I am heading to the Land of Austerity today and so the blog will be relatively short. I was last in Europe this time last year and one of the vivid memories was the proliferation of for sale signs across the urban landscape. For sales signs even were in bountiful supply in well-to-do suburbs in Maastricht where I had never seen such things because the houses sell by word-of-mouth such is the attractiveness of the locations and it is “so not done to have common advertising awnings in your front garden”. But the houses stopped selling and pragmatics overcame their false dignity and the signs were multiplying. Things have become worse in the ensuing twelve months as the failed EU leadership has imposed one poor policy choice after another on their ailing economies. Anyway, for the next two weeks I will be reporting from various locations in Europe and beyond (UK). But for now a long flight awaits.
First of all I am hoping a bit of Bulgarian common sense rubs off on their western neighbours. The Reuters article (September 3, 2012) – Bulgaria abandons plans to enter euro zone – reported that:
Bulgaria has abandoned plans to adopt the single currency in response to deteriorating economic conditions and rising uncertainty over the prospects of the European Union …
While Bulgaria is the poorest member of the EU (GDP per capita) it has long hoped (as a non-partisan political goal) to join the Eurozone. It would become much poorer if it joined the monetary union.
It now needs to abandon its currency peg with the Euro, which has required the Government to run restrictive fiscal policies and suppress growth and improved prosperity for its beleagured citizens.
Unlike the majority of Eurozone nations, Bulgaria will grow by about 1.5 per cent this year although that is barely sufficient to improve living standards.
But back to the Eurozone, Bloomberg news briefs carried the following headlines yesterday:
*MERKEL SAYS `DEBT MEANS DEPENDENCY’
*MERKEL SAYS EU MUST ENSURE THAT IT FIRST EARNS WHAT IT SPENDS
*MERKEL SAYS `ECONOMY THERE FOR PEOPLE, NOT PEOPLE FOR ECONOMY’
*MERKEL SAYS EUROPE HAS TO LEARN TO ONLY SPEND WHAT IT TAKES IN
*MERKEL SAYS TOO MANY IN EUROPE HAVE LIVED BEYOND THEIR MEANS
*MERKEL ‘ABSOLUTELY CONFIDENCE’ ECB TO WORK WITHIN ITS MANDATE
Which tells you that Dr Merkel should stick to quantum chemistry and leave economics to those who know what they are talking about.
This about what those comments actually imply.
At the aggregate level, she wants the EU to run balanced budgets across the board. Spend what you earn. Which means no external surpluses because that would mean that the nations they are runnnig surpluses against would be “dependent” (using her language).
If nations are to balance their public budgets (that is spend what they “earn”) and ensure they do not impose any “debt dependency” on other nations (via external surpluses) then the private domestic sectors would also have to run balanced budgets (that is investment would have to equal saving).
Households could still save out of disposable income but only to the extent that private investment allowed.
Now quite apart from whether any of these balances can be managed through policy (they cannot) what do you think would happen if there was a sudden loss of private sector confidence and households stopped consuming and/or private firms stopped investing under the rules that Dr Merkle thinks are appropriate?
Private spending would drop and firms would immediately notice an unplanned buildup of inventories. They would soon work out that the collapse in demand was not a transitory phenomenon and they would then lay off workers and cut production and so national income would fall.
Import spending would drop because that is positively tied to national income. Then there would be a move towards surplus on the external account (unless all other nations were indulging themselves in the same ridiculous policiy strategy). So immediately “debt dependency” would be rising in other nations – how does Dr Merkel feel about that?
Moreover, the government’s budget would move into deficit because tax revenue would be falling and welfare payments would be rising. So Dr Merkel thinks the government would then be duty bound to run pro-cyclical discretionary fiscal policy – that is, cutting discretionary spending and/or hiking tax rates – to attempt to restore the balance.
Which is exactly what the Eurozone nations are being forced to do by the elites with Britain following as fast as they can – all of them going down the double-dip recession gurgler.
But then think about that as a strategy. What the economy needs at that point is a deficit from the public sector to offset the surplus in the private sector. What Dr Merkel’s rules say is that the public sector should not play that role.
So what happens? Fiscal austerity makes matters worse. The squeeze on net spending from the public sector further undermines aggregate demand and private sector activity slumps again with unemployment rising. The rising unemployment is highly deflationary – undermining business confidence and entrenching intergenerational disadvantage.
The economy moves further into recession and the government’s budget deteriorates further. Many of those who hold mortgages can no longer service them and they lose their homes. Housing markets deteriorate and private wealth falls. More and more people who were working and supporting reasonable debt levels and enjoying stable incomes are now heading towards penury and – in lieu of governments letting them starve – wholly dependent on public welfare support for survival.
That is the sort of world that Dr Merkel would bring. It makes a mockery of her claim that the “Economy there for People”. Fiscal rules and balanced budget stipulations place the economy above people but, ultimately, because the understanding that supports such rules is so flawed – the obsessive pursuit of such rules ends up destroying both the economy and the fortunes of the people.
Further, the idea of “living within ones means” is another of those logical sounding rules that resonate across the conservative world. But what does it mean when a policy environment deliberately forces millions of people onto the unemployment scrap heap with no means and a diminished life.
The means available to an economy can only reasonably be thought of in real terms – that is, the real resources that a nation has available either within its own borders or via trade with other nations.
Living within a nation’s means would require permanent full employment not chronic and significant long-term unemployment. There is some financial sense in the concept of “living within one’s means” when applied to a family or an individual because as users of the currency such spending agents are financially constrained.
Their means relate to the real resources that they can command and that command is limited by their income, capacity to borrow and prior saving.
But for a national government the only sense that can made of that concept is the real resources that the nation as a whole can command.
It is true that the Eurozone arrangements have deliberately rendered the national governments devoid of currency-issuing status, which makes then equivalent in status to an Australian or American state government. The big difference is that our states know that when events turn sour, the Federal government is the currency-issuer and will ensure growth doesn’t collapse.
But even though the EMU has a deeply flawed architecture it still has a currency-issuing institution that can act like the federal governments in Australia and the US. Obviously, the ECB was not created to fulfill that role but it can and to a certain extent is.
The likes of Jens Weidmann might be threatening to resign as the BuBa head if the ECB continues to run its Securities Market Program (buying trouble government’s debt on the secondary markets) but he cannot deny the reality that the SMP and other ECB fiscal-type interventions has been the only reason why the Eurozone hasn’t collapsed to this date.
In that sense, even for a national government within the Eurozone, the concept of living within one’s means essentially remains a real concept. How many resources can the Greek economy bring to bear via its own capacities or through imports?
But then Dr Merkel would seek to ensure that the German export machine was curtailed to render the external balance and avoid pushing the Greeks into “debt dependency”. How she would do that is anyone’s guess – given that those who propose such nonsensical rules also seem to assert the primacy of individual freedom and private market prerogatives.
If those “freedoms” and “prerogatives” were really allowed to dictate outcomes, then it would be an extraordinary coincidence that the national accounting balances would all be square.
Her vision is also in denial of history. Nations go through development phases as they build their productive capital. Initially, nations are capital importing and then move towards capital exporting. Government deficits typically have to be higher, other things equal, when a nation runs external deficits to ensure that the private domestic sector can accumulate – overall – savings.
Whichever way you look at it, the fiscal rules that Dr Merkel espouses bias economies towards on-going stagnation and entrenched high unemployment – the anathema of “living within one’s means”.
European Commission major conference – Jobs for Europe
I will be in Brussels as an invited speaker at the – Jobs for Europe: The Employment Policy Conference – being staged by the European Commission (September 6-7, 2012).
The Conference site says:
The conference will build on the Employment Package put forward by the Commission on 18 April and on the outcomes of the 2012 European Semester, but also on a series of conferences which the Commission organised during 2011 in order to explore new dimensions of employment policy, notably regarding the functioning of European labour markets, wage developments, flexicurity in a crisis context, and inequalities.
One of the five main topics is “Pathways to full employment: job guarantee, social economy, welfare to work”.
My sesssion will on the Job Guarantee and the EC has prepared this document – Issues paper: Job guarantee – Concept and implementation – to inform the session I am presenting. It is an excellent sign that the EC is now considering core Modern Monetary Theory (MMT) ideas to be of sufficient merit to include as one of the main topics of this major European conference.
The Jobs for Europe Conference will be streamed live via the Internet. The various streams relate to the different rooms being used for sessions.
Thursday, September 6, 2012
GASPERI : http://webcast.ec.europa.eu/eutv/portal/jobs_europe060912
Friday, September 7, 2012
Apparently, the streams will “only be possible in Live streaming and Windows media player with Internet Explorer. Like its handling of the Eurozone crisis, it seems that the European Commission is once again “backing the wrong horse” (a reflection of my dislike for Windows and IE).
You will also be able to track live tweets will be sent from the plenary room, with the hash-tag: #Jobs4Europe.
My session on the Job Guarantee will be in the Mansholt Room on Thursday from 16:45 to 18:30
You can find a full program in English HERE.
After Brussels I am off to CofFEE-Europe, a branch of my research centre located at Maastricht University for five days. Then on September 14-17 I will be in London.
Normal blog services will resume when I get to Brussels tomorrow – and the first thing I will write about is the story the Australian National Accounts data is telling us (released AEST Wednesday 11:30).
Until then books and movies.
That is enough for today!
(c) Copyright 2012 Bill Mitchell. All Rights Reserved.