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.
As an aside, I first associated the slang term – Roach Motel – with the way the Java Memory Model orders accesses to synchronised blocks. The US company that developed the cockroach bait used an advertising tag – “Roaches check in, but they don’t check out” – in the JMM memory accesses can be moved into synchronised blocks but you cannot move them out – hence the association.
In the context of the EMU it isn’t clear what the Roach Motel association refers to – a cheap lodging in the seedy part of town – or the asymmetrical access! The inference in Marshall’s New Deal 2.0 article is the latter. It was easy for the politicians to dupe their populations into joining the EMU but it is now a major political problem trying to exit. Recall that the original plan was for a country-by-country ratification process (by referendum) which would have, at least, rendered the decisions to join the union democratically based. But as the early votes demonstrated the people were largely against joining up and so the politicians abandoned that approach and forced through the arrangement via the Lisbon Treaty.
I also borrowed the term – kicking the can down the road – from this Bloomberg article (November 29, 2010) – Ireland Wins $113 Billion Aid; Germany Drops Threat on Bonds – which reported on the agreement worked out at the emergency meeting of European Union (EU) finance ministers in Brussels over the weekend.
The Euro bosses decided to give in to the “bond markets” by giving the Irish government “an 85 billion-euro … aid package” and have diluted the German demands that would have forced “bondholders to cover a share of future bailouts”. The meeting also extended the horizon for Greece to pay back the emergency loans (110 billion euros) which brings both bailouts so far into line – seven-year terms.
Ireland has to impose further anti-growth/anti-people measures on its population courtesy of the IMF to get the cash!
Of-course, Ireland had done everything that was asked of them by the austerity monsters – and as I predicted (here) the situation deteriorated. Now they are having to make further cuts which will further worsen their outcomes. They are racing to a very deep bottom and it is only a matter of time before major civil unrest brings their corrupt and inept government down.
It is clear that the bond markets will pick off EMU countries one by one with Portugal lining up next – then Spain – then Belgium and then …. No EMU member-nation is immune from this crisis as a result of the flawed design of the monetary union.
The Germans demanded that the the EMU extended its austerity rules to allow for orderly defaults that would impose costs on the holders of public debt. I just laughed when I read their policy proposals. What the hell do they think would have happened?
They create a situation where the bond markets rule – totally unnecessarily – then tell the “investors” that if they lend too much they will take losses.
Apparently the “compromise” is that the IMF will determine who takes the losses on a “case-by-case” basis. Handing any discretion to the IMF is a mistake at the best of times. But it will just worsen this crisis and encourage more destructive targetting by the bond traders.
The other point is that the crisis is starting to threaten the penthouse occupants! In this UK Telegraph article (November 26, 2010) – EU rescue costs start to threaten Germany itself – we learn that the “escalating debt crisis on the Eurozone periphery is starting to contaminate the creditworthiness of Germany and the core states of monetary union”, which was always going to happen. All these nations are dependent on the “fiscal capacity” of the European Central Bank as a result of the flawed design of the monetary union.
Apparently, fear is spreading in Germany. The article reports that:
Germany cannot keep paying for bail-outs without going bankrupt itself … This is frightening people. You cannot find a bank safe deposit box in Germany because every single one has already been taken and stuffed with gold and silver. It is like an underground Switzerland within our borders. People have terrible memories of 1948 and 1923 when they lost their savings.
The Germans have been trying to force the pending public debt losses on the bond markets – so-called “creditor haircuts” which has clearly made matters worse. The bond markets have decided (those amorphous decision-makers) that Greece is not the limit of the problem. They soon set out to ruin Ireland and now Portugal and Belgium are being targetted.
The bond markets know that the EMU nations have ceded their currency sovereignty and acted over the last decade in a way that was in denial of that loss of sovereignty. So these governments, which gave up their capacity to “save” or guarantee their own banking systems, then allowed these systems to go berserk and effectively bankrupt their nations. All these governments should resign en masse.
But the point is that the Euro bosses are waging a losing battle – they are just “kicking the can down the road apiece”.
I am not a fan of the “bond markets” and I view public debt as corporate welfare. But I also recognise the logic of their motivation. Given the governments agree to a system where the individual member states are without sovereignty and are thus “financially constrained” they have to rely on the bond markets for funding of their deficits.
To then say to the “investors” that you lose if we overextend is not only a corrupt concept but also foolish. Overextend in this context has to be defined within the ridiculous context of the Maastricht Stability and Growth Pact (SGP) rules which provide no real capacity for any government to adequately address a major demand shock.
In this environment, there is a growing call for Germany to exit the EMU and leave the Euro to the weaker trading nations. For example, in this article – German exit from euro ‘realistic prospect in 2011’ – the author says:
Germany’s presence in the euro is a problem for the PIIGS, since the export powerhouse keeps the value of the single currency high, making it difficult for the likes of Greece and Ireland to escape their crises by increasing their own exports. Without Germany, the euro would fall in value, giving a much-needed boost to the competitiveness of weaker members.
Which as far as so-called informed commentary goes just demonstrates how skewed the debate has become. The fundamental problem facing the EMU is not that the member nations have differential trading capacities.
Certainly, net exports contribute to aggregate demand which drives income and employment growth. So Germany has always relied heavily on its export sector to maintain real output growth, while some of the other EMU nations have not. But it is perfectly reasonable (and desirable) to have strong domestic spending growth brought about by various mixes of consumption, investment and public spending.
The problem for the weaker EMU nations is that the nonsensical rules that have been developed by the monetary union prevent the member governments from using fiscal policy to fill spending gaps that have arisen from a collapse in private domestic spending – net exports status notwithstanding.
It is true, that one of the problems for each EMU nation is the fact they no longer can vary their individual nominal exchange rates and have to try to engineer changes in their real exchange rates via domestic deflation, which savages pay and working conditions for the domestic population. Clearly, a sovereign nation has to not only issue its own currency but also has to float that currency to free up the capacity of domestic policy to pursue public purpose.
But while Germany’s exit from the Eurozone would allow the weaker nations to “devalue” as a block, it still doesn’t restore sovereignty to the individual governments in the “block”. It could work if the remaining members agreed to cede fiscal authority to a unified “fiscal agency” which also was aligned with the currency issuing authority (it could be the same entity).
But without that overall fiscal capacity to meet asymmetric aggregate demand shocks, merely losing the “strongest” nation in the union will not achieve anything constructive for the remaining nations.
Some might say what is the difference between a nominal exchange rate change that generates a real depreciation and the same result achieved by domestic deflation (cuts in nominal wages and inflation). The difference is that workers have nominal contractual commitments which are aligned (more or less) with their nominal pay levels. A depreciation in the nominal exchange rate squeezes these workers somewhat to the extent that they purchase imports or products with significant import components. But they still (within reason) can then prorate the “real income losses” across their overall budget and prioritise their nominal contractual obligations.
But directly cutting nominal pay attacks their capacity to meet their nominal commitments. Yes, the real income losses might be the same but if they do not have enough nominal pay to meet their obligations then default follows.
This is one of the reasons why Keynes and others argued that workers are prepared to take real wage cuts that arise from a rise in the price level but will resist an equivalent real wage cut that might follow a nominal wage cut. The second option exposes the workers to nominal contract default. The argument generalises to why cutting pay is a very poor way to solve unemployment. Please read my blog – What causes mass unemployment? – for more discussion on this point.
Further, Germany’s export strength relies heavily on the import spending of the other EMU nations. This is the myopic aspect of the German position. They want to maintain strong exports but they also want to impose fiscal austerity on the “importing” nations, which will not only significantly reduce public spending but will also reduce private spending (as incomes drop). I am reminded of the Aesops Fable – The Goose with the Golden Eggs:
One day a countryman going to the nest of his Goose found there an egg all yellow and glittering. When he took it up it was as heavy as lead and he was going to throw it away, because he thought a trick had been played upon him. But he took it home on second thoughts, and soon found to his delight that it was an egg of pure gold. Every morning the same thing occurred, and he soon became rich by selling his eggs. As he grew rich he grew greedy; and thinking to get at once all the gold the Goose could give, he killed it and opened it only to find nothing.
Which might be re-written as:
One day Germany realised that the poor saps down south would buy whatever products they offered for sale – in particular, military equipment allegedly to ward of enemy neighbours. Germany couldn’t believe how stupid these southern nations were going into a monetary union with them but realised that they could grow wealthy from exporting to them. As Germany grew rich they also became greedy; they also wanted to take the islands that belonged to the southern nations and so imposed ridiculously harsh austerity programs on those nations to force them to hand over the islands. Soon after, the southern nations went broke and couldn’t buy as much stuff from Germany any more.
Please read my blogs – Export-led growth strategies will fail and Fiscal austerity – the newest fallacy of composition – for more discussion on this point.
There is also some argument about whether the Irish situation is a Euro crisis or a specific country banking crisis. The root cause is definitely the Euro membership and the banking crisis has exposed the lack of fiscal capacity that the EMU member states have as a result of ceding their monetary and fiscal capacity to the ECB.
While the banking crisis is symptomatic and has been instrumental in causing the Irish government’s budget deficit to increase the underlying cause of the problem now is Ireland’s membership of the Eurozone.
It is clear that the pro-free market Irish government lost oversight of its nation and allowed its banking system to run riot as they privatised the profits in the property bubble period. Certainly, the low interest rates coming from the ECB made borrowing cheap and helped fuel the property speculation. The low corporate tax environment also promoted economic allocations that were not in the long-term interests of the Irish population.
All of these developments have clearly combined to make the Irish crisis worse than most and reflect the lack of adequate government oversight.
But even with this appalling record of corrupt and incompetent governance, the Irish government could have reduced the costs of the meltdown had it been sovereign in its own currency and not been held hostage to the SGP fiscal rules.
It is true that the free-market bias of the Irish government which led it into trouble as above has also made it easier for them to impose the harsh fiscal austerity on its people. But that just means the Irish people should ensure they kick the government out of office as soon as possible. But even the most progressive government with all the insights in the world about how to promote domestic employment growth etc will not be able to do anything constructive while they remain in the Eurozone.
An aside also relates to the concept of governance that is lost in the current debate. The private markets are devoid of any “values”. They are amoral in that sense. To think that the decisions that private market participants make will somehow advance public purpose is naive in the extreme.
One of the roles that we seek in government is to mediate the private markets to reflect the “social values” of the nation. The neo-liberal era has successfully eroded the concept of collective will and has actively promoted the idea that nations do not exist beyond being a “collection of self-seeking individuals”. That is the myth that introductory economics textbooks seek to propagate – that optimal outcomes emerge when individuals pursue their self interest.
The current crisis should inform us of the folly of that “religious” belief. And it has also exposed the folly of governments that renege on their responsibilities to adequately regulate the private markets to ensure they work to advance social outcomes and welfare. The Irish government clearly abandoned that responsibility not only in allowing the markets to rip but also in shoe-horning their citizens into the monetary union which was always destined to come unstuck as soon as the first sizeable demand shock emerged.
The following blogs cover my recent commentary on the EMU:
- The sick Celtic Tiger getting sicker
- The Celtic Tiger is not a good example
- Live coverage now on
- World Bank boss has a brain attack
- The Euro bosses ignore all the lessons
- Euro zone’s self-imposed meltdown
- A Greek tragedy …
- España se está muriendo
- Exiting the Euro?
- Doomed from the start
- Europe – bailout or exit?
- Not the EMF … anything but the EMF!
- EMU posturing provides no durable solution
We know that the ECB boss is blinded by neo-liberal ideology and now he seems to be noticing it. I am announcing a new contest which will offer very generous prizes and finish at some unspecified time for the best caption to this photo of Trichet adjusting his glasses while speaking at a press conference after the emergency meeting of European Union finance ministers in Brussels over the weekend just past.
I will announce a winner sometime and no correspondence will be entered into :-)
When I saw the photo, I started singing – I can see clearly now:
I can see clearly now, the Euro is gone
I couldn’t see all obstacles in my way
Gone are the dark clouds that had me blind
The Euro is dead (dead), gone (gone)
and I am having a very bad day
Anyway, now the EMU has decided to “kick the can down the road a while” but the monetary system will remain flawed and those flaws will ultimately bring it down unless the ECB keep providing “fiscal support” via their secondary bond market purchases.
The next EU finance ministers’ emergency meeting should have only one agenda item: how the hell can we dissolve the monetary union and restore currency sovereignty to the individual nations and minimise the (huge) adjustment costs that would follow?
While those adjustment costs would be large I guess they would be lower than the accumulating economic and social costs that will accompany their pig-headed attempt to maintain the system.
That is enough for today!