skip to Main Content

Live coverage now on

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 graph comes from the front page of the UK Guardian (Business) and I wanted to preserve it for posterity. Live coverage of a debt crisis … what has the world come to. When you think that this is totally avoidable – not without pain given recent history – but the Irish government could stop this madness virtually immediately – leave the EMU, default (re-negotiate all Euro-denominated debts in punts), and start using their regained sovereignty to get people back to work and consuming again.

This is what I was writing in 2006. This writing eventually came out in my 2008 book with Joan Muysken – Full Employment abandoned. Here is a brief selection starting with an attack on the dominant economic policy framework:

The overriding priority of macroeconomic policy has shifted towards keeping inflation low and suppressing the stabilisation functions of fiscal policy. Concerted political campaigns by neo-liberal governments aided and abetted by a capitalist class intent on regaining total control of workplaces, have hectored communities into accepting that mass unemployment and rising underemployment is no longer the responsibility of government. As a consequence, the insights gained from the writings of Keynes, Marx and Kalecki into how deficient demand in macroeconomic systems constrains employment opportunities and forces some individuals into involuntary unemployment have been discarded. The concept of systemic failure has been replaced by sheeting the responsibility for economic outcomes onto the individual …

At a time when budget deficits should have been used to stimulate the demand needed to generate jobs for all those wanting work, various restrictions have been placed on fiscal policy by governments influenced by orthodox macroeconomic theory. Monetary policy has also become restrictive, with inflation targeting – either directly or indirectly – pursued by increasingly independent and vigilant central banks. These misguided fiscal and monetary stances have damaged the capacities of the various economies to produce enough jobs …

It is important to document how structural explanations for unemployment have been used to justify widespread labour market deregulation; attacks on the rights and capacities of labour unions to represent their members; wasteful privatisations of public assets; the compliance focus of welfare-to-work policy, a retrenchment of the role of the public sector as an employer, and widespread reductions in the social wage … macroeconomic policy, characterised by inflation targeting and a growing fiscal conservatism, has supported this microeconomic emphasis structural reform. While the current orthodoxy extols the virtues of budget surpluses as the exemplars of fiscal responsibility … this policy stance is, in fact, damaging for economic growth …

Additionally, and contrary to neo-liberal rhetoric, the systematic pursuit of government budget surpluses is necessarily manifested as systematic declines in private sector savings … the decreasing levels of net private savings financing the government surplus increasingly leverage the private sector. The deteriorating debt to income ratios which result will eventually see the system succumb to ongoing demand-draining fiscal drag through a slow-down in real activity.

I have been writing along those lines for most of my academic career and will stand by that analysis and its predictions. It was always obvious that the neo-liberal policy dynamics were going to explode and generate a terrible recession. The way in which restrictive fiscal policy and massive private debt accumulated was coordinated across nations via the increasing financialisation of our economies meant that the contagion was going to be huge once the house of cards started to collapse.

If you had been going to conferences or lectures where Randy Wray, Warren Mosler or myself were talking – way back in the mid-1990s you would have picked up on this trend. If we had have been in charge it would not have happened!

In 1997 I wrote (subsequently published the following year in the US Journal of Economic Issues):

[There is a] … priority of spending and … that debt issue is not essential for governments to spend beyond tax revenue … bond issues are essential only to support the cash rates set by the Central Bank. Deficit spending without Treasury bond sales would generate excess reserves in the banking system, so that government debt helps to maintain a positive overnight interest rate for private banks. The idea of crowding out in this environment is as meaningless as debates about the term maturity of the debt. Deficits add to the net disposable income of households in the economy and the income provides markets for private production. An endogenous credit economy then serves to provide the deposits necessary to make payments, which facilitate production. The higher demand stimulates investment that creates capacity as a legacy to the future. The higher is current demand, the higher is productive capacity in the future. Spending brings forth its own savings. Savings are not required to exist as a prior pool for spending to occur.

And clearly I could offer pages of such quotes. The point is that there has been no empirical evidence over this long period which poses questions for my analysis and the core of Modern Monetary Theory (MMT). Note we have to be careful to distinguish my personally preferred policy interventions from the analysis of the existing policy stance. My analysis over a long period of the latter has been rock solid and continues to be.

That is background. If events that followed did not support my understanding then it would have given me a major headache (the loss of face) but it would surely have provoked me to question the basis of my understanding about how the monetary system operates and the way in which the government/non-government sectors interact. I certainly would not continue to advocate explanations and related policies that had been shown to fail and cause untold damage to people all around the world.

So lets go back to February 23, 2006 – on that day this article appeared in the UK Times Newspaper – Look and learn from across the Irish Sea – written by the now British Chancellor George Osborne.

Osborne said that

A GENERATION ago, the very idea that a British politician would go to Ireland to see how to run an economy would have been laughable. The Irish Republic was seen as Britain’s poor and troubled country cousin, a rural backwater on the edge of Europe. Today things are different. Ireland stands as a shining example of the art of the possible in long-term economic policymaking, and that is why I am in Dublin: to listen and to learn.

It seems that George didn’t stay in Dublin long enough for he would have seen the folly of his remarks.

After waxing lyrical about all the foreign companies that had set up in Ireland (courtesy of the very low tax rates) and the lifestyle in general, Osborne ventured to speculate on what had “caused this Irish miracle” and how could “Britain emulate it” and listed “Ireland’s education system is world-class”, the Irish understanding that “innovation requires world class research and development” and “low business taxes” and substantial business de-regulation.

Osborne then said:

The new global economy poses real long-term challenges to Britain, but also real opportunities for us to prosper and succeed. In Ireland they understand this. They have freed their markets, developed the skills of their workforce, encouraged enterprise and innovation and created a dynamic economy. They have much to teach us, if only we are willing to learn.

Of-course, I don’t need to tell the story of Ireland over and over again. Major deregulations particularly in the financial sector; banks allowed to career out of control; entry into the EMU (and thus surrendering their currency sovereignty); a huge real estate price bubble driven by a massive increase in private sector indebtedness; major divergence between GDP and GNP (as foreign firms repatriated huge earnings from the nation).

Please read my blogs – The sick Celtic Tiger getting sicker and The Celtic Tiger is not a good example – for more background discussion and analysis.

But the neo-liberals were strutting around at that time telling us all that this was the miracle that a belief in the self-regulation of private markets and fiscal rectitude brings.

The mainstream macroeconomists increasingly tried to claim in the 1990s and up until the recent crisis that they had “won” – been vindicated and those stupid Keynesians would never see the light of day again. The Great Moderation was upon us!

One notable example, is the 2003 presidential address to the American Economic Association, where Robert E. Lucas, Jnr of the University of Chicago said:

My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades. There remain important gains in welfare from better fiscal policies, but I argue that these are gains from providing people with better incentives to work and to save, not from better fine tuning of spending flows. Taking U.S. performance over the past 50 years as a benchmark, the potential for welfare gains from better long-run, supply side policies exceeds by far the potential from further improvements in short-run demand management.

So no humility there. Problem solved. There is no business cycle. Please read my blog – The Great Moderation myth – for more discussion on this point.

On February 20, 2004 the current US Federal Reserve Board Governor Ben S. Bernanke made one of the worst speeches by an official of a major policy institution ever. It was entitled The Great Moderation.

At the time, I was among only a few macroeconomists who poured scorn on the propositions that Bernanke outlined as “truth”. Now, the experience of a big economic crisis has demonstrated to anyone that the essential ideas that were used to justify the policy positions taken by countries across the world were so wilful in their neglect of basic understanding of how the system actually operates.

Sure growth was possible while private sector credit expansion was strong. But the credit flows left a nasty stock – private indebtedness – and this debt was supporting increasingly fragile nominal asset values. It was always going to collapse – and so it did.

But the right didn’t see it coming at all. Take this article – It’s Not Luck – which appeared in the National Review Online on March 16, 2007. It was written by one Chris Edwards who is aligned with the right-wing Cato Institute in the US.

Edwards was commenting on the improvement in the Irish GDP growth in the years leading up to the crisis and asked:

Was this dramatic change the luck of the Irish? Not at all. It resulted from a series of hard-headed decisions that shifted Ireland from big government stagnation to free market growth. After years of high inflation, double-digit unemployment rates, and soaring government debt that topped 100 percent of GDP, Irish policymakers began to cut spending in the late 1980s … [and] … has steadily reduced its tax rates. However, the key to Ireland’s success has been its excellent tax climate for business … one of the lowest rates in the world … have helped … attract huge inflows of foreign investment.

Edwards then continued on this theme talking about “open borders” and “stable money” and then launched into a rave about “politicians who spend their time trying to undermine the free market” (citing Venezuela’s Hugo Chavez).

But you get the picture. Within a few months of Edwards writing this article which urged the US to follow suit and cut taxes and public spending and deregulate further, the global financial crisis was upon us. The GFC morphed into a real recession (nearly depression) because the government response in the US and elsewhere was too slow and too small. That response was tempered and delayed because of the influence of the likes of George Osborne and Chris Edwards and the host of ideologues who preached deregulation and small government.

I did a search today as a follow up to these articles to see how these two actually rationalised what the crisis was all about. It is hard to find anything at all that you would call definitive that allows us to understand how they move from this pre-crisis position which was advocating policies etc that clearly led to the crisis to an explanation of why the crisis occurred.

So how to these characters explain what has happened? Edwards recently wrote an article (I won’t link to it for obvious reasons) entitled – “Plunder! How Public Employee Unions Are Raiding Treasuries, Controlling Our Lives, and Bankrupting the Nation”.

The fact is that the neo-liberals have bypassed an extensive analysis of the crisis and have redefined it as a fiscal crisis. They waited a while until things became a little more stable and then started launching into their maniacal attacks on government spending and public debt.

The fiscal austerity program that Osborne is “managing” in the UK is testament to his ideological zeal. Not only will the austerity policies make the UK go backwards in economic terms as overall aggregate demand falters but the policies will make it much harder for the private sector to reduce their very high debt levels and reduce the precariousness of their financial situations.

And then you read that:

Financial hit squads from the International Monetary Fund, the European Central Bank and the EU will be parachuted into Dublin within days to finalise details of a multibillion-euro bailout for the stricken Irish economy …

And the Irish finance minister was reported as saying that the bond markets are “not being good to Ireland” given that “borrowing costs shot up to 9% last week” as the full extent of the banking insolvency becomes obvious.

The next stop will be Portugal and Spain. Greece is already effectively in receivership with the ECB providing the “fiscal life line”.

So the parachute squads are demonstrating beyond any stretch of the imagination that Ireland has no sovereignty – economic or political. They surrendered that when they entered the EMU.

The whole European monetary system has failed. When are they going to realise that?

On November 13, 2010 (Monday) Eurostat published the latest Provision of deficit and debt data – which provides the most recent estimates for 2009 of the trends in public financial data.

The release brought a large reaction from the press because the Greek deficit for 2009 was 15.4 per cent of GDP rather than the previously estimated 13.6 per cent.

My reaction when I received the update in my E-mail and read it was to mumble – “so what! What else would you expect?”.

The press reaction was quite different – pointing that the Greek government was now violating the terms of the bailouts it received in the earlier part of 2010 and that the public debt ratio would be the highest in the EU.

The reality is that the Greek government is now entering default. The UK Guardian quotes a “senior government aide” who said:

We will face a profound strategic issue of how to repay €70bn-€80bn when redemption of the rescue loans comes … There will have to be some disguised rescheduling of the time frame in which we repay the money.

That is, default.

The Guardian also reported that there was parachute squad in Athens as well (from the IMF, ECB and EC) and there are noises emerging from the Greek Prime Minister that the increased budget deficit (beyond the bailout agreement) would require even further cuts in net public spending.

Don’t they ever learn.

The budget outcome is driven by spending patterns in the private sector. Economists call it an endogenous result because the government cannot set a target budget outcome and guarantee it will succeed. It all depends on what the non-government does.
Please read my blog – Structural deficits and automatic stabilisers – for more discussion on this point.

So with a private sector heavily undebted and world trade growth fairly flat, the only thing that will work in the Greek case is to expand fiscal policy. If people are paying down debt and credit growth is flat, then the low interest rate regime the ECB is running won’t help.

The Japanese learnt this lesson in the 1990s. They had nearly zero interest rates from 1995 in an attempt to revive their economy which had been severely damaged by the collapse of the real estate boom in the late 1980s. The only thing that stimulated growth was fiscal policy. In 1997, the conservatives succeeded in scaring the Japanese government into tightening fiscal policy again. Result? Japan went back into a deeper recession and the budget outcome was a higher deficit driven by the automatic stabilisers (collapsing tax revenue).

There can be no repair of precarious private sector balance sheets while the government is cutting back and economic growth is stalled or going backwards. If the private sector desires to net save overall then the government has to run deficits to match the spending withdrawal from the private sector.

There is no other choice.


Ireland was never an example of a desirable growth policy framework just as it is not an example of how to deal with a collapse in aggregate demand and a major bank crisis.

Building growth on ever-increasing levels of private sector indebtedness that was supporting an inflated real estate market is not a desirable growth path. Further, providing a landscape devoid of regulation and allowing foreign firms to rip is also not desirable.

In addition, allowing banks to become casino players is totally nonsensical.

And finally, joining a monetary system where you surrender your currency sovereignty and fix your “exchange rate” (such as in the EMU) is the height of madness.

Our “exemplar” – Ireland – went for all these options. And now they are paying for it.

On Monday, October 20, 1980 an article written by J.K.Galbraith appeared in the Agenda column in the UK Guardian (Page 7). Here is the article (courtesy of the Guardian/Observer Digital Archive – it is in JPG form and the full picture (click if you want to read it) is about 457 kb in size.

Galbraith was talking about the debates between Keynesians and Monetarists at the time. He noted that:

Such is the case against the workability of the Friedmanite formula, and all experience shows that for the faithful it is not convincing. What has been needed is a trial; thus one’s gratitude that Britain has, in effect, volunteered to be the Friedmanite guinea pig …

At the end of 17 months of Friedmanite policies in Britain, inflation is 16 per cent, manufacturing output is down by 8 per cent, small business bankruptcies are up and unemployment … is the highest since the Great Depression.

So Ireland has pioneered the neo-liberal fiscal austerity route this time and now Britain is in hot pursuit. They will fare badly.

Remember spending equals income. Someone has to spend.

I will stand by what I have written here and in my academic work. I would be deeply humiliated if I had have written the sort of stuff that Osborne and Edwards and a myriad of other conservatives wrote during the lead up to the crisis. They were wrong then. They are wrong now. What will it take to convince the people that their policies are wrong.

So in tonight’s live coverage we can sit back and wonder where the parachute squads are heading next – Lisbon, Madrid … maybe even Roma!

That is enough for today!

Spread the word ...
    This Post Has 39 Comments
    1. The reality is that the Greek government is now entering default.

      The likeliness is increasing but it finally comes down to “don’t fight the ECB”. Speculators got their fingers burned last time and will be careful this time. And the ECB did that with without doing too much.

      Next time one may hear of another article in the Lisbon Treaty interpreted to mean that the ECB can directly purchase government bonds from the government Treasuries, not necessarily from the secondary markets.

      Complicated games ahead – class struggle dynamics between the workers and the capitalists and people in power.

    2. The economy of Europe is so geographically diverse. I guess the alternatives to the PIIGS leaving the euro are.

      1) Germany and prosperous neighbours purchase Piggy bonds until the day Europe has a geographically balanced economy. That will be the same day the devil straps on a pair of skates. Can’t see conservative Germans buying the idea.

      2) The PIIGS economies sink lower. Wages reduce and people emigrate on mass. This reduces the demand for PIIGS Government services and increases the demand for German et al Government services. This is balancing the European economy a la USA. Not gonna happen. I can see Sarkosy setting up internment camps.

      So dead Euro walking is the correct term.

    3. If they are going to try and ride this out, they have no choice but to let the FED, I mean the ECB get on and sort it out. The politicians need to shut up especially Merkel. If they can’t do that then give up the whole experiment.

    4. I agree. The way the EuroZone is conceived is a recipe for economic disaster. This experiment failed. All economists who took part in setting up the experiment should be fired immediately for sheer incompetence. And the EuroZone must be dissolved in an orderly fashion. But this takes time and some hard-thinking.

      For the moment we have more urgent problem. No matter how I thought about the problem it always presents itself in one very impolite sentence. Jean-Claude Trichet is a clueless idiot. Like a parrot he always dishes out the same nonsense. Austerity is the real thing. Each member nation shall slash wages and export itself into economic nirvana. Government spending is evil and doesn’t change a thing because Europe is populated with Ricardian aliens. He’s too stupid to acknowledge the most basic fact. That the ECB is the 800 pound gorilla in town and all these bond vigilantes are mere bonobos. Make a credible announcement to buy each and every bond denominated in Euros for a price of your choosing and the bonobo hoard will subjugate. And you’re done. Then we can start to unwind the experiment in an orderly rational way.

      And his stupidity seems to be contagious. A German economist educated at the LSE suggested, that the ECB buying Greek bonds on the secondary market is not the solution. Because once Greece defaults on her bonds, the ECB must write them off and the German taxpayer must then consequently bailout the ECB. I’m now waiting for an US economist picking up this theory and musing that QE 1,2,3,… is dangerous because if it fails the US taxpayer must bailout the Federal Reserve.

    5. Dear Bill,

      do you honestly believe leaving the Euro is going to help the Irish or Greek people?

      From what I understand, the problem seems not so much whether these nations are part of the Euro zone, but whether they understand the folly of austerity. If Greece were to leave, but stick to austerity, would they really be that much better off? I realize that the floating exchange rate and a likely devaluation of a newly introduced Drachme would help, but it still seems like things aren’t going to get better significantly until governments realize that austerity is a stupid idea.

      However, *if* they understand this simple fact, then the problems should be fixable within the Euro zone as well. I am thinking of fiscal policy on a Euro-wide level – e.g. a Job Guarantee that is administered locally, but paid for by a Euro treasury.

    6. Stephan (at Wednesday, November 17, 2010 at 21:55):
      I totally agree. The same can be said for our minister of finance, Wolfgang Schäuble. He’s stupid and/or reckless. These people are dangers to our society, and I am ashamed that my country is ruled by them.

    7. @Nicolai
      I don’t think that Schäuble is an idiot. But you are certainly right insofar as he is totally incompetent in matters of economics and finance. Nowadays he also seems to suffer from some sort of hubris. The problem is: we elect these people. Meanwhile me even thinks one of few sane persons in German politics is Sahra Wagenknecht. Some years ago I would never have anticipated that I won’t find any respectable social-democratic politician with a grasp of economic reality. Now I must take refuge to Die Linke? Here a good insight concerning the ECB: The European Central Bank: A neoliberal failure

    8. The greatest mystery of all is why thirty-plus years of empirical falsification has hardly dented, or even scratched, the credibility of the neoliberal myth. Science is not sufficient, apparently. In the post-democratic “advanced” countries, especially the U.S., propaganda trumps it every time.

      Three cheers for Michael Hudson, who turns his back on all of the smug ideologues and pointless arguments. And heads for Latvia, Iceland, China, or wherever the front line happens to be, to offer practical advice to the opposition.

    9. Ambrose Evans-Pritchard wrote this for the Telegraph:

      It is the conservative movements across Europe that are loudest (no surprise there) in their criticism and scepticism of the EU and EMU. So sadly, from the perspective of a general Europhile, both your and his economic reasoning end up feeding into the same, Europhobe, isolationist political conclusions, namely that there is no case to be made for even attempting to bring the diverse countries of this plagued subcontinent closer together other than through neoliberal ‘reforms’.

      Assuming that you, unlike Evans-Pritchard, support the idea that European nations should somehow strive for more economic conversion (of the positives sort), what would your economic policy proposals to achieve that goal look like if one assumes no currency union and no further cession of political sovereignty to a central government? Are there decentralized arrangements or agreements other than the free trade mantra that could be made to somehow automate upward economic conversion?

    10. “Was this dramatic change the luck of the Irish? Not at all. It resulted from a series of hard-headed decisions that shifted Ireland from big government stagnation to free market growth. After years of high inflation, double-digit unemployment rates, and soaring government debt that topped 100 percent of GDP, Irish policymakers began to cut spending in the late 1980s … [and] … has steadily reduced its tax rates. However, the key to Ireland’s success has been its excellent tax climate for business … one of the lowest rates in the world … have helped … attract huge inflows of foreign investment. ”

      I’d love to hear an MMT interpretation of Ireland in the pre-boom years. Why didn’t that soaring public debt reduce unemployment? What was causing the inflation? Help me understand this, please.

    11. it seems to me that simple government spending on anything is not enough. It makes a big different where the money is directed. There are enough money in private hands even now to turn recession around world wide. The problem is that money is in the hands of people who already have too much of them and their only way to “invest” them is to buy stocks and bonds all over the world and then pressure governments whose bonds they bought into neo-liberal policies. So if new government spending will end up in the same hand – it won’t help at all.

    12. Reading this blog is part of my re-education. I’m now convinced that most everything that I was taught about money and macroeconomics in business school at U Chicago was wrong. So now I need to sort through MMT ideas and develop a deeper understanding of its implications.

      I’m now reading L. Randall Wray’s book, “Understanding Modern Money:The Key to Full Employment and Price Stability”. I’ve also read Warren Mosler’s “The 7 Deadly Innocent Frauds of Economic Policy”. Now what I’d love to find is an MMT view of post-gold standard economic history. Anyone have reading suggestions for me?

    13. “Plunder! How Public Employee Unions Are Raiding Treasuries, Controlling Our Lives, and Bankrupting the Nation” is actually a book by Steve Greenhut.

      Edwards’ Cato article was a book review.

    14. ““Plunder! How Public Employee Unions Are Raiding Treasuries, Controlling Our Lives, and Bankrupting the Nation” is actually a book by Steve Greenhut.

      Edwards’ Cato article was a book review.”

      Sheesh! Any *serious* suggestions?

    15. LMBO

      I wasn’t responding to you, Dismayed. I was just clarifying something from Professor Mitchell’s post and pointing out that the article he referenced was actually a review of Greenhut’s book (completely unimportant in the scheme of things, of course)…

    16. @Dismayed
      What about “The General Theory of Employment, Interest, and Money” My impression is this book isn’t very popular in Chicago ;-) Or Wynne Godley / Marc Lavoie: Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth

    17. Not fighting the central bank is very wise. Whenever someone offers you something for free — you take it. Sell all the Greek bonds to the ECB and don’t look back. Don’t even think of trying to outbid them, because if they want those bonds, then they will win the auction. You can rotate into Spanish bonds, or whatever other investment you think is the most unsound, yet politically favored.

      PIMCO did this beautifully, leveraging up on MBS, and then when the crisis came, instead of taking a capital loss (as it should have), the Fed stepped in to “discipline” the bond holders with capital gains. So Pimco rotated out of agencies and into treasuries at a profit. Now again, they are being “disciplined” with bigger spreads as the CB rushes to relieve them of treasuries (at a premium, of course). They call it “shaking hands with government”.

      Typically the problem with making bad investments is that there may not be a greater fool when those investments go sour. But as long as central banks are willing to be those fools, then PIMCO will continue to earn record profits. After all, CBs have lots of money, and are happy to give it to bondholders in the name of helping the little guy maintain access to credit.

      As long this “class war” is fought by means of trying to force up asset prices and shove cash down the throats of the wealthy, then we know who the bonobos are, and who is the Gorilla.

      If you don’t believe that, then ask yourself why Greece doesn’t just default, or why the Agencies didn’t default. Neither were issuing risk free debt. Both are burdened with the debt to the point of it disrupting their core function — why not default? Because it might upset the bondholders. It would not upset Greek Citizens — they would cheer. For some mysterious reason — possibly distribution — they don’t see the debt as an asset “overall”. But we can make our own money now, so that there are new opportunities. Why should a little thing like ability to pay prevent a creditor from earning a return? And if bondholders disagree, we will fight a class war against them by doubling their wealth if they don’t toe the line.

    18. Nicolai Haenle: “If Greece were to leave, but stick to austerity, would they really be that much better off?”

      If Greece were to stick to austerity, why would they leave? :)

    19. As an Australian, one of the things I find most interesting and often wonder about the EU and the Euro is the extent to which there is a true European identity.

      I’ve done quite a bit of traveling in Europe this year and got the chance to talk to people about it, and I was quite surprised at how many people I met did actually say they felt some kind of common European identity. That’s not really the impression you get reading the press at the moment. I’d love to here from any Europeans who post here what they feel.

      It’s interesting to compare to federations like Australia of the USA. The national identity is stronger than the state identity for most people (I would say) but there is still a pretty strong identification with the state’s as well.

      Also related to this is the question, what level of fiscal co-ordination is required for a successful monetary union?

    20. @ Bill: There’s both more and less going on here than your post suggests.

      There’s less going on here in three ways: In the first place, the Irish crisis is not a € crisis. The Irish crisis is a crisis of Irish domestic governance. Ireland has a trade surplus, and has had one throughout, so nothing prevents Ireland from simply telling the international money markets to go take a hike. Nothing, that is, except the fact that Ireland is run by corrupt halfwits.

      In the second place, the crisis is not inherent to the fact that the EU has a common currency. There are plenty of ways to structure a common currency that do not cause this sort of balance of payments crises. The problem is that the € contains two pernicious elements: The German Stupidity Pact (known in more polite company as the Growth and Stability Pact), and the fact that the ECB is mandated to pursue an inflation-first policy. Neither is an intrinsic requirement for having an EU-wide currency. It would be perfectly possible, for instance, to abolish the GSP, and stabilise current accounts by having the ECB issue a Eurobancor to those countries that have intra-€-zone balance of payment deficits.

      Another possibility (and the one I would favour) is to raise the inflation target to [maximum of current €-zone member’s actual inflation rates for the three years prior to entry into the €-zone] + 2 % + [your country’s intra-€-zone balance of payments normalised to GDP]. The first term in the formula is to ensure that no country is forced below the inflation rate that it would have had if it had pursued an independent economic policy. Different countries have different structural inflation rates, and it is always far less unpleasant to force your economy above its structural inflation rate than to force it below. The second term is there to leave some room for manoeuvre – any country will occasionally overshoot its inflation target and need to go below its inflation target in a following year to maintain its relative price level, and to make sure that any pressure that has to be exerted by the sovereign will definitely be in the upwards direction. The final term is there to insure against long-term internal current accounts imbalances, by forcing countries that run up an internal surplus to inflate their prices faster than countries that run internal current accounts deficits. Of course, you’ll still have to do away with the GSP – that goes without saying, since the GSP is stupid under any conceivable institutional framework other than a commodity standard.

      In the third place, even under the prevailing institutional regime the current crisis could have been largely avoided; the current problem is that the EUropean governments at all levels are populated by incompetent halfwit ideologues, who have drunk so deeply from the market-fundie koolaid that they are absconding from their duties to manage the political economy. Hardly a month goes by without one of our Dear Leaders expressing the sentiment that the international money markets know the value of the assets they trade better than the governments of the EU. Which, given the fact that “the markets” have been behaving like a ferret on crystal meth [alternatively, have been engaging in pump-and-dump scams], should tell you something about our leadership’s willingness to suspend disbelief in the face of economic reality. Hell, our central banks even seem to have forgotten how to take a bankrupt bank into receivership.

      With that sort of leadership, we’re fucked. Common currency or no common currency.

      Conversely, if the ECB leadership had been able to find their asses with both hands and a flashlight, they would have simply intervened in the secondary market, and everybody who was pump-n-dumping Greek sovereign bonds would have been burned. Hard.

      So the € is not, in principle, a bad idea. From an economic point of view a common currency is of debatable value, given the inherent trade-off between inflation and the size and diversity of the currency union. But the € was never about economics anyway – it was always first and last a political unification project.

      Which brings us to the way in which these crises are more important than meets the eye: What you are looking at here is not an economic crisis. The €-zone as a whole has no structural economic problem that it is not fully within the collective power of its members to solve. What you are looking at, in live coverage, is a constitutional crisis. The European Union is institutionally unable or unwilling to face up to the trade-offs inherent in being a continent-wide federation. Or, to put it a little more bluntly, this is a power struggle between a camp of “core” countries, led by Germany, and a camp of “peripheral” countries led by… well, nobody in particular.

      On the “core” side, the objective is to be able to continue to dictate policy (economic and otherwise), both at the federal level and, through the combination of current accounts surpluses and a common currency, internally in the “peripheral” countries. A secondary objective being to ensure that the EUropean industrial policy continues to favour the incumbent firms (by making sure that the EU keeps prohibiting determined industrial policy), which are largely located in the countries in the “core” camp. On the “periphery” side, the objective is to claw back some of the political power that the “core” has arrogated (in some cases informally rather than through open and above-board treaty negotiations), including some way to industrialise on their own terms, rather than on German terms.

      Now, the fact that the EU is going through a constitutional crisis does not mean that the EU or the € are failed projects. The EU is less than three quarters of a century old – most countries and federations have constitutional crises in the first fifty or sixty years after their first formal constitution. Constitutions are, after all, tricky things to write, and small oversights can create quite prominent unintended consequences (which the beneficiaries will, naturally, seek to hang on to). The US, at the equivalent point in its history, was fighting a civil war – and for all the venom unleashed in the present crisis, there is some way to go yet before Europeans start shooting at each other.

      On the other hand, the fact that most successful states and federations have had constitutional crises does not mean that the EU or the € will necessarily survive this one. After all, most failed federations also had constitutional crises before (or when) they failed.

      @ Stephan: Yes, the stupid is contagious, but the other way around: Trichet got it from the Germans (or rather, Trichet was appointed because he honestly believes the German party line).

      @ Dismayed: Here’s my suggested reading list:

      Aside from Keynes’ General Theory, as suggested above, I’ll note Irving Fisher’s debt-deflation theory of the Depression and Hyman Minsky’s Stabilising an Unstable Economy. Fisher describes how a systemic margin call can create a Keynesian liquidity trap. Minsky takes Fisher’s debt-deflation theory and expands it.

      There is a very nice video somewhere on the ‘net with a Japanese economist who explains systemic margin calls, balance sheet recessions and liquidity traps. But I misplaced the link a while back and haven’t been able to find it again.

      Other important books would be Galbraith’s The Affluent Society and The New Industrial State and Torstein Veblen’s Theory of Business Enterprise.

      The last two aren’t Keynesians, precisely – Veblen is earlier than Keynes and Galbraith breaks with Keynes in that Keynes is a productivist (that is, Keynes views the purpose of economic policy as ensuring that people get more goods) while Galbraith is not (Galbraith’s take is that the problem of production is largely solved – our capacity to create consumer goods exceeds any reasonable need for consumer goods; the purpose of modern economics should therefore be to serve other social goals than increased production).

      Finally, if you’re looking for something more modern, you will want to look at Joseph Stiglitz Globalization and its Discontents (Making Globalization Work is not bad either but somewhat more technical) and Robert Reich’s Supercapitalism (but Supercapitalism only really makes sense if you’ve read Galbraith’s New Industrial State).

      Another option (if you have a lot of time on your hands) is to go back and start from the beginning – Adam Smith, David Ricardo, Friedrich List, John Stuart Mill, (parts of) Karl Marx, and then the people I listed above. Most of these people are a lot more interesting than their worshippers make them out to be – Smith, in particular, would be spinning in his grave if he saw what kinds of policies the modern market fundamentalists used his good name to justify.

      – Jake

    21. As an Australian, one of the things I find most interesting and often wonder about the EU and the Euro is the extent to which there is a true European identity.

      I’ve done quite a bit of traveling in Europe this year and got the chance to talk to people about it, and I was quite surprised at how many people I met did actually say they felt some kind of common European identity. That’s not really the impression you get reading the press at the moment. I’d love to here from any Europeans who post here what they feel.

      Identification with Europe is, broadly speaking, correlated with education and anticorrelated with age. It is generally greater in recent members (or at least that used to be the case before the ECB started giving them the IMF treatment – I dunno how it looks now). Among people of a left-wing persuasion, it is more prevalent in the countries which are historically right-wing (I have a Portuguese friend who goes so far as to claim that “everything civilised in Portuguese politics” is the result of the EU), since for them the EU represents an improvement over what they used to have. And, of course, the correlation goes the other way for right-wingers.

      Also related to this is the question, what level of fiscal co-ordination is required for a successful monetary union?

      I touched upon that in my post above, but the tl;dr version is that at a very minimum you need a Bancor-style current accounts rebalancing system (though there are more directly interventionist setups that obviate the need for a Bancor).

      – Jake

    22. Oh, forgot an important point: Identification with the pan-European project is (of course, one might say) highly correlated with being comfortable with more than one language.

      I suspect that this latter point may have biased your sample somewhat ;-P

      tl;dr: Pan-Europeanism exists, and is more prevalent than the press gives it credit for. But it is not a dominant ideology.

      – Jake

    23. Mark Thoma alert! Mark Thoma alert! I interrupt this conversation to quote from a post by Mark Thoma, noted unhelpful progressive economist who has strong neoliberal biases regarding the monetary system. He has been ridiculed here on occasion for his refusal to accept reality. He actually made some progress today…………………………. before back sliding. Two steps forward and then three backward.

      Here is the promising part

      “First, on whether paying interest on reserves is a constraint on loan activity, the supply of loans is not the constraining factor, it’s the demand. Increasing the supply of loans won’t have much of an impact if firms aren’t interested in making new investments. Businesses are already sitting on mountains of cash they could use for this purpose, but they aren’t using the accumulated funds to make new investments and it’s not clear how making more cash available will change that.”

      Sounding like he’s on the right track….. loans are demand driven….. making more cash available ( I know I know ) wont affect loans

      But then two paragraphs later;

      “Paying interest on reserves gives the Fed control over reserves they wouldn’t have otherwise, and control of reserves is essential in keeping inflation under control. If, as the economy begins to recover, the Fed loses control of reserves and they begin to leave the banks and turn into investment and consumption at too fast a rate, then inflation could become a problem.”

      Yikes! Fed losing control of reserves…… reserves leave the banks…. at too fast a rate….. (siiiiighhh) At least he’s not Mankiw!

    24. Lol Greg, it looks like we’re thinking the same thing. I just posted this on Warren’s website (words in parenthesis have been added by me now for clarification):

      At least this part can be agreed on:

      “the supply of loans is not the constraining factor, it’s the demand. Increasing the supply of loans won’t have much of an impact if firms aren’t interested in making new investments.”

      From there it is just a short step to admitting that the quantity of reserves, per say, is not a constraining factor on (the supply of) loans. As you (JKH) and Mr. Mosler point out, it is the price, not the quantity (of reserves that matter). Actually, I think Professor Thoma might understand this, but is just incredibly sloppy with his language. After all, commercial banks must eventually obtain reserves for settlement purposes, no? Providing additional liquidity by increasing the amount of reserves in the banking system should lower these costs (costs of extending additional credit), correct? Perhaps Professor Thoma believes these lower costs will be passed on to borrowers. Or am I completely confused?”

      *end quote*

      Also see my comments to Don in that same thread you linked to. I think slowly some MMT ideas may be coming to the attention of mainstream economists (even if they are ignored).

    25. Gamma, as a person living in Europe in a place from where a 2-3 hours drive can bring you to 6-7 countries (both euro and non-euro) I can say that European identity has nothing to do with monetary union. I would not care much at all about it though having one currency and not caring about exchange rates does help a bit. But even this is a no big factor. Western European banks have subsidiaries in Eastern Europe and often when you withdraw cash you are charged mid-rate without extra fees. The rest I do not care.

      European identity is about feelings towards people next you. In this sense globalisation is a much more important driver than any monetary bla-bla-bla. However globalisation brings about its own twist in Europe. Cases of bi-lingual families living in a third language country are getting extremely common. So how about this effect on European identity? Globalisation is not an invention of Brussels and Frankfurt and they were just lucky political “investors” to capitalize on this trend.

    26. JakeS, thanks very much for your insight. Yes I would never have thought it was a dominant ideology, but I was surprised at how accepting of it many people I spoke to were. But as you mention, I’m sure there was a sample bias!

      Actually one French guy I was talking to (who was familiar with Australia) tried to claim that the French and Italians would consider themselves almost as similar to each other as Queenslanders and Victorians would! There aren’t huge regional variations in Australian culture, the ones we do have generally relate to things like which football code we watch and what type of beer we drink! Actually on second thought, those things are pretty important….;)

      But yes, Europe is interesting and I wonder if the sentiment is heading towards a greater level of fiscal co-ordination or not.

    27. @ Gamma: Well, the Latin cultural sphere (France, Italy, Iberia) has always had more of a shared identity than Europe taken together – in the same way that the Nordic countries (Scandinavia + Finland), the Baltic countries and the German language group have always felt a certain commonality. This is not necessarily an indication of support for a wider pan-European project, although the European project can obviously capitalise on such sentiments.

      – Jake

    28. JakeS says:
      Thursday, November 18, 2010 at 11:03

      …Conversely, if the ECB leadership had been able to find their asses with both hands and a flashlight, they would have simply intervened in the secondary market, and everybody who was pump-n-dumping Greek sovereign bonds would have been burned. Hard…

      …Which brings us to the way in which these crises are more important than meets the eye: What you are looking at here is not an economic crisis. The €-zone as a whole has no structural economic problem that it is not fully within the collective power of its members to solve. What you are looking at, in live coverage, is a constitutional crisis. The European Union is institutionally unable or unwilling to face up to the trade-offs inherent in being a continent-wide federation. Or, to put it a little more bluntly, this is a power struggle between a camp of “core” countries, led by Germany, and a camp of “peripheral” countries led by… well, nobody in particular…

      Precisely! There was always a choice over who would take the hit in the crisis. And, as everywhere else, it has worked out as: bail out the banks and blame the victims. 1:0 for the supply side. The difficulty in the European project lies in deciding to what extent there is enough political will and unity to make institutional integration work. I personally believe there should be far more supranational discussions and informal agreements, more room for differences and far more democracy and transparency to the process, even if this means that it slows down or even goes into reverse every now and again. Quality, not quantity is what should count. There is nothing morally superior to diving head over heels into contracts that take a bloody crisis to resolve. And vanity fair that is European politics pays far too much attention to symbolic gestures with no real commitment to back them. They’re just feeding the conservative trolls.

    29. @ Oliver: I think you underestimate the power of institutional inertia as a driver of political integration. Once an institution has been set up, it will not go gentle into that good night.

      Fundamentally, the European Union needs to make the ECB subservient to the Commission, make the Commission subservient to Parliament and de-claw the Council. Until and unless that happens, the federal European level will keep bumbling two steps forward, one step back and one step sideways.

      After that, we can start work on morphing the parliamentary groups from confederations of state-level parties into genuine pan-European parties; we can start picking fights about providing the European Parliament with the power of the purse, and so on and so forth. But establishing a parliamentary-system chain of command in the fundamental institutions of the EU is the sine qua non of any integration effort.

      – Jake

    30. Gamma. I’m not your typical UK subject, my mum’s Norwegian, my dad’s a geordie who spoke welsh til he went to school as his mum was proper Welsh speaking from Aberystwyth in ‘real’ Wales, I was born in South Africa but back to Oxfordshire where I was brought up-hence my complete and utter lack of an accent ;), I’m NW European, not in the slightest Irish though! ;)

      Oddly the major area of European identity is in golf…it’s great to whup the yanks more often than not in recent years.

    31. Dear Vincent Cate (and All)

      I note you posted a link to a Youtube video you had made about printing money under the guise of commentary on this blog. I chose to delete the “comment” and not provide throughput to your site because:

      1. The so-called “comment” was an advertisement for your own site rather than an effort to engage the community here in good faith.

      2. As an educator, I will not provide promotion for sites that contain technical errors or other misinformation about the monetary system. You are free to promote erroneous ideas. But you are not free to use my resources to do so. By diverting my readers to your site you provide no avenue for a wider debate here.

      I know you will be disappointed with that decision and probably infer all sorts of liberty arguments but I thought I should explain it anyway.

      best wishes

    32. JakeS says:
      Friday, November 19, 2010 at 1:18
      @ Oliver: I think you underestimate the power of institutional inertia as a driver of political integration. Once an institution has been set up, it will not go gentle into that good night.

      But that’s precisely the kind of thinking that got the EU into this mess in the first place. Admittedly, it’s also the only reason it came into existence. I’m watching the whole debate from the safe haven of Switzerland – no EU, no Euro, only a couple of treaties such as Schengen. I’ve often wondered what Europe would look like nowadays, if all nations had been as consistently doubtful of European matters as the Swiss (I’m not a Swiss national, btw.). Tricky question. What I do see happening, is that if and when a national electorate actually gets to vote on a key issue, it usually turns it down. There is a serious disconnection between politicians Brussels and the Capitals and their subjects. Maybe a more direct democracy is a better kind of institutional inertia than this ideologically motivated, self serving ‘heroism’? Just let the people vote on everything (except on the Euro, of course :-D). I mean, what’s to fear?

    33. There are two structural problems with referenda:

      In the first place, the EU treaties are rather on the heavy side as micromanaging legalistic detail goes. This is because most countries in the Union are adverse to granting sweeping powers to EU institutions. Referenda work best when both the issues and options are clear – EU treaties offer neither, and will not begin offering either unless we start making treaties that grant more discretionary power to the federal institutions than the typical treaty does today.

      In the second place, the way treaty ratification works, you have to win every referendum to pass the treaty. Which means that Cyprus or Luxembourg could hold up a treaty that was ratified by 60 % of the popular vote across the EU. That’s obviously not a viable way to go about amending a constitution.

      As for where Europe would be if the EU had not been carried forward on the principle that flawed federal institutions beat no federal institutions… well, the last time we hit an economic crisis of this magnitude, it ended with a serious shooting war.

      – Jake

    34. Well, he’s right that the Irish crisis isn’t caused by the €. Ireland has no need to devalue their currency – they run an intra-€-zone trade surplus. Sure, they lost their monetary policy by joining the €, but monetary policy isn’t worth two pots of piss anyway as a macroeconomic stabilisation tool. The only real problem with Ireland being in the € is the German Stupidity Pact. This is a real problem, but the GSP is not an inevitable feature of the €, it is a policy that can be changed.

      The heart of the Irish crisis is that they were governed by Fianna Fail for several decades, and Fianna Fail is in bed with banksters and property developers, which resulted in a tide of corruption, cronyism and flat-out criminality. With that sort of mismanagement, it is not terribly surprising that their economy blew up. And it would have done so, € or no €, because Fianna Fail has insisted throughout on making their bankster friends whole – which would have entailed not devaluing the currency even if they could (at least not until the banksters had absconded with their plunder, like they did in Iceland).

      Of course, aside from getting the causes of the Irish crisis right, he’s dead wrong about pretty much everything else, but that’s par for the course for a British pundit talking about the EU…

      – Jake

    Leave a Reply

    Your email address will not be published. Required fields are marked *

    This site uses Akismet to reduce spam. Learn how your comment data is processed.

    Back To Top