufficient backed by the currency-issuing capacity of the ECB.
That is a bridge to far for the Eurozone (bullied by Germany) so the situation remains chronically risky. Very little progress has been made in the 8 years of the crisis.”
11 Ingelesez: “… the Member States have no currency-issuing capacity to support large deficits if required.
…. Member State governments should be restricted in their spending decisions by “market discipline”, which doesn’t really solve anything. I say that because the markets are smart enough to realise that each Member State carries credit risk on any debt it issues, which limits the scale at which it can operate.
We have already seen how the bond markets appraise this credit risk in 2010 – Greece, Portugal then Italy – all experienced sharp increases in the yields they had to offer on their debt, which without ECB intervention would have sent each one of them bankrupt.”
12 Ingelesez: “Essentially, the ECB should just write off all the outstanding public debt and use its currency-issuing capacity to fund the necessary fiscal deficits to restore and sustain growth.
Please read my blog – OMF – paranoia for many but a solution for all – for more discussion on this point.”
13 Ingelesez: “The ECB thinks that negative interest rates and quantitative easing is sufficient to fulfill its role as the currency-issuer. It is sorely wrong.
Please read my blog – The ECB could stand on its head and not have much impact – for more discussion on this point.
The problem is that the Germans will never allow the ECB to play the role that it should be playing as the currency-issuer. The result will be on-going stagnation and deflation.”
Gogoratu: Interes tasa negatiboak eta, besteak beste, honako hau: QE, Europar Batasuna, inflazioa eta deflazioa…, Schäuble, progreak eta abar.
14 Ingelesez: “The German response is exemplified in this report – Causes of the Eurozone Crisis: A nuanced view – which wants to introduce what they call “Maastricht 2.0”.
See also – Consequences of the Greek Crisis for a More Stable Euro Area: Special Report – published in July 2015 by the German Council of Economic Experts.
It will make you weep!”
15 Ingelesez: “First, “The transfer of fiscal and economic sovereignty to the European level and simultaneously the assumption of comprehensive joint liability by the European partners”.
But this “central decision-making authority” would have “the power to enforce tax increases, spending cuts and structural reforms” in any Member State.
For the same reasons as I outline above, they reject this option.
They conclude that “it is highly unlikely that a democratically legitimised transfer of fiscal and economic sovereignty to the European level will happen anytime soon. Any half-baked implementation of this option, however, with substantial national control remaining vis-à-vis joint liability, would be the worst of all worlds”.”
16 Ingelesez: “So the second, they propose:
The continuation of national sovereignty over fiscal and economic policy, excluding any joint liability for government debt.
And this would require in their vision:
1. The Member States would have to “bear the consequences of unsustainable fiscal policies”, which means rising unemployment and poverty would be the adjustment buffer in the absence of rising deficits.
An anti-people stance.
2. “National fiscal policy is monitored on the basis of common fiscal rules defined by the Stability and Growth Pact and infringements are seriously sanctioned”.
So Germany could continue to run these huge external deficits, but a Member State would be under surveillance and interference from technocrats in Brussels (and Frankfurt and Washington) if they dared run deficits sufficient to bring unemployment down in the event of a nasty (imported) spending shock (as in the case of the GFC).
3. “National debt brakes and their monitoring prevent the accumulation of excessive public debt”. So the restriction on fiscal deficits and the bias towards fiscal surpluses, which has a mirror image of a bias toward greater private debt is deemed appropriate.”
joseba says:
Nazioarteko Moneta Fondoak euroguneaz:
Bill Mitchell-en IMF finds the Eurozone has failed at the most elemental level
(http://bilbo.economicoutlook.net/blog/?p=37927#more-37927)
The IMF put out a new working Paper last week (January 23, 2018)) – Economic Convergence in the Euro Area: Coming Together or Drifting Apart? – which while they don’t admit it demonstrates that the Economic and Monetary Union (EMU) has failed to achieve its most basic aims – economic convergence. The stated aim of European integration has always been to achieve a convergence in the living standards of those within the European Union. That goes back to the 1957 Treaty of Rome, which established the EEC (Common Market). It has been reiterated many times in official documents since. It was a centrepiece of the 1989 Delors Report, which was the final design document for the Treaty of Maastricht and the creation of the EMU. The success or otherwise of the system must therefore be judged in terms of its basic goals and one of them was to create this convergence. The IMF finds that the EMU has, in fact, created increased divergence across a number of indicators – GDP per capita, productivity growth, etc. It also finds that the basic architecture of the EMU, which has allowed nominal convergence to occur has been a destabilising force. It finds that the Stability and Growth Pact criteria has created an environment where fiscal policy has become pro-cyclical, which is the exemplar of irresponsible and damaging policy implementation. Overall, the conclusion has to be drawn that the EMU, at its most elemental level, has failed and defies effective reforms that would make it workable. It should be scrapped or nations should exercise their own volition and exit before it causes them further damage.
(…)
Of course, the reality was different to all this ‘free market’ rhetoric and the EMU created conditions for divergence rather than the stated goal of convergence.
But it is no surprise that (…) the IMF have found limited convergence across the 19 Member States.
(…)
In my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale – I detailed the farcicial nature of the pre-euro convergence process (Chapter 12) where smokescreens and denial were the preferred tools to convince the neoliberal, Europhile Groupthinkers that things were on track and Stage 3 (adoption of euro) was justified.
(…)
There was no economic logic, just a set of arbitrary numbers grabbed out of the air, which were then backfilled with a series of spurious ‘economic’ reports that claimed to represent these numbers as ‘economic knowledge’. They were never that. They were always just ideological statements about the Monetarist disdain for government activity.
All this meant that the convergence criteria had to be watered down.
In effect, they all agreed to fudge the books and bend the rules they had set for themselves, because the rules themselves were impossible to meet while still maintaining anything like politically acceptable unemployment rates.
The upshot was that eleven nations were deemed to have met the convergence criteria and would enter the EMU.
The politicians had demonstrated a spectacular capacity to bend their own rules but there were limits if they wanted to retain any semblance of credibility. Greece was at that stage beyond these limits.
But not for long!
(…)
The Europhile Left fell into this sort of mindless spell that progress was being made and the introduction of the euro was a symbol of that progress.
They were told by outsiders (like me) that this was folly and would end badly. But their capacity to reason was way below the blindness from their rose-coloured-Europhile glasses.
And they hurried to beat the conservatives to the front of the queue – to ‘walk the plank’ and fall into the abyss of austerity and dysfunction.
And still, they defend the system. You still see stupid tweets from so-called Europhile Leftists who think there is no democratic deficit in the Eurozone, who hold hopes for progressive reforms, who think Europe is still on the right path.
They fail to see the reality.
IMF report on post-euro convergence.
(…)
Remember, the designers of the EMU had become infested with the false ideas of Monetarism, which claimed that if a nation attained price stability that it would automatically achieve optimal growth rates and full employment (real criteria).
The obsession was then with nominal criteria as a path to achieving real concerns.
They wanted to discipline fiscal policy “to reconcile a common monetary policy with decentralized fiscal policies, preventing spillovers from national policies”.
The austerity bias was built-in to the whole Maastricht architecture – to satisfy the neoliberal (Monetarist) preference for reduced government activity and influence.
At the time, critics argued that the link between the nominal criteria and actual economic outcomes was flawed.
It was also pointed out that:
1. If everyone had the same inflation rates (a key convergence requirement) then all the adjustments for the lack of exchange rate adjustment would have to be borne by domestic wages and employment if there were productivity differentials. That would be a very damaging process for nations with lower productivity growth.
History has borne those concerns out.
2. A common interest rate was hailed “as a dividend from monetary union” but as history has shown us, was a dangerous source of instability – viz Spanish real estate boom on the back of low interest rates as a result of German dominance in the monetary policy setting.
Germany required low interest rates to address recession early in the EMU period.
3. The Stability and Growth Pact criteria has created an environment where fiscal policy has become pro-cyclical (contracting when the non-government sector was also contracting its spending).
The SGP requirements do not give government sufficient flexibility to meet large negative cyclical events.
Further, given the conduct of the ECB since the crisis (in effectively funding government deficits to keep the Eurozone from collapsing), the IMF are correct in concluding that the “no-bailout clause, which was to ensure that governments did not engage in fiscally irresponsible policies … lacked credibility”.
The architecture of the Eurozone was thus deeply flawed – at the most elemental level.
First, the economic cycles were not symmetrical across the Member States, which meant that the EMU was “making countries worse off with a common monetary policy than outside the monetary union”
Second, “idiosyncratic business cycles leave a tough burden for national fiscal policy to offset asymmetric shocks” and the common SGP rules made it impossible for individual states to achieve that offset.
Further, there has been little evidence of sufficient labour mobility to transfer workers from high unemployment areas to those nations where the negative shock of the crisis had less impact.
The IMF Report concludes (among other things):
1. “Inflation rates converged substantially before euro adoption, but did not align further thereafter” – since 1998, there has been very little additional convergence in inflation rates.
The “persistent inflation differentials contributed to competitiveness gaps” (via differential real exchange rates)
2. “Nominal interest rates also converged, but the convergence was undone during the crisis” – the IMF agree that with persistent inflation differentials, the common interest rates meant that “real interest rates fell sharply in some countries and overshot convergence”, which “fueled credit booms and domestic demand, re-enforcing inflationary pressures”.
These differences worked against ‘real’ convergence.
3. “contrary to expectations, income convergence among EA-12 countries slowed after Maastricht and subsequently came to a halt” – this was only contrary to the neoliberal claims.
Critics of the EMU proposals were always saying that there would not be further income convergence once the common currency was introduced.
The IMF say that there has been further “divergence since the crisis, reversing the initial narrowing in income dispersion”.
(…)
4. “Contrary to expectations, there was no productivity catch-up following the introduction of the euro … countries with low initial productivity have had consistently lower TFP growth and experienced a sharper slowdown over recent years” – again the expectations were generated by delusional Europhiles not those who were grounded in their understanding of what the EMU would achieve.
5. “A larger fall in investment and employment since 2008 further added to the post-crisis divergence in economic growth” – all courtesy of the application of the key EMU rules (SGP, Fiscal Compact etc).
6. “While business cycles have become more synchronized during EMU, the size of these fluctuations has diverged … the divergence in amplitude means that the optimal degree of tightening or loosening of macroeconomic policies would differ for different countries”.
So trying to impose common fiscal rules on nations experiencing vastly different amplitudes in spending variations in their economies will lead to worse outcomes than if the nations were free to pursue their own responses to cyclical variations.
But with a common currency, unless the ECB is empowered to fund any fiscal deficits that the nation states feel are essential to counter asymmetric negative spending shocks in the non-government sector, a Member State might violate the fiscal rules but then find that the bond markets will not provide them with the ‘foreign’ currency (the euro) that they need to remain solvent.
It is a circular dysfunction.
7. “Germany’s financial cycle has become increasingly disconnected from the others … a large and growing variation in amplitudes across national financial cycles. In particular, financial cycles were strongly amplified in Spain, Ireland, and Greece, with standard deviations close to five times the euro area average.”
What does that mean? A financial cycle is proxied by movements in the cost of credit and residential property prices.
There were massive capital flows flowing from “core country banks to … Spain, Ireland … and … Greece” which then set up the bank crises.
In turn, the harsh bailout provisions imposed on Greece, were designed to ensure that the exposure of the Northern (French, German) banks to the Greek crisis was reduced and the Greek people paid the price. A substantial proportion of the bailout payments that the Greek government has been forced to make were to protect these banks not help the Greek economy.
On adjustment mechanisms that the neoliberals claimed would “help income convergence and countries’ capacity to adjust to shocks within the single currency”, the IMF found that:
1. “the envisaged adjustment mechanisms under monetary union have been insufficient to support convergence, and have in some cases contributed to divergence.”
2. “Intra-euro area trade is substantial, but has not increased as much as predicted … the effect of EMU on trade has likely been small” – there have been little ‘competitive’ gains from the internal devaluation forced on to nations – a point I have made regularly since the crisis began.
Further, the Europhile Left continually talk about the benefits of the common currency in reducing frictions at the border (currency changes) as if the macroeconomic gains of this are large.
The IMF finds that trade gains have been virtually non-existent.
3. “The adjustment impact from intra-EU labor mobility has also been modest” – “language, cultural and administrative barriers” remain and will always remain.
This is one of the major reasons, the EMU can never really work. Germans do not think of themselves as ‘Europeans’ united with Greeks, for example.
A cultural sharing has to be present in effective federations.
4. “Capital flows, meanwhile, increased substantially, but financed investments in low- productivity sectors and drove unsustainable booms” – we have discussed these above.
5. “At the same time, foreign direct investment (FDI) flowed disproportionately to Central European countries, rather than other euro area countries” – Germany’s suppression of its own domestic demand, which created reduced opportunities for profitable domestic investment, not only saw capital flows to the ‘south’ within the EMU.
But German industry has been busily creating a low-wage supply chain for its manufacturers in the weaker Eastern European nations.
Refer back to the introduction – where non-Eurozone European nations to the east have been booming in recent years.
Conclusion
The IMF think the answer is to fast track structural policy initiatives (cutting pensions, further deregulation, etc) and “Recalibrated euro area fiscal rules to allow for greater countercyclical policies, together with a common fiscal capacity”.
I agree with the second not the first of these solutions.
The main problem is not a lack of productivity among some member states. The sort of problems we have seen post Euro were not there before.
The main problem is that the Member States ceded their currency sovereignty and then were put in a straitjacket by the Treaty so that fiscal policy became pro-cyclical – and thus has worsened any non-government sector spending decline.
Of course, the Europhile Left think that can be corrected (with unemployment insurance schemes etc). Little do they know.
What score out of 10 would we now give the Eurozone on those grounds some 18 years after the inception of the common currency?
I would give it 1/10 and only because there is more exchange rate stability because they wiped out the Member State currencies.
But the instability that dogged European currencies since the inception of the Common Market has now been shifted (via internal devaluation) into massive divergences in standards of living across the Eurozone.
In that sense, I would give the Eurozone a negative (less than 0/10) rating.