The central bankers of the World met at Jackson Hole, Wyoming last week for their annual gathering far from the madding crowd. And as far away from the mess they have helped to create as you could imagine. Out of sight out of mind I guess. The ECB boss felt it his purpose at the gathering, which you can guarantee is plush in all respects (catering, wines, etc), to urge politicians to introduce more “growth-friendly policies”. He claimed in his speech – Unemployment in the euro area – that the so-called “sovereign debt crisis” had disabled “in part the tools of macroeconomic stabilisation”. Which is only true if one accepts that a central bank should play no role in supporting fiscal policy and that fiscal policy should be constrained by innane rules that deliberately prevent it from having sufficient latitude to meet foreseeable crises. Which is about as inane as one could get. But then none of these central bankers are accountable for anything much. They can swan around to meetings and issue ridiculous statements about growth-friendly policies, while supporting austerity, and nothing much happens to them personally.
I recall a speech by the European Parliament President Martin Shultz – Jobs for Europe – (in German) – where he railed against the European Commission policy makers.
He wondered why Brussels did not attack unemployment with the same fervour that it attacks budget deficits (“Warum werfen wir uns in Europa nicht mit derselben Inbrunst in den Kampf gegen die Arbeitslosigkeit, mit der wir den Kampf gegen Haushaltsdefizite angehen?”).
He also said that his visits to Greece, Spain and elsewhere had left the impression that the legitimacy of the EU was increasingly threatened because it was seen as an anonymous bureaucratic power handing out austerity and dismantling the welfare state (“Gerade in den Ländern, die von der Krise besonders hart getroffen sind, wird die EU zunehmend als anonyme bürokratische Macht gesehen, die Sparmassnahmen und den Abbau des Sozialstaats diktiert”).
That sense of impersonality and unaccountable bureaucracies which pump out the TINA mantra is the hallmark of neo-liberalism. Who is to blame? It is hard to find anyone who will accept responsibility for the catastrophic policies that have been introduced.
The central bankers and politicians seem to retire with handsome superannuation benefits
Recall Christine Lagarde’s claim that the crisis was payback time for the Greeks and that despite not paying any taxes herself, the Greek “parents have to pay their tax” (Source). This was from a person who is not accountable to any of the voters that the IMFs policies are inflicted upon and who enjoys – – $US467,940 per annum plus an allowance of $US83,760 for which she has not accountability, all other expenses for entertainment connected to the job reimbursed, per diem travel allowance plus all travel and hotel expenses.
She gets hotel and travel for her spouse/partner. All of this is tax free and indexed annually. Her superannuation plan is more generous than most and there are other benefits for her spouse/partner.
So no worries for her when the IMF makes massive forecasting errors which leave millions of workers without jobs and steadily impoverishes them through austerity.
The following graph shows real GDP per capita from 2000 to 2013 (Eurostat annual data – table nama_aux_gph). It is one measure of real standard of living but only from a material perspective. It does not show the psychological torment that accompanies unemployment for example.
It is clear that the Eurozone has not worked for the vast majority of nations. 14 years after the common currency came into operation, most nations are barely better off in terms of real income per capita. Italy is in disastrous shape with the index at 93.3 (compared to 100 in 2000).
As an average measure, it also doesn’t account for the distributional characteristics and we know that the growth that has emerged in various nations since the crisis has not been shared anywhere near equally/proportionately. The high income earners have taken a massive share of the growth proceeds while the middle class have been increasingly hollowed out and the low income earners left behind in increased poverty.
This UK Guardian report (June 6, 2014) – The fault in our starry-eyed ‘recovery’: 2014 looks like we’re going bust again – provides some insights there.
Draghi’s version of “growth-friendly policies” qualified any notion that there remained a massive cyclical shortage of spending by introducing the usual neo-liberal ‘get out’ clause that “a significant share of unemployment is also structural”.
The one way to test that is to introduce a Job Guarantee where every local authority, backed financially by the ECB, would provide work for anyone who wants it at some socially-acceptable mininum wage. There is an almost limitless number of productive activities that could be furthered with this sort of workforce – and jobs could easily be designed for the most unskilled.
How low do you think the unemployment rates would go? Answer: extremely low. The structural explanation is just an excuse for the unwillingness of governments to provide sufficient jobs in the face of a refusal of private employers to take on extra labour. The latter are motivated (constrained) by profit considerations, the former are constrained by mindless neo-liberal Groupthink.
Europe’s unemployment problem could be solved within a few weeks if they introduced a Job Guarantee.
Even Draghi had to admit that:
… estimates of structural unemployment are surrounded by considerable uncertainty …
The models that are used to estimate it provide ridiculously large standard error ranges.
He called for an expansion in “aggregate demand policies” but claimed that:
… since 2010 the euro area has suffered from fiscal policy being less available and effective, especially compared with other large advanced economies.
Which is misleading. It has been very effective – in a destructive way – austerity has been effective in killing off growth and causing millions to lose their jobs.
The other “large advanced economies” were not as constrained by the fiscal rules and a lack of a federal fiscal capacity. There is nothing deficient about fiscal policy. It is just that the Eurozone elites have deliberately straitjacketed it and prevented it from doing what it is designed for.
Extraordinarily, he admitted that:
This is not so much a consequence of high initial debt ratios – public debt is in aggregate not higher in the euro area than in the US or Japan. It reflects the fact that the central bank in those countries could act and has acted as a backstop for government funding. This is an important reason why markets spared their fiscal authorities the loss of confidence that constrained many euro area governments’ market access.
Yes, the difference between sovereign states that are always solvent in all the liabilities they issue in their own currency and non-sovereign states that choose to use a foreign currency (the euro) and prevent the currency issuer (the ECB) from underpinning the use of that currency.
But Draghi defended the Stability and Growth Pact “which acts as an anchor for confidence and that would be self-defeating to break.”
It was broken in a most public way in 2003 when France and Germany defied the European Commission after failing to bring their deficits down below the SGP thresholds.
It has always been claimed that part of the justification for the strict SGP rules is to assuage concerns in the amorphous financial markets so that governments can continue to borrow at affordable interest rates.
But even though the European Council rejected the Commission’s recommendations in November 2003 plunged the SGP into crisis, there was no reaction from the financial markets to the resulting impasse.
The ten-year government bond spreads relative to Germany, which are meant to reflect the risk of government default, moved by less than 0.03 per cent between 2003 and 2005. Even when the Italians threatened to leave the European Union in March 2005 there were no major deviations.
The Financial Times reported at the time that the financial markets saw the Ecofin rejection of the Commission’s recommendation as a positive sign for growth in the EMU. A related Financial Times concluded that:
If the European Union’s fiscal rules died yesterday – at least in their strictest version – few in the financial markets mourned their passing.
That article quoted a Goldman Sachs executive as saying:
Our view is that it is not that big a deal. It’s a good thing that the stability pact in its strictest interpretation is dead … its interpretation is moving in the direction of allowing more cyclical leeway for budget deficits during economic downturns, and that is something we think should have been there from the beginning.
Draghi’s claims are just part of the scaremongering. The Securities Market Program brought in by the ECB in May 2010, which involved it buying public debt in massive volumes, forced the private bond markets into submission.
There is no hint that if fiscal deficits in the Eurozone nations rose with ECB backing that there would be a “loss of confidence”.
Given the parlous state of private spending and stagnation, the rising deficits would stimulate growth and spur a renewed sense of confidence in the future – at least until people were reminded of how moribund the basic structure of the Eurozone is.
But even within the constrained logic, Draghi made it clear that “it would be helpful for the overall stance of policy if fiscal policy could play a greater role alongside monetary policy”.
That is obvious.
The UK Guardian article (August 24, 2014) – The eurozone needs an alternative solution to its economic woes – concluded that:
The ECB now accepts it would have been better for Europe to have followed the American approach, which seemed to involve getting the economy back on its feet before worrying too much about how much money the Federal Reserve was printing or the size of the budget deficit.
What is required immediately is:
1. Overlook the SGP rules – allow nations to exceed the deficit and debt thresholds (encourage them to do so) – they can invoke the emergency let outs in the Treaty.
2. Announce that the ECB will buy any government debt. This can be done within the Treaty via the secondary markets. That will eliminate any problems with bond markets and higher yields. The ECB can guarantee solvency implicitly in this way and still stick within the legal constraints.
3. Announce a massive public employment and public infrastructure program throughout Europe. That would eliminate unemployment and spur growth in private spending.
4. Do not waste time introducing a quantitative easing program. All bond purchases should be tied to increasing fiscal deficits.
5. Provide a demogrant of some euro amount to all people in the bottom 3 quintiles of the income distribution funded by the ECB. That would flow straight into the expenditure stream. There is nothing in the Treaty rules that say the ECB cannot do this. They just cannot bail out governments or allow overdrafts to them.
As it stands, the Eurozone is a failed system. It has been for 14 years.
Unless there is a major shift in thinking it will continue to be.
That is enough for today!
(c) Copyright 2014 Bill Mitchell. All Rights Reserved.