The next few days are very tight for me – travel and meetings. So the blogs might be shorter (cheers I hear!). The thing about blogs which I find interesting is that I normally have to write in a very tight fashion (for academic publication) and editorial discrimination becomes paramount. Whereas the blog is a flowing environment and the only limit I place is the time I spend per day. Within that time span I just type and what comes out comes out with only spelling corrections. The grammar is sometimes not as correct and hyperbole and colloquialisms are rife. But that is a liberating offset to my usual literary output each day. Anyway, I thought the quote of the day (actually December 10, 2010) was – The Eurozone in bad need of a psychiatrist. Well perhaps it is the leaders and their hangers-on who need this help. And when the shrinks have finished with Brussels and Frankfurt they can stop in at London on route to Washington. Canberra can follow sometime soon after. The problem is that we have a person-made mess that is relatively easy to address and yet the ideological straitjacket that has been imposed on the solution amounts to cutting the wound wider and deeper so the blood loss is even greater. Madness! And the rest of us go along with it and elect politicians who say they will whip us even harder. Bring in the men and women with the white coats! For everybody …
I am working on a book at present on the way recessions entrench growing disadvantage beyond the costs that the actual crisis period imposes on the unemployed and others. The idea is that the neo-liberal era has systematically been associated with a trend towards erosion of working conditions and a rising inequality in outcomes far beyond anything that could remotely be justified by disparate individual or sectoral productivity trends. It is clear that the rise of the financial sector has been generated a massive redistribution of national income in most countries away from workers and productive sectors. As part of this research I am delving beyond the usual “economic” analysis that I might take of recessions. I am also trying to document how recessions occur and how the recessions of the last 40 years have reflected a growing disregard by our governments for their legitimate responsibilities to advance public purpose. In turn, this disregard has seen them turn a blind eye to corruption and incompetence in the private sector while we were being told that by privatisation and deregulation they had solved the macroeconomic problem and we would enjoy unparalleled prosperity. It was a con job of major proportions and now the question should be who is going to pay for all the damage they caused?
My friend Marshall Auerback has described the EMU has the Roach Motel – a very North American term but one which resonates everywhere. The full article – is recommended reading. Very amusing and perspicacious. He says – “The Germans might occupy the penthouse suite, but it’s the penthouse suite of a roach motel” which is apposite. The latest decisions of the EU finance ministers after an emergency meeting in Brussels over the weekend will just hold the ultimate crisis at bay for a little while longer. The EMU is currently surviving because the ECB has stepped in as the “missing” fiscal agent and keeping the bond markets at bay. While the ECB is the only entity in the EMU which has currency sovereignty and can “fiscally fund” member state deficits permanently, the underlying logic of the monetary system will continue to ensure these on-going crises will spread across the union. The EU bosses are just buying time and “kicking the can down the road a bit” at the moment. Ultimately, to survive the system has to add a unified fiscal authority and abandon the fiscal (Maastricht) rules (not politically possible) or accept the experiment has failed and dissolve the union. The latter option is clearly preferred and while the can is being kicked down the road apiece the EU leaders should be dismantling the Roach Motel and setting the captives free.
I have been thinking about changing industrial/sectoral shares today and how it bears on the way we construct macroeconomic policy (spending and taxation). At present, a major debate in Australia is how we are going to deal with the strong growth in the mining sector and the negative consequences this growth is having on other sectors that are not enjoying buoyant demand conditions. The mainstream response – to impose fiscal consolidation and tight monetary policy – is exactly the opposite response to what is required. But the discussion about sectoral change has further application in terms of the long-run movements in demography and shifting demand for health care and other age-related services. It generalises even further if we consider the growing need for environment care services. The upshot is that trends which will require a rising public share of total resource usage should not be seen as financial crises. Rather we should see them as part of the long process of structural transformation in our economies. Once we see it from that perspective, then the ideological nature of the ageing society debate is exposed. But first, Ireland …
It has become like a sporting event. We now have the live coverage with commentators and up to the minute news updates and scores. The only problem is that we are actually viewing the dynamics of a monetary system – in this case, a system so poorly conceived and blinded by ideology and cultural prejudices that it is was certain to collapse. But only 3 or maybe 4 years ago the same ideologues who constructed this failure were telling us that some nations within this monetary system should be the role models for all of us to follow. Now the live coverage is of the crisis that these “role” models are in. It is no surprise though – I disagreed with the entreaties to “believe” in this model when the hype was at its maximum. I wrote several years ago “when this crisis comes it will be very big” in relation to the growing private sector indebtedness and the move to fiscal austerity as the neo-liberal madness climaxed. It was only ever a matter of time. Anyway, live coverage is now on …
The World Bank boss Robert Zoellick claims that we should all return to the Gold Standard to restore economic stability in the World economy. He is crazy. Sorry! The G-20 meeting in Seoul this week will obviously be concentrating on side issues such as the impact of the latest US quantitative easing plans on world inflation and the international currency system which many commentators are now claiming is in turmoil. Zoellick’s proposal will be added to the agenda which will reinforce what a waste of time these meetings are turning out to be. Zoellick’s call for a gold standard is just another one of these conservative smokescreens that attempt to solve the problem by denying it. They are all just expressions of obsessive and moribund fear of fiscal policy and the erroneous allegation that budget deficits cause inflation. So we will get a G-20 communiqué in a few days calling for more international cooperation in trade and currency settings and more fiscal consolidation and the need for on-going discussions about the creation of a new international reserve currency (perhaps a gold standard). But all these words will be in spite of the real policy agenda that is required – more public spending. What will they come up with next?
I was thinking about the recent European Council meeting today which was held in Brussels over the weekend. It is clear that the Eurozone bosses are choosing to ignore all the lessons that the current crisis has provided to them about the basic design flaws of their monetary system. They think the solution to their problems is to make it even harder for member governments to provide net spending to their economies at times of stress. They fail to articulate the most basic macroeconomic fact that confronts them – unemployment is rising across the zone and production generally is stagnant because there is not enough demand for sales of goods and services. If the private sector won’t provide that demand then the government sector has to given that they cannot rely on net exports to cure the deficiency. By deliberately restricting governments and effectively forcing them to engage in pro-cyclical fiscal responses the Euro bosses are not only prolonging the agony the citizens are facing but are also engaging in a self-defeating strategy. As we are seeing budget deficits are rising as austerity is imposed. The solution to the Eurozone problems is to disband the zone and restore individual currency sovereignty at the national level. It would be painful to do that but in the medium- to long-term it will be less painful than the trajectory they are following.
I am now in Maastricht, The Netherlands where I have a regular position as visiting professor. It is like a second home to me. The University hosts CofFEE-Europe, which we started some years ago as a sibling of my research centre back in Newcastle. My relationship with the University here is due to my long friendship and professional collaboration with Prof dr. Joan Muysken who works here and is a co-author of my recent book – Full Employment abandoned. Our discussions last night were all about the Eurozone and I was happy to know that most of the Dutch banks are now effectively nationalised as part of the early bailout attempts. It is also clear that the ECB is now stuck between the devil and the deep blue sea. If it stops buying national government debt on the secondary markets those governments are likely to default and the big French and German banks the ECB is largely protecting will be in crisis. Alternatively, every day it continues with this policy the more obvious it is that the Eurozone system is totally bereft of any logic. Once the citizens in the nations that are being forced to endure harsh austerity programs realise all this there will be mayhem. The other discussion topic was the possible revision of the fiscal rules that define the Maastricht treaty. That is what this blog is about.
If I was to become the boss of a sovereign government, the first thing I would do would be to introduce a Job Guarantee and immediately set about restoring jobs and a living income to those who are without either. This would immediately boost aggregate demand and give business firms a reason to start investing and producing. The second thing I would do would be to pass legislation outlawing all the international rating agencies. If I was to become the boss of a government within the EMU, the ordering would be similar except that before I introduced the Job Guarantee I would withdraw from the monetary union, default on all Euro-denominated debt, and reintroduce a sovereign currency. Then I would offer a job to anyone who wanted one at a living minimum wage and outlaw the ratings agencies. All that could be done on the first day of my tenure in official office. The recession would be over within a few months and then I would set about nationalising the zombie banks. It would be a fun ride!
Today I consider the idea that governments which have surrendered their sovereignty either by giving up their currency issuing monopoly, and/or fixing their exchange rate to the another currency, and/or incurring sovereign debt in a foreign currency might find defaulting on sovereign debt to be their best strategy in the current recession. I consider this in the context that any government that has surrendered their sovereignty is incapable of pursuing policies across the business cycle that serve the best interests of their population. While re-establishing their currency sovereignty may not require debt default, in many cases, default will necessarily be an integral part of the move back to full fiscal sovereignty. This is especially the case for nations that have borrowed in foreign currencies and/or surrendered their currency issuing capacities to a common monetary system. So here are some thoughts on when default is a way for a nation to progress.