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Who is responsible for the Eurozone crisis? The simple answer: It is not Germany!

Today, the Australian Treasurer will release the so-called Mid-year Economic and Fiscal Outlook (MYEFO), which will reveal that the fiscal deficit has risen on the back of slower economic growth. I will comment about that and the reactions tomorrow, probably. Today’s blog is about the Eurozone, obviously one of my favourite research topics. There was an article in the UK Independent (December 14, 2015) by British economist Simon Wren-Lewis – Who is responsible for the eurozone crisis? The simple answer: Germany. The article largely avoids the question and chooses, instead, to focus on more contemporary influences which have magnified rather than caused the crisis. The article clearly blames Germany for the crisis and exonerates Greece, Ireland and Spain. However, I have argued in the past that France is largely responsible for the mess that Europe is in economically at present and it’s responsibility goes back decades before the Eurozone was even constructed. The causa causans of the Eurozone crisis is the essential design and construction of the Economic and Monetary Union (EMU), which was never going to be capable of operating in an effective manner. Germany set in train policies that would ensure they were insulated from the wreckage that the dysfunctional system would engender. Germany ‘gamed’ a dysfunctional system for its own advantage but they didn’t create that system and in that sense they are only a causa sine qua non, rather than the essential cause.

The Article leaves a reader to consider the proposition that if Germany had not run consistent current account surpluses and had not introduced the Hartz reforms to their labour market in 2004 then the Eurozone crisis would have been short-lived at worst.

Further, the reader is induced to believe that if Germany had not frustrated the European Central Bank’s ambitions to introduce “a large-scale quantitative easing program”, which was “some six years later than similar programs in the US and UK” then things would have been decidedly better in the Eurozone now.

In addition, the Article argues that Germany also frustrated the ECB’s attempts to act as a “‘sovereign lender of last resort’, which means being prepared to by its own government’s debt if the market fails to”. Apparently, this distinguished the Eurozone from, say Britain, where the Bank of England played “a key role in reducing the risk associated with government debt” by acting as a lender of last resort.

History seems to have slipped the grasp of the author. He says that:

The ECB initially refused to play this role, leading to self-fulfilling market panics over Irish, Portuguese and Spanish government debt. The ECB changed its mind in 2012, and the debt funding crisis quickly came to an end. Despite this, German politicians have tried to declare this move illegal in the courts.

However, he fails to mention that the ECB introduced its Securities Markets Program (SMP) on May 14, 2010 and by the end of October of that year had already purchased €63.5 billion of government debt in the secondary bond markets.

The ECB accelerated its purchases at times when the difference between the yields on some Member State government bonds against the benchmark bond, the German bund (the ‘spreads’) were widening significantly.

The first large spike in purchases in May 2010 was associated with the escalation in spreads on bonds issued by Greece, Ireland, Portugal and Spain.

So Simon Wren-Lewis is incorrect in concluding that the ECB “refused to play this role” in relation to Ireland, Portugal and Spain. In May 2010 and beyond, the ECB was effectively giving these governments billions of euros by ensuring that primary bond dealers could off-load purchases in the secondary markets at favourable prices.

A second, larger round of acquisitions began in August 2011 and were mostly associated with the sharp rise in the spread on Italian government bonds, which went from 1.5 percentage points in April 2011 to a peak of 5.2 percentage points in November 2011.

The large-scale ECB buying stabilised the Italian bond spreads by the end of 2011 and by April 2014, they had fallen back to 1.77 percentage points.

Given the size and importance of the Italian economy to Europe, the ECB was clearly not going to allow the Italian spreads to rise as quickly or as far as the Greek spreads had risen.

Of course, the SMP purchases effectively allowed the relevant governments to ignore the bond markets, which meant that the size of the spreads were moot anyway.

On September 6, 2012, the SMP was formally replaced on 6 September 2012 when the ECB introduced the Outright Monetary Transactions (OMT) program. This is the ‘change of mind’ that the Independent article is referring to.

The grain of truth in the Independent article in this context is that the German Bundesbank was highly critical of the decision by the ECB.

After the SMP was launched, a number of ECB’s official members gave speeches claiming that the program was necessary to maintain ‘market function’. In other words, by placing the SMP in the realm of normal weekly central bank liquidity management operations, they were trying to disabuse any notion that they were funding government deficits.

This was to quell criticisms, from the likes of the Bundesbank and others, that the program contravened Article 123 of the EU Treaty.

In early 2011, the fiscally conservative boss of the Bundesbank, Axel Weber, who was being touted to replace Jean-Claude Trichet as head of the ECB, announced he was resigning, ostensibly in protest at the SMP and the bailouts offered to Greece and Portugal.

Another ECB Executive Board member, German Jürgen Stark, also resigned in protest over the SMP in November 2011. Stark told the Austrian daily Die Presse that the ECB was heading in the wrong direction by pushing aside the crucial no bailout clauses that provided the bedrock of the EMU.

Weber’s successor as head of the Bundesbank, Jens Weidmann, maintained the criticism, albeit in a more muted manner.

As the ECB accelerated its SMP purchases in 2011 to quell the rising bond yields on Italian government debt, Weidmann gave a speech in Berlin on November 8, 2011 – Managing macroprudential and monetary policy – a challenge for central banks – which reiterated the Bundesbank’s obsession with inflation.

He said:

One of the severest forms of monetary policy being roped in for fiscal purposes is monetary financing, in colloquial terms also known as the financing of public debt via the money printing press. In conjunction with central banks’ independence, the prohibition of monetary financing, which is set forth in Article 123 of the EU Treaty, is one of the most important achievements in central banking. Specifically for Germany, it is also a key lesson from the experience of the hyperinflation after World War I. This prohibition takes account of the fact that governments may have a short-sighted incentive to use monetary policy to finance public debt, despite the substantial risk it entails. It undermines the incentives for sound public finances, creates appetite for ever more of that sweet poison and harms the credibility of the central bank in its quest for price stability. A combination of the subsequent expansion in money supply and raised inflation expectations will ultimately translate into higher inflation.

The German ‘Angst vor der Inflation’ is very evident in that speech. But despite the German resistance, the ECB bought billions of euros worth of Eurozone government bonds.

Whatever spin one wants to put on the SMP, it was unambiguously a fiscal bailout package. Weidmann was correct in that sense.

The SMP amounted to the central bank ensuring that troubled governments could continue to function (albeit under the strain of austerity) rather than collapse into insolvency. Whether it breached Article 123 is moot but largely irrelevant.

The SMP reality was that the ECB was bailing out governments by buying their debt and eliminating the risk of insolvency.

The SMP demonstrated that the ECB was caught in a bind. It repeatedly claimed that it was not responsible for resolving the crisis but at the same time, it realised that as the currency issuer, it was the only EMU institution that had the capacity to provide resolution.

The SMP saved the Eurozone from breakup.

It is true that the most responsible strategy for Europe, given the severity of the crisis and the particular exposure of some European economies and banks, would have been for the Council to immediately suspend the SGP provisions and for the ECB to announce that it would support all necessary fiscal deficits to offset the private spending collapse.

The former decision could have been justified under the ‘exceptional and temporary’ circumstances provision of Article 126 of the TFEU relating to the EDP.

It was clear that the situation was ‘exceptional’ and with appropriate policy action would have been ‘temporary’. The Council had already demonstrated a considerable propensity to bend its own rules.

The ECB could have immediately announced a program such as the SMP whereby it promised to buy up unlimited volumes of national government debt in the secondary markets.

If the SMP had been introduced in 2008 rather than 2010 and without the conditional austerity attached, things would have been very different.

No Treaty change would have been required for either of these ad hoc arrangements to be put in place.

While obviously inconsistent with the European Groupthink, these policy responses would have saved the Eurozone from the worst.

Fiscal deficits and public debt levels would have been much higher but in return, there would have been minimal output and employment losses and private sector confidence would have returned fairly quickly. The response of the private bond markets would have been irrelevant.

So the conclusion by Simon Wren-Lewis that “Germany helped to aggravate the 2010 crisis by pressurising the ECB not to act as a lender of last resort” is in historical terms incorrect.

The fact is that the ECB did introduce the SMP, and despite its own efforts to distance the program from so-called Quantitative Easing (QE) and the ‘printing money’ connotation by ‘sterilising’ the intervention, the reality was that the SMP was virtually indistinguishable from QE.

Both strategies kept bond yields lower than otherwise by strengthening demand in the private bond markets and both provided an interest-bearing alternative to the bond holders via the standing facilities on excess reserves (offering a return on excess bank reserves).

QE added bank reserves (cash) and the relevant central bank then paid interest on the excess reserves created, whereas the ‘sterilisation’ functions associated with the SMP merely shunted the excess euro reserves created by the bond purchases into a separate ECB account, which earned interest.

So the fact that the ECB is only now openly calling its bond purchasing program QE doesn’t negate the reality that it had been conducting an equivalent program at the height of the crisis in 2010.

The Independent article correctly challenges the notion that the Eurozone crisis was “an inevitable result of the debt funding crisis that hit the eurozone periphery in 2010”. In other words, the author is rejecting the narrative that the origins of the crisis is to be found in government debt dynamics.

The author rightly points out that:

Countries like Belgium or Italy entered the crisis with debt-to-GDP ratios over 100 per cent, yet did not require Troika bailouts, whereas Ireland and Spain, which had ratios below 40 per cent, did.

The author concurs with what is becoming a popular explanation for the crisis that ” the 2010 crisis was essentially the result of excess lending to the private sectors of countries such as Ireland, Portugal and Spain, lending that often originated with banks in Germany or France”.

In other words, the crisis was a private debt crisis rather than a public debt crisis.

Simon Wren-Lewis does acknowledge, in a roundabout sort of way, that currency sovereignty is important. He noted that:

It is now well understood that the reason why economies in the eurozone, and only those economies, suffered a debt funding crisis in 2010 is that these countries did not have their own central banks.

Other capacities were also lacking:

1. Their governments did not have legislative authority over the currency issuing institution.

2. They did not have their own floating exchange rate.

3. They used a foreign currency (the euro!).

4. They issued debt in a foreign currency (the euro!).

5. They were unable to run deficits commensurate with the non-government sector spending gap as a result of the fiscal rules under the Stability and Growth Pact (SGP).

It is hard to blame Germany for all of those missing capacities. To fully understand the Eurozone crisis since 2010 we have to do understand why such a defective monetary arrangement was implemented in the first place.

That is what my current book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale is about. It is a long story that dates back in time to the efforts made in the immediate post-Second World War period to ensure a lasting peace would ensue.

The Eurozone crisis is the combination of two very powerful and destructive vices.

The first is the age-old Franco-German rivalry. A corollary to this rivalry is a disdain for the ‘Latinos’ who by geographic proximity cannot be ignored, much to the angst of those further north.

A major driving force in the early debates about European integration was France not Germany. France was caught up in its own sense of ‘exceptionalism’, which was driven, in fact, by deep inferiority as its colonial empire was collapsing.

The cultural and historical aspects of the Franco-German rivalry are permanent constraints on European progress. At some point the Gauls and the Prussians began hating each other and it is clear that the two ‘nations’ were at odds after Napoleon incorporated German-speaking areas such as the Rhineland during the First Republic.

The long-standing ‘enmity’ evolved in the post World War II period. While the rivalry was intense and open under President de Gaulle, which held back European integration, later the rivalry was expressed from the French side as a desire to neutralise German power, and the only way to do that was to create a European state where France dominated.

French politicians of various persuasions firmly believed that they could control the process of integration by setting up European-wide institutions that would not only be controlled by national governments, but, those national governments would be, in turn, dominated by French superiority.

After all, Germany was in tatters and not in a position to assert any European-wide power.

From the German side, whether anyone wants to talk about it or not, a deep and silent shame gripped the nation as a result of its actions during the 1930s and 1940s. The only source of national pride became Germany’s economic acumen, its technical and organisational skills and the discipline of its workers.

The stereotype of the ‘clever German’ arose to replace that of the ‘ugly German’. European integration became a way the German nation could win back some respect by demonstrating that it could be part of a peaceful Europe. Reunification accelerated that desire but accentuated the paranoia in the rest of Europe about the ‘German question’.

This rivalry and divergent ambitions and motivations dominated the path to monetary union over many decades. When finally Mitterand and Schmidt seemed to be working together, the motivations and cultural baggage remained as disparate as they had been when Monnet and Schuman first proposed the ‘European Project’ in the late 1940s.

The problem was that the French seriously overestimated their own capacity and created a monster, which under the guidance of Jacques Delors, became the Maastricht Treaty.

The second vice that has crippled the Eurozone is the domination of free market economics, the Groupthink, which though empirically deficient and riddled with internal theoretical inconsistencies, still rules the academy and through its graduates, the policy making sphere.

How the economics profession has been able to convince the rest of us that by ‘counting angels on a pinhead’ and then not being able to correctly sum the angels they claim to see (their so-called ‘economic models’), they have anything to say about enhancing societal well-being, is a study in itself and constitutes one of the biggest frauds of the 20th century and beyond.

All the evidence from psychology and behavioural studies tell us that the mainstream economic assumptions about human motivation and decision-making are devoid of reality.

Simon Wren-Lewis is a practitioner of New Keynesian thinking, a major stumbling block for progress in economic thought. Please read my blog – Mainstream macroeconomic fads – just a waste of time – for more discussion on this point.

But it was the rise of Monetarism, which originated out of the academy in the US, that created a ‘post national’ tension among the politicians, and cut across the old state based rivalry between the nations in Europe.

Whereas the early discussions about union placed the national state at the forefront, by the time Delors and his Committee met (in the late 1980s), the global capture by the financial elites of the policy process was well entrenched and the promotion of Monetarist economic ideology aided their agenda.

Recall that Delors excluded the national finance ministers from his panel to ensure that the Monetarist perspective would emerge quickly and not become derailed by national political hankering.

It was imperative that the supranational entities, which were created as part of the union, were consistent with this post national ideology.

That is why the fiscal role of the state was so restricted and the primacy of the depoliticised ECB elevated.

The old national rivalries have persisted but their expression has become increasingly channelled by the free market narrative, which created the monster that is the EMU.

Initially, the Germans were not in a dominant position. The French drove the process of integration and became increasingly influenced by the Monetarist thinking, which pushed them closer to the German emphasis on monetary control and fiscal thrift.

What the French didn’t appreciate was that this emphasis could not deliver effective outcomes to its own economy much less the broader European Member States, given the fact that German manufacturing and its trade capacity was superior in every way.

The French played into the German hands. If they had not become intellectually infested by Monetarism then the stand-offs that had prevented the earlier attempts at monetary integration (for example, the Werner report in 1970) from being implemented would have persisted.

The convergence among policymakers, their advisers, the bureaucracy, and the commentariat in the media to Monetarist ideas allowed the German monetary mentality to play a large role in the design of the EMU.

So the Eurozone crisis is not the fault of Germany. France drove the move to integration thinking it would dominate. It was a delusional expression of their own pathetic sense of being exceptional.

While I don’t believe Germany caused the crisis nor do I exonerate it from magnifying the consequences of the monetary system failure.

I have written about that on numerous occasions. For example, in the blogs – The German model is not workable for the Eurozone and Germany is not a model for Europe – it fails abroad and at home – I outlined why the German model is an inappropriate way for the Eurozone to proceed as it sought recovery.

I won’t repeat the arguments made in those blogs and other blogs I’ve written in a similar vein. Essentially, the latter blog cited contains a very similar discussion to that which appeared yesterday in Simon Wren-Lewis’s article. There is no accusation of plagiarism but the construction of the argument is uncannily similar – the emphasis on the Hartz changes and the divergence in unit labour costs, for example.


At present, a number of economists are attempting to revise the narrative to make it appear that my profession is not profoundly implicated in the Eurozone crisis and the GFC, more broadly.

In the last year, we are seeing several public statements acknowledging issues about the unsustainable buildup of private debt, the inflexibility of the fiscal rules in the Eurozone, and other obvious things that have been staring them in the face for years only to meet met with ideological denial.

Some of these economists even have the audacity to claim that the existing body of mainstream macroeconomic literature readily explains the crisis and prescribed the cure.

This is laughable when we think back to the dominant New Keynesian models, which didn’t even have financial sectors integrated within them.

There is also an on-going denial of the historical factors that have created the EMU and why it failed. Acknowledging those factors would be tantamount to a rejection of mainstream macroeconomic theory and practice.

It is thus convenient to black sheep Germany because its behaviour during the crisis and prior has been nothing short of reprehensible. But it was only acting within the parameters of the system that France and the other Member States eagerly embraced as a manifestation of their Monetarist ideals.

That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.

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    This Post Has 30 Comments
    1. Professor,

      This is a brilliant, brilliant blogpost substantively, and I thank you very much for it (and will share liberally).

      In light of that, may I respectfully suggest a careful proof-reading and editing thereof?

      1. “The article clearly blames Germany *fall* the crisis and exonerates Greece, Ireland and Spain.”
      2. “However, I have argued in the past*,* that France is largely responsible for the mess that Europe is in economically at present ** and *it’s* responsibility goes back decades before the Eurozone was even constructed.”
      3. “Germany*,* set in train policies that would ensure they were insulated from the wreckage that the dysfunctional system would engender.”
      4.”Germany ‘gamed’ a dysfunctional system for its own advantage but they didn’t create that system ** and in that sense they are only a causa sine qua non, rather than the essential cause.” [A cause sine qua non is a necessary cause, a necessary condition of existence. How a necessary cause is not an essential cause escapes me.]

      “If they had not *of* become intellectually infested by Monetarism then the stand-offs that had prevented the earlier attempts at monetary integration (for example, the Werner report in 1970) from being implemented would have persisted.”

      And so on.

      Thank you in advance.

    2. Yes, a nice psycho/cultural/historical analysis of post war Europe and the EU. I read several blogs (not this one) where well meaning reformers get off on tangents about “the cartel” “the deep state” etc. The fact is that Capitalism generally and Finance Capitalism specifically are so riven with the psychology of power, profit and control that there isn’t really any need for conspirators to be evilly slavering over some vector analysis board consciously manipulating nations and regions…all that is required is to let leader’s psycho/cultural/historical biases compete for power, profit and control. Having said this, there undoubtedly are Gordon Gecko and Dr. Strange Love types out there, but again the underlying psychology of the paradigm/zeitgeist of PP & C is what must be dealt with if Mankind is ever to flourish…or even survive. All the more to contemplate Wisdom and its pinnacle concepts, and then apply them as policy in our systems.

    3. Dear GrkStav (at 2015/12/15 at 13:44)

      Thanks for your observations. I am usually rushing and had to go to a meeting immediately after posting the blog today. I have fixed as many of the errors that I can see.

      best wishes

    4. Dear professor Mitchell, I don’t understand what the terms “Germany” or “Spain” are, they are not unities. Inside them there are winners (few) ans losers (many). The nationals of all these countries are, in general, impoverished,…but, perhaps, still they think that is not advisable to joint forces with other nations’ nationals,..

    5. Another great article Bill, but is there any chance of discussing the latest Australian MYEFO. One suspects that the LNP will now be turning pro cyclical policy into hyper-drive.

    6. “They didn’t make the rules. They just play by them.”

      Is that why they had no problem with their banks gorging on Greek Government bonds when the Greek government was clearly not using the proceeds to improve the productive capacity of the country but, instead, enjoying the bribes and other inducements of German-based corporations to steer lucrative (but not optimal for Greece) government contracts to said German corporations?

      I am all for going to the root of the problems and Bill does so very well. On the other hand, let’s not quite give Germany (its politicians etc) a carte blanche. They’re not innocent parties.

    7. I am not an economist, but I think you are talking about a different crisis than the one discussed by Prof. Wren-Lewis in his article. He was not discussing the original crash (“the crisis”) but the response to it. The policy response was imposition of austerity-based policies in return for loans. And Wren-Lewis argues that was the wrong response and that this response was pushed (almost “imposed”) by Germany and German interests.

      It’s comparable in analysis to the writings of Paul Krugman both about the US and the Eurozone in response to the financial crash in 2008.

    8. Indeed GrkStv – this is exactly what the Spanish Finance Minister has said about austerity in Spain, that ‘Spain belongs to a club’ and if you break the rules they have to be applied to ‘you.’ Clearly not being applied to ‘him’ judging by the impeccable suit and plush office surrounding. Unlike Neil, I don’t accept these people are innocent bystanders -‘naffin’ to do with me Gavnah.’ (Cockney type demotic for those that are non-Brits).

    9. Bill- Germany’s rise in economic power must also be linked to it’s early ‘Americanisation’ and money pouring in from the Marshall Plan (including massive debt reductions) to use it as a bulwark against the Eastern Bloc. It is well documented that the US used elements of the Nazi officialdom to keep some of the bureaucracy alive for this purpose.

    10. Hmmm…

      Surely the point is that given the importance of credibility and sending market messages within central bank roles, with the general anti-lender of last resort (LoLR) sentiment that both the German government and the top people in the ECB were giving off while engaging in SMP, the bond market couldn’t trust that the bank would, act as LoLR when it came down to it.

      Plus, given the evidence of the fact that while SMP was in place, it didn’t stop the spreads growing to unsustainably large levels in self-fulfilling panic… whereas after OMT was announced, the panic stopped, it seems to be clear that it is incorrect to claim that “the reality was that the SMP was virtually indistinguishable from QE.”

      Realistically, despite SMP, until OMT, the Eurozone was at almost monthly risk of hitting a challenge that triggered break up due to market panic about contagion and self-fulfilling prophecies. As De Grauwe & Ji (2013) point out (, OMT can be seen as a success just on the basis that by announcing it, the panic stopped.

      Presumably, the major differences between the two are that with SMP, the purchases were made under duress on the secondary market, while OMT was a credible promise that the ECB would undertake any action necessary (including direct purchases) to support the system.

    11. “Is that why they had no problem with their banks gorging on Greek Government bonds when the Greek government was clearly not using the proceeds to improve the productive capacity of the country”

      Yes. If you have no federal oversight, then one state can gouge the other ones.

      You’d have the same in Rugby if there was no referee.

      Funnily enough that’s called the Eton Wall game, so you can see where our esteemed leaders get the idea from.

    12. “Funnily enough that’s called the Eton Wall game,”

      Keynes played that while at Eton, he was apparently quite good at it according to Skidelsky. Although wasn’t his general surplus recycling mechanism supposed to override that? SO he must have overcome the culture he was brought up with to some degree.

    13. True that. While I’m glad that some of the New Keynesian herd are talking sense, I don’t trust them. They seem to be only able to absorb Post-Keynesian arguments long after the fact – as you say, as a sort of whitewash to pretend that they always understood the issues. As we move into the future and the issues change they will continue to lag. So, I’m with you. Don’t let up on these guys. Until they stop teaching students ideological junk with no empirical basis, they shouldn’t be trusted.

    14. The Euro should never have been more than a private money supply, meaning that it should never have been accepted for debts to governments (taxes and fees). That’s the fundamental error plaguing the Eurozone and elsewhere – the conflation of private and government money supplies. They clearly should be distinct since government is FORCE and the private sector should be VOLUNTARY cooperation. Could government money (inexpensive fiat for ethical and practical reasons) be used for private debts? Certainly but no private money should EVER be accepted for government debts.

    15. Simonsky, re Keynes – able to overcome the Eton Wall game rules or overcome his virtual idolatry of Marshall? He himself mentioned that overcoming what he had learned from Marshall was incredibly difficult. He was never completely successful in doing so. Though a revision of the General Theory, which he was planning, might have been able to complete his intellectual journey. But the war came and he died soon after his government work was done.

      Thee is a non-technical discussion of the history of reparations in respect of Germany in in interview of Albrecht Ritschl, an economic historian at LSE. He discusses why what happened in the ’20s and ’30s and after WW2 are relevant to the treatment of Greece.

    16. Neil, surely they didn’t need the Eton Wall game to reinforce the idea that lack of oversight would facilitate practically any old thing. There are lots of historical examples. Unless you wish to argue that they are ill educated as a consequence of going to Eton and the game and its rules were their sole inspiration. I once had a colleague who had been to Eton and, while he was good, I couldn’t argue that he was an Einstein.

    17. Keynes had a good mind alright, but his analysis was incomplete both policy-wise and philosophically. His contemporary Douglas was one of the first to recognize the creditary nature of money, and being an engineer by profession (as well as a cost accountant and the modern equivalent of an efficiency expert) looked directly at commerce, its monetary empirical facts and then the mathematical implications of those datums. Starting from those engineering, scientific and calculus roots came policies that would have transformed modern economies. Keynes once referred to Douglas as a private, not a Major in economic reform (Douglas was referred to as Major Douglas). I’m afraid it was the other way around. There have only been three modern economic philosophers, Smith, Marx and Douglas.

    18. Bill,

      Just playing devil’s advocate for a moment: We can say that separate currencies aren’t necessary in the EU if we replace the concept of external devaluations and revaluations with one of internal devaluations and revaluations. Those countries which are in trading deficit should see a natural fall in wages, leading to a more competitive trading position, and those countries which are in trading surplus should see a natural rise in wages leading to a less competitive trading position. Prices shouldn’t vary to anywhere near the same extent because of the integrated nature of the EU market.

      In reality we can observe that internal devaluations may just about be possible, but they are intensely painful to achieve. So much so that they just don’t work. But I haven’t heard any mention of internal revaluations. In practice the German government ensures that these don’t occur by taxing away what they consider to be surplus euros which enter the German economy.

      So, in that sense are the German government really blame free? Aren’t they, and all other EZ countries who refuse to let real wages rise within their economies, so allowing a rise in the living standards of German workers, and at the same time restoring the competitiveness of other EZ economies, at least partially responsible for the eurozone crisis?

    19. Steve, in modern times, Macleod and, following him, Mitchell Innes should perhaps be given “credit” for espousing a credit theory of money. For Mitchell Innes, there was no substantial difference between debt and money. Keynes was familiar with the work of Mitchell Innes, reviewing one of his Banking Law Journal articles, one of which appeared in 1913 and the other in 1914.

    20. Great article. Your historical insights are extremely useful in framing the debate. I am a bit uncomfortable with the depiction of the role played by the ECB. Yes, they did do SMP etc…, too late in my mind. But I cannot forget Trichet’s blackmail letter to President Zapatero that put an end to his fiscal expansion policy, imposed a recipe of neoliberal deregulation leading to salary devaluation, and brought us tumbling down into the worst depression of our history. In my mind that was effectively a coup d’êtat. Frankly, I still believe that Trichet worked first and foremost to save French and German banks.

    21. Larry,

      Yes, that is true, but the important thing to garner from that is the integrative incompleteness of Keynes’ understanding of money…..and the completeness of Douglas’. There is room for both Debt and monetary grace/gifting, for both governmental (Keynesian) stimulus and (missing from Keynes’ theory) direct gifting to the individual via a citizen’s dividend and rebated discount to retail prices. Economies have not been in a state of equilibrium since the economy was much less industrialized and hence less capital intensive and closer to a state of barter. Hence they have “progressed” toward a more pronounced state of cost/price inflation, and the importance of including/integrating both Debt and Gifting becomes ever more important as innovation and AI increasingly destroy aggregate demand. Keynes’ theories were the fall back position of modern finance so that it could “live another day”….and as we see, once again dominate and manipulate the world with its paradigm of Debt ONLY. The insights of MMT (and other cutting edge theory and reform movements) regarding the importance and reality of national monetary sovereignty integrated with Douglas’ policies that enable monetary policy reach directly and all the way to the (then sovereign) individual can form the basis for a full economic and monetary integration philosophically based on a new and increasingly primary paradigm of monetary grace the free gift. This is my premise in Wisdomics/Gracenomics/Gracientialism.

    22. >So the Eurozone crisis is not the fault of Germany. France drove the move to integration …

      I think this is not correct. The move came from both sides.
      The first step to overcome the skepticism against a commen currency of the Werner Report and other studies in the 1970ies (Marjolin-Report, MacDougall-Report) was the “Genscher Memorandum” from February 1988. This memorandum is pure monetarism, with an absurd circular argument:
      >Die Währungsunion ist der Katalysator für eine notwendige Konvergenz der Wirtschaftspolitiken, ohne die es keine Währungsunion geben kann.
      It was written with support from the Bundesbank.
      You find it as an appendis in this book:
      Delors stept in this a few weeks later. Together these two were able to convince the rest of Europe.
      Genscher convinced Kohl, Delors convinced France and the European Centralbankers.

    23. @ Bill,

      You’d probably argue there was no contradiction between the two postings, but I prefer the tone of your comments in Germany should look at itself in the mirror.

      Where you said:

      “If Germany could look at itself in a mirror it would see an ugly nation – failing in many respects to provide for the well-being of its people.”

      I’d add the well-being of all those in the EZ . By helping itself it would be helping others too.

    24. Interesting perspective and analysis Bill. I guess what you say is true to some extent.
      However despite Germany not being the architect of this mess, and although it would be naïve to blame a sovereign nation from acting in their own interest and setting themselves up to benefit from the existing paradigm, I believe it is wrong to dismiss Germany’s role in this (not that you’ve done that). The fact they are a stakeholder who benefits from the current system, and enforce its cancerous consequences even to the long term detriment of its stability/viability and their long term interests, makes them largely complicit in this heinous system of oppression. They stand in the way of progressive reforms and solutions. They intend to keep these extractive institutions in place to the point of destroying the EU, for the sake of “enforcing legal (debt) contracts” and maintaining their new found position; even when they (their lawyers) acknowledge these contracts make no economic sense and are detrimental and threatening the sustainability of the EU. The Germans might not have started this mess, but they ensure its continuing blight and relentlessly frustrate efforts to end or even lessen it. These beuracrats and lawyers care little for the people, just like their Neo-liberal economist cousins.

    25. Any nation that supported the creation of the Eurozone – whether from within it or outside it – has caused the crisis.

      The Eurozone is a grouping of nations that, economically-speaking, are a bad match for one another.

      If it wasn’t this crisis, it would have been a different one.

      They’re all to blame, including Germany.

      PS The idea that Germany is only playing by the rules is a rare moment of blindness and/or naivety from the usually insightful Neil.

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