A depressing report from Florence

I am in Rome today and tomorrow. This afternoon I am giving a presentation at the Roma Tre University (Università degli Studi Roma Tre) on Modern Monetary Theory (MMT) and how we might advance the spread of the ideas. There is a very committed group of people in Italy who want to build a political presence to counter the neo-liberal dominance, which has infested all the major parties here (and everywhere). The first thing they need to do is to forget MMT as an organising vehicle and, instead, articulate a vision that advances public purpose and prosperity. MMT is a tool box or framework to understand the consequences of economic decisions (private and public) on the macroeconomic aggregates. It is not a policy agenda. I have suggested they concentrate on full employment, job security, climate change and reducing inequality and advancing opportunity for all as the organising vehicle for their political endeavours. Otherwise, there is the danger that they become an MMT cult. Anyway, I left the Florence roundtable thinking that dramatic shifts are required in the way the EU is structured before Europe can make any significant return to those sorts of policy aims. I also concluded that the elite is so entrenched in its own neo-liberal Groupthink and its own advanced sense of preservation that very little will change and mass unemployment will persist for years to come. It is a very sad state.

The roundtable – How can we govern Europe? – was organised by the new Italian media group – eunews – which aims to provide analysis beyond the daily flow of news about EU matters, particularly the economy. I spoke to one of the founders and the project is worthy.

I was aiming to be able to provide audio from my presentation but that plan fell foul of ad hoc organisational changes. We were asked to prepare 20 minute slide presentations, but the so-called moderator decided in her wisdom, without consultation that she would interview the panel instead. So I am sorry there was no formal presentation.

I will record this afternoon’s session at the University and make it available tomorrow.

My contribution was predictable – the problems they face are by design – they deliberately created a monetary system that would fail once a major economic spending shock came along and their policy positions are unsustainable. I noted that if Greece could resume employment growth at the rate they achieved in the 2000-08 period (0.3 per cent per quarter) it would take until the June-quarter 2034 to get back to the peak before the crisis (June-quarter 2008).

With very modest population and labour force growth, the unemployment rate would still be above 17 per cent in June 2034 at that rate. That cannot be the product of a system that just needs some tinkering around the edges – which is the approach taken by the EU political elite.

The system is dysfunction, biased to crisis and stagnation and should be scrapped. I suggested Italy should show leadership and exit the whole ridiculous arrangement.

But while most speakers (not just on my panel) were now happy to admit that the problem was one of deficient aggregate demand (spending), they all believed that the Eurozone could work within the current rules and structure. There were very few people at the conference (speakers) who thought an exit was desirable. That, in itself amazes me.

I spoke to some people who would call themselves firmly ‘left’ in the political spectrum on both economic and social grounds and they were opposed to exit and wanted to strengthen integration. The major reasoning that I could deduce for that extraordinary ‘left’ position in the current context was that the extreme right were leading the charge on the exit option and the ‘left’ couldn’t afford to be associated with Euroscepticism.

That also amazed me. That there could be such a lack of tactical leadership aspiration on the ‘left’. I argued that the challenge was to articulate the differences (and there are huge differences in terms of social policy and attitudes to immigration, climate change etc) even if on some of the economic issues, the left and the right were one.

If you go back to Germany in the early 1930s, the National Socialists rejected the orthodox (neo-classical) policy prescription for solving the Great Depression and were Keynesians before Keynes. The macroeconomic management was excellent and allowed growth in employment to return much more quickly than elsewhere. Sure enough, their national aspirations were appalling as were there social policies. But should the ‘left’ have rejected major macroeconomic public sector stimulus packages just because the Nazis also were doing it?

The other argument presented against exit by the ‘left’ is that people no longer trust their national political systems and think that Brussels/ECB is a more competent policy making body. This argument is particularly applied to the chaotic and often corrupt Italian political system.

There is truth in the argument that culture intersects with the economy. For example, even if the major insights from MMT are understood, are dysfunctional polity will still deliver poor outcomes.

But is that a recipe for sub-contracting major economic policy to the technocrats and self-serving politicians in the European Commission? Especially, when that system has delivered such a elevated level of incompetence – as is evident everyday in the data that Eurostat pumps out.

Mass unemployment that will last for decades. Huge daily national income losses. Banks that are insecure. Property markets in collapse. Rising income and wealth inequality. Stagnant growth or on-going recession (after 7 years). Deflation! Rising social instability. Increasingly extreme right-wing political prominence (again!). Rising poverty. Degrading public infrastructure. Florence, for example, is much worse than when I was last there before the crisis (degrading urban amenity etc).

And ordinary citizens are not even able to get penicillen in some nations because of the austerity attacks on the public health system.

The centralised bureaucrats and politicians that have overseen that disaster are hardly worth putting a nation’s faith in.

There seems to be a desperate need for a new political force on the left to form and take on the mainstream parties. I had a talk with an aspiring Greek politician at the Roundtable (an economist – I will not mention his name given his political aims at this stage) who thinks exactly along those lines – a new force is required to break down the dominance of the mainstream and challenge the legitimacy of Brussels/Frankfurt/Washington.

The mainstream national politicians or all persuasions have just behaved as surrender monkeys to the Troika and have been prepared to sell their national interests down the drain to sit in pretty with the Troika elite.

The moderator of my panel also gave a disproportionate time to the ECB Vice President Vítor Constâncio, who spun the usual line that the ECB was in charge of the situation, had been a little surprised by the fact that they had consistently missed their inflation target in the last year (2 per cent) by overestimating the actual inflation.

Interestingly, he then admitted that the Eurozone was now facing a deflationary situation – that is, negative inflation. I read the ECB publications (speeches, news releases, etc) as they come out and the ECB has not yet admitted that. They talk about the dangers of deflation and the need to push the inflation rate up to their target but have never conceded the current situation is one of deflation – which means they have really failed.

Now he didn’t actually say – the Eurozone is in deflation. What he said was that the estimates of the deflator (CPI type measures) overstate the actual inflation rate for a number of well-known reasons. So when the official annual inflation estimate is below one then the actual inflation rate is likely to be negative – that is, there is deflation.

Eurostat currently estimates – Eurozone inflation – to be at 0.4 per cent.

We are waiting for the ECB now to formally announce that there is deflation in the Eurozone, and for the senior officials including the Vice President to resign as a result of their failure to manage their main agenda properly.

Surprisingly, there was no headline in the Italian press which was covering the roundtable about this admission.

Constâncio also claimed that one of the advantages of Quantitative Easing (QE) was that it would push up inflation and with very moderate (read stagnant) nominal wages growth, that would lead to falling real wages, which would spur growth. I found that part of his contribution more disgusting than the rest of it which was pretty awful on average.

In another panel, the talk turned to trade. We were told by various EU/OECD and neo-liberal academics that the main problem was the trade imbalances. If they were reversed then growth would return.

It is an extraordinary argument really. The German economist Daniel Gros, who is the Director of the Centre for European Policy Studies (CEPS) presented this argument most eloquently. But he forgot, conveniently to mention the very big Elephant in the room and its smaller offspring!

He correctly noted by way of defending the German position that external surpluses in Germany (currently around 7 per cent of GDP) were smaller than those in Switzerland and the Netherlands for example. The so-called – Macroeconomic Imbalances Scoreboard (MIP) – introduced by the Commission to ascertain “potential imbalances” as part of their “early warning system”, dictates that a Current Account deficit of 6 per cent is the limit, beyond which an imbalance is considered to be existing.

This framework is another example of a lost vision of what the role of government should be. In my panel presentation I argued that the government does not exist to balance a budget or meet some other financial rule.

Why is the ‘sustainability of public finances’ a separate objective given that fiscal policy should always be in service of prosperity, which at least requires that full employment and price stability be achieved, at least.

If a rigid fiscal or other rule compromise the capacity of a government to promote sustained employment growth then they are inappropriate. Policy parameters have to be flexible enough up and down to allow a government to maintain adequate levels of total spending in the economy.

The MIP is just another example of the rigidity that the EU elites impose to cover the fact that their goal is not widespread prosperity of all but the prosperity of those who capture their decision making – banksters etc.

The ‘Macroeconomic Imbalance Procedure’ was embedded in the so-called ‘Six-Pack’ and exposes the inherent, anti-people biases that dominate European policy making.

The stated aim of the MIP surveillance mechanism is “to identify potential risks early on, prevent the emergence of harmful macroeconomic imbalances and correct the imbalances that are already in place”.

The so-called MIP Scoreboard uses ten ‘early warning’ indicators that provide information about “macroeconomic imbalances and competitiveness losses” which are easy to compute and communicate. Threshold values (positive and negative) are provided to assess when there is an imbalance.

The priorities are clear. A nation that had endured an unemployment rate of say 9.9 per cent for the last three years is not considered to be imbalanced, given the warning threshold is 10 per cent. The Commission chose this very high threshold due to a “focus on adjustment in labour markets and not on cyclical fluctuations”.

In other words, they do not consider the unemployment problem in terms of insufficient jobs being caused by deficient levels of spending but, rather, consider the only policy concern to be so-called ‘structural’ issues.

This, in turn, concentrates their attention of ‘market impediments’, the standard neo-liberal, supply-side bias that has failed since it became the dominant approach in the early 1990s.

In the Commission’s annual ‘Alert Mechanism Report’, which is based on a review of the MIP scoreboard, any reference to unemployment is usually accompanied by some conclusion that wages are too high and need to be reduced in line with productivity growth.

There is no recognition that the enduring recession has caused both productivity growth to slump and jobs to disappear due to a lack of spending. The European policy makers are thus ‘content’ with very high levels of unemployment yet they hide their intent in a language of deception.

Another bias is evident in the way they deal with current account deficits and surpluses. They conclude that “sustained current account surpluses do not raise the same concerns about the sustainability of external debt and financing capacities, concerns that can affect the smooth functioning of the euro area” as do current account deficits.

The MIP thus accords “a greater degree of urgency” to “countries with large current account deficits and competitiveness losses”. The upper warning threshold (for a surplus) is 6 per cent of GDP. If the balanced budget rule is satisfied by a nation sitting on the current account surplus threshold, then its’ private domestic sector will be saving overall 6 per cent of GDP.

Where will those savings go? That was the topic that Daniel Gros addressed in his presentation.

In previous blogs, I have discussed how Germany maintained its external competitiveness once it could no longer manipulate the exchange rate. The 2004 Hartz reforms reduced the capacity of workers to share in the productivity growth of the economy and suppressed domestic demand.

Profitable investment opportunities were limited in the German economy as a result and capital sought profits elsewhere. The persistently large external surpluses (and 6 per cent is large) were the reason that so much debt was incurred in Spain and elsewhere.

In the ‘Alert Mechanism Report 2014’, issued on March 3, 2014, the European Commission concluded that Germany had a macroeconomic imbalance as a result of its current account surplus being above the 6 per cent threshold.

The Commission acknowledged that the large surpluses have been, in part, due to the suppression of domestic spending and hence imports.

But they praised the surpluses because they “provide savings to be invested abroad”. They concluded that Germany will have to find ways to “strengthen domestic demand and the economy’s growth potential”. However, they dodge the main issue. Higher domestic demand will require faster wages growth both to boost the very modest consumption performance and to attract investment into the domestic market.

But such a change would be at odds with the mercantile mindset that dominates the nation because it would reduce the competitive advantage that Germany enjoys over other nations that have treated their workers more equitably.

Daniel Gros also failed to present the high saving rate in Germany in this context. He said it was cultural. Germans are austere types who like to be penurious. And most importantly, the deflationary effects of that behaviour could not be altered by government policy.

He claimed that you can “take a horse to the water but not make it drink”. So he left the audience thinking that government was powerless to alter the high surpluses in the northern European states.

But what he failed to mention – an omission also made by the EU trade official, the OECD trade official and the academic on that panel was that:

1. People are saving more because there is a major fear of unemployment and loss of income.

2. People are not spending much in Germany because their real wages have been cut or stagnant for years as a result of a deliberate government strategy to undermine the competitive positions of the other Eurozone partners once the Bundesbank could no longer manipulate the exchange rate.

3. Boost real wages and Germans will consume more – that is the ‘elephant’s offspring’!

4. And the elephant – if the non-government sector doesn’t want to spend for whatever reason and the government cannot force them to spend then what is the obvious solution?

Over to you folks – the Government can spend itself! Duh!

This refusal to allow that prospect in the Eurozone is why they cannot escape this malaise. The German government could increase its deficit (it now has a small surplus) by several percentage points and that would boost incomes across its economy and one of the first principles of Macro 101 is that private consumption is a positive function of national income.

Go figure. Eurozone governments are powerless to act because the Commission has them in a Stability and Growth Pact straitjacket and the neo-liberals are telling everybody that that will boost growth. It is inane and the Groupthink in Europe is so entrenched that even the ‘left’ go along with it.

Interesting, Richard Koo was a presented on my panel and he pointed out that the non-government sectoral balances were so high that there was a need for fiscal deficits to be at least twice as large in most Eurozone nations.

His argument was that if the non-government sector doesn’t want to borrow to rechannel the high household savings into spending (investment) then the government sector should do the spending (and borrowing).

Please read my blog – Balance sheet recessions and democracy – for more discussion on this point.

Richard Koo, though, is no adherent to MMT. His balance sheet recession state is a special case when central banks have interest rates at zero and people still won’t borrow and spend. The reason he gives for this state is that the private sector a repairing their balance sheets after a period of excessive borrowing.

That logic is sound but then he concludes that when the balance sheets are repaired the mainstream textbook principles return – money multiplier, danger of fiscal deficits pushing up inflation and interest rates and all the rest of the neo-liberal mythology.

So for now, Koo is a fellow traveller advocating much higher fiscal deficits but once growth resumes he goes back into the mainstream camp. In other words, his overall framework is deeply flawed and he just happens to get it right under the current circumstances.


Overall a pretty downcast experience. I have to think about today now.

But if you read on, not all was lost!

Running in Florence

If you are a runner and travel then finding nice circuits to run is always a challenge. In Florence, I recommend staying in the district between the main railway station and the River Arno, to the west of the main station (around Via Solferino or thereabouts).

From there you have a fabulous park that runs between the racecourse and the river. You can run around 4.5 kms in one direction until you come to a main bridge (Viadotto Indiano) and then back along the river (Viale dell’Indiano, Via JFK, Via Abraham Lincoln) and then across a little footbridge (that crosses over the SS67 main road that runs west-east across Florence) and back into the hotel district.

I also discovered you can tack on another few kms by crossing the Viadotto Indiano and running on the East side of the Arno. I stopped at 6.5 kms and came back the route mentioned. There are also many possibilities of shorter distance at various turnaround points in the park.

The surface is good and often firm and even gravel (where the horses are exercised away from the track) – similar to the famous tan track in Melbourne where I run a lot (near the Botanical Gardens).

In each of the runs I did while in Florence around this area I didn’t have to turn off my running computer once – no waiting at intersections.

A great location for runners. One of the best I have found. My challenge today is Rome – not easy.

And after a hard run, in the same hotel district you can get this type of treat to fill your legs up with again!


That is enough for today!

(c) Copyright 2014 Bill Mitchell. All Rights Reserved.

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    6 Responses to A depressing report from Florence

    1. Neil Wilson says:

      “they were opposed to exit and wanted to strengthen integration.”

      One world idealism has gone completely mad. It is just as rabid an ideological position as free markets, or neo-keynesianism.

      We must fix it all at once, or not at all. Talk about cutting off your nose to spite your face.

      And underlying it all is still this firm belief that there is some sort of magic equilibrium and if we can just set the levers in the right position everything will magically fall into place without any effort.

      The system is chaotic and needs constant active management – preferably automatically. Just getting that across to people seems to me to be the first step. It won’t just magically work out. Not ever.

    2. dnm says:

      Dear Bill,

      It may be a bit late now, but you could try this site to find a suitable running route:


    3. Icarus Green says:

      The problem is that most people can’t see through all this nonsense. It seems actually like common sense to economically illiterate people to run massive CA surpluses, ‘improve competitiveness’, introduce ‘structural reforms’, and balance the budget. Workers in Germany are like battered housewives, they have crap living standards relative to their productivity, can’t afford to own property, and have had stagnant real incomes for a decade, but think they’re getting a good deal because a lot of other Europeans are unemployed! This is the neoliberal meta game – make things so unbelievably bad, that even minor mercies are to be lauded from the rooftops – hence the embarrassing talk about Ireland being a good example of neoliberalism. As usual neoliberalism turns to monetary policy to pick up the demand slack, rather than face the horror of having to spend or redistribute, which is hilarious because the zero lower bound cant be breached and the only way monetary policy might work is by inflating away creditor debts and increasing their consumption power – which they WILL NEVER DO.

    4. The Dork of Cork says:

      The EU is a rejection of the ancient Greek principle of defined borders.

      The EU is in fact engaging in a full employment policy – it so happens to be the entire world.

      Italy had a net migration policy of a cool 2 million souls in 2010
      My point is the jobs have no purpose but the resident 20 and 30 some things don’t have the purchasing power to have a family because of these strange demographics.
      We are living inside the most extreme market states in the world.
      As samir amin observes , these are no longer capitalistic national monopolies , they function within a larger framework of highly concentrated but generalised capital that has total power but not ownership of capital.
      Anyhow ownership has no meaning in the modern world.
      19th century politics where the factory owner or let’s say a trader of tea or something has local political power has now no meaning.

    5. Dr. Mitchell, I have enjoyed this blog entry entirely and I share your pesimism on the European economic situation. This is so dreadful! I have so many friends struggling economically and I myself am not doing to well either. In any event I have of late become addicted to MMT and reading anything I can get: Godley, Randall Wray, etc… All with the purpose of understanding and finding solutions to this crisis. I have even contemplated the idea of getting a PhD in economics (at my venerable age of 50!) since I decided to get an MBA after my Bachellors degree in Economics thinking that I was interested in a carreer in business. Little did I know that our economy should end like this stifling my professional advance! Maybe I am in danger of becoming a member of a “cult”. On the other hand I find myself preaching in the desert, except that some “radical left” parties are begining to come up with some “bizarre”proposals such as a basic income, renegotiating the debt and renegotiating the Maastricht Treaty: Today Wolfgang Münchau wrote a great piece that I have recommended to everybody: http://www.ft.com/intl/cms/s/0/48e6fa76-70bd-11e4-8113-00144feabdc0.html?siteedition=intl

    6. The attitude of the British left is pretty much the same as our Italian comrade. Because UKIP and the Tory right are leading the Eurosceptic movement they have decided to go walkabout on the issue of the EU. The left happily used to be Eurosceptic when there was much less to be Eurosceptic about. The old Common Market / EEC operated relatively successfully for many years as a free trade group and, of course, it made more sense then to want the British economy to share the benefits too. So if they could find it in themselves to be Eurosceptic then, why the change now that the EU, and in particular the Eurozone, has turned into an economic disaster zone?

      There is barely a word of criticism towards the EU from anyone on the British left and particularly since the passing of Tony Benn earlier this year. That’s a gross dereliction of international socialist responsibility in my opinion. They need to wake to themselves and speak up for workers everywhere who are being oppressed by crushing neo-liberalism.

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