I haven’t had time yet to fully work through the decision by the European Commission yesterday to provide grants and loans to struggling Eurozone countries. I will comment on that when I have had time to understand the implications and be in a position to provide fair comment. It seems to be a vastly inadequately response in quantum, on top of an existing lack of fiscal support. But more on that another day. Today, I am investigating the latest data from the ECB. On May 26, 2020, the ECB released its bi-annual – Financial Stability Review, May 2020 – which seemed to excite some journalists to advance narratives that ‘sovereign debt’ investors (although none of the Eurozone nations are sovereign) will soon become spooked by the sharp rise in public debt levels in Europe, which will “threaten to undermine private-sector spending” and stall any growth prospects. The quote is from a Financial Times article (May 26, 2020) – ECB warns of challenge for eurozone from soaring public debt – which followed the release of the ECB’s Review. The elephant is, of course, the ECB assets and its ability to control all yields on public debt at will.
It is Wednesday and I have a lot of commitments and deadlines hanging over me today. But I thought I would briefly comment on the yesterday’s – Decision – by the Bundesverfassungsgericht (German Federal Constitutional Court) (May 5, 2020) on the legality of the ECB’s Public Sector Purchase Programme. The BVerfG concluded that the ECB has been operating ultra vires and made orders as appropriate, which bind the German government and the Bundesbank and demonstrate once again the myth of central bank independence. There is all sorts of angst being expressed out there about this decision and progressive Europhiles are almost apoplectic. But it won’t surprise you to know that I think the Court made the correct judgement by exposing the complete sham that the European Union and the Eurozone, in particular, has become – an illegal, look-the-other-way, neoliberal cabal that the Union has become.
Things are a little odd when a Minister for Finance & Public Expenditure and Reform of a nation (Ireland) informs the press that if his government isn’t cautious in its fiscal response to the largest medical and economic crisis in a century then the “bond vigilantes” will turn on them. And this is in the context of governments around the world issuing long-term debt at negative interest rates and the relevant central bank is buying billions of government bonds with its currency-issuing capacity. But that is what the Irish Finance Minister did last week ((Source). Fear of God strategy Number 1. That still works in god-fearing places. He referred to the “the fiscal architecture we are anchored in within the euro area” which will ultimately impose Excessive Deficit Procedures as the medical crisis eases (see his April 23, 2020, Speech on Stability Programme Update). Code for a renewed bout of austerity once people have stopped dying. A wonderful prospect. And while currency-issuing governments around the world are introducing variously large direct fiscal stimulus packages (that is, spending going into the economy immediately), the European Union is once again demonstrating their inability to respond to crisis. Nothing has been learned from the GFC.
Last Thursday (March 26, 2020), the European Council met to discuss the way in which the European Union would deal with the coronavirus crisis. Not much happened. Well that is not exactly true. A lot happened in the sense that even when faced with the worst health crisis in a century that is already devastating the populations in Italy and Spain and creating economic havoc throughout, the leadership split along familiar lines and failed to come up with any solution. There was a lot of talk about solidarity and all the buzz words that the European leadership frequently outputs in their wordy statements. But very little action and lots of acrimony, division and back to form behaviour. My view is that the Member States should now just do whatever they consider it takes to bolster their health systems and protect their economies, which will involve significant fiscal deficits (multiples of the allowable limits under the Stability and Growth Pact), and trust that the ECB’s unlimited bond buying spree will back them. And when the Brussels technocrats start talking about Excessive Deficit Mechanisms and the rest of the blather, they should just show them the door. And if push comes to shove, they just should exit the whole rotten structure. But now is the time for defiance and disobedience. Now is the time that democracy fought back and told the elites to be quiet.
Major developments across the globe in monetary and fiscal policy keep happening on a daily basis at present. We are now hearing conservatives, who previously made careers out of claims that government deficits would send nations broke and more, appearing in the media now claiming “We need the state to bail out the entire nation”. Not too many economists are pushing the line that the market will deal with this crisis. They all the want the state to be front and centre as their own personal empires (income etc) becomes vulnerable. In a normal downturn there is not much sympathy for the most disadvantaged workers who bear the brunt of the unemployment. Now it is different. This crisis has the potential to wipe out the middle classes and the professional classes. And suddenly, who would have thought – the nation state is apparently back, all powerful and being begged to intervene. It is wake up time. Now no-one can be unclear about the fiscal capacity of the state. They now know that politicians who claim they don’t have enough money to do things were lying all along. They just didn’t want to do them. And when this health crisis was over we have to demand that the governments continue to lead the way financially and work out solutions to the socio-ecological climate crisis. No-one can say there is not enough funds to do whatever it takes. We all know now there are unlimited funds. The question must turn to the best way to use them. I also provide in this post some further estimates of the labour market disaster that Australia is facing as part of the development of my 10-point or something plan. It is all pretty confronting.
Life as we knew it is changing fast, almost by the hour. Most of my speaking engagements, which were heavily booked for the foreseeable future, have been cancelled or deferred. All the gigs that my band was booked for have been cancelled until people start returning to the now, empty venues. And, more significantly, the ideologues are giving way to the pragmatists in the policy space. Almost (see below). The sudden realisation that even Germany will now spend large amounts to protect their economy exposes all the lies that have been used in the past (up until about yesterday) to stop governments doing what they should always do – maintain spending levels in the economy to sustain full employment and ensure no-one falls through the cracks and misses out on the material benefits of growth. In the early days of the GFC, I thought that the neoliberal era, supported by the mainstream macroeconomists, might be coming to an end. Maybe I was a decade out in my prediction. Perhaps this crisis, induced by a human sickness, will end the madness that has redistributed massive volumes of income to the top-end-of-town, sustained elevated levels of labour underutilisation and seen the traditional progressive political voices become mouthpieces and even agents for the neoliberal economic lies. I was wrong in 2008 on this score. I hope something good like this comes out of the current disaster. The coronavirus comes on top of already growing dissent over the failure of mainstream economic policy. It will redefine what governments can do with their obvious fiscal capacity and will demonstrate once-and-for-all the lies that the mainstream economists tell about deficits, inflation, interest rates, etc. It will categorically demonstrate the capacity of the currency-issuer. All that will lay the foundation for a better future, if we get beyond this current malaise.
I am back into my usual patterns, which means that I plan to write less on a Wednesday for my blog than other days. I have a number of projects underway at present – academic and advocacy – and I need to devote writing time to those. Given that yesterday I wrote about the Australian National Accounts data release and today I have to travel a lot, it is another case of Thursday becomes Wednesday and I offer some snippets. I will write a detailed account of my view on how to deal with the coronavirus from an Modern Monetary Theory (MMT) perspective next week. But today I want to highlight something that just ‘goes through to the keeper’ (cricket reference meaning no-one pays attention to it) but is significant in understanding what is wrong with the Eurozone. I refer to information that is contained in the latest – Annual Report 2019 – released last week by the Deutsche Bundesbank. If you juxtapose that with another report on the Greek health system you get a fairly clear view on what is wrong with the whole EU set up.
One of the themes I exercised when speaking in Europe recently, particularly when presenting at the French Senate Commission and the Ministry of Finance, was that by pushing European integration into an unworkable currency union and refusing to budge, the European political class was undermining the valid aspects of the ‘European Project’, which the likes of Jean Monnet and Robert Schuman saw as a way of bringing peace to the Continent after several attempts by Germany to usurp the rights of citizens in other European nations through military endeavours. Research released by the The PopuList Project, which is a UK Guardian motivated attempt to bring together academics and journalist to study shifts in European voting sentiment since 1989, is rather alarming for those who hang on to hope that the European Union is capable of progressive reform. And the latest shenanigans in the European Commission and the Council over the ‘Budget’ is indicative of why the PopuList Project is generating such results. If there was foresight among the leaders in Europe they would take a step back and restore national currencies and restore the quality of European democracy, which has been significantly compromised since the 1990s.
Thursday is my last teaching day in Helsinki. The Tour moves onto Dublin tomorrow where I hope to learn a lot about the implications of the recent Irish election where Sinn Féin came out of nowhere, as they say, to gain the most votes by some margin and 37 seats, only one less than right-wing conservative party Fianna Fáil and two more than the other right-wing conservative party, the ruling Fine Gael. I have various meetings coming up in Helsinki on Thursday as I finish up this year’s Helsinki visit (although I will be back in June for other commitments). So today I am publishing the video of my presentation at the Italian Senate last Friday (February 7, 2020).
I guess I cannot avoid commenting on the European Commission’s recently released (February 5, 2020) – Economic governance review – which, allegedly, “seeks to assess how effective the economic surveillance framework has been in achieving three key objectives: ensuring sustainable government finances and economic growth, as well as avoiding macroeconomic imbalances; … promoting convergence in Member States’ economic performance.” The short answer is that the framework has failed on all fronts. The Member State fiscal situations are always mostly teetering on the edge of insolvency and only the ECB has been bailing them out; macroeconomic imbalances that really matter, such as the on-going illegal German external surpluses persist, and divergence is the Eurozone norm. Why? Another simple answer: because the architecture of the currency union is deeply flawed and biases the economies to crisis and makes them vulnerable, in an existential sense, to fluctuations in global activity. Why would they have done that? Answer: the triumph of neoliberal ideology over reason.