Earlier this year, the French collectif Ecolinks, which is a group of economics academics and students in various French institutions published their Petit manuel économique anti-FN, which carried a preface from Thomas Piketty. The group says it is opposed to the current consensus in economics yet its blog seems to be full of Paul Krugman or Wren-Lewis quotes or links to their articles (or other New Keynesians – who are the ‘consensus’, unfortunately). They are obviously worried about the political popularity of FN (Marine Le Pen’s National Front) and have thus produced their anti-FN book as a critique of FNs economic approach. They claim that FN proposes policies that represent “le repli sur une identité étriquée et une vision fantasmée de la nation, rendent cette perspective catastrophique” or in translation, “a retreat into a narrow identity with a fantasised vision of the nation, which would be catastrophic”. The book has received some coverage since its release by a French press that is increasingly worried about Le Pen’s popularity. Please do not interpret in what follows any hint of support for FN from this blog other than as a ‘cat among the pigeons’ force in European politics, anything that upsets the right-wing, neo-liberal, corporatist elites that run the show is to be welcome. I also support Marine Le Pen’s observation that the “The EU world is ultra-liberalism, savage globalisation, artificially created across nations”. That is why I hoped the Leave vote in Britain would win. It is a pity that she marries these views with other hostile views towards immigrants etc, although I am not an expert on immigration so I do not write much about it. It is also a pity that the so-called progressive Left in France (or elsewhere) has left it to the likes of Le Pen to articulate what I would consider to be progressive economic policies. Although, that assessment has to be tempered by the observation that Le Pen’s approach to economic policy is somewhat confused – in part, by her ‘political’ assessment that France is not yet ready to leave to Eurozone. At that point, some bizarre contradictions emerge and the anti-FN book correctly points them out.
FN’s policy proposals are outlined in its – 144 Engagements Présidentiels (144-point manifesto).
The opening statements talk about regaining France’s freedom and mastery over their own destiny (“Retrouver notre liberté et la maîtrise de notre destin en restituant au peuple français” and defines sovereignty in terms of “monétaire, législative, territoriale, économique”, which would suggest a return to its own currency.
Critics seem to characterise those who advocate a return to national currency sovereignty as ‘small vision’ as opposed to the European Union which is claimed to be ‘big’. It is big on corporatism and anti-democratic bullying and certainly big on the unemployment it has created.
My view is that a return to national currency sovereignty, that is exiting the Eurozone and floating one’s currency is a grand vision for full employment and reduced inequality.
Of course, the neo-liberals can take control of a nation that is sovereign in its own currency (as in Australia or the UK at present) and use the capacity that currency independence brings to bad effect.
But a truly progressive government cannot really exist in the Eurozone or in a nation that pegs its currency or accepts legal dictates from an undemocratic bloc (such as the EU).
The Manifesto is big on law and order and border protection – which I leave to one side.
It moves on to talk about “Une France prospèreun nouveau modèle patriote en faveur de l’emplo” (which is a new patriotic model for employment) and seems to include strategies for re-industrialisation, industry support for French companies facing unfair international competition (aka protection, although apparently it will be “protectionnisme intelligent”) and the restoration of a national currency adapted to our economy to act as a lever for competitiveness (“le rétablissement d’une monnaie nationale adaptée à notre économie, levier de notre compétitivité”).
FN also (sensibly) wants to free itself from European constraints regarding public procurement policies, which under EU rules are outlawed under the state assistance laws.
Any state should have the capacity to use its spending power to buy what it wants and to use its spending to advance national interests.
It makes no sense for a nation to endure persistent and elevated levels of labour underutilisation (unemployment and underemployment) and for the state to be purchasing goods and services from abroad, if they can be produced locally.
They want to create structures to prevent predatory financial market speculation damaging the local real economy – we should support that.
They want a state body to manage economic change due to new technologies to ensure that all French workers benefit.
They want to stop French companies that receive public assistance in building productive capital from being bought up by foreign private equity companies (then asset stripped etc) – we should support that.
They want to expand the publicly-funded research funding in France by 30 per cent – we should support that.
And then we get to the interesting parts (from my perspective).
We read Item 43 (in part):
Sortir de la dépendance aux marchés nanciers en autorisant à nouveau le nancement direct du Trésor par la Banque de France.
Which aims to eliminate the dependence on the financial markets by authorising the direct financing of the Treasury by the Bank of France. That is Overt Monetary Financing (OMF).
I will come back to that because it is the essence of today’s blog.
Item 43 also talked about eliminating wasteful public spending in areas such as immigration and the EU.
There follows a host of fiscal stimulus measures (tax cuts, public spending etc) “privilégiant l’économie réelle” (privileging the real economy over the financial sector) and “garantir la protection sociale” (guaranteeing social protection), the latter embracing various pension improvements etc, none of which I find problematic.
There are so many proposals designed to reduce the power of the profit-seeking private markets in area such as health care, energy provision, consumer protection, educational access, support for those with disabilities (including access to employment), and more, all of which are sound policies that a progressive agenda should support.
This intent to regulate markets to ensure they deliver outcomes that benefit the wider population and not just the narrow class of capital owners extends to a rejection of the so-called ‘free trade’ agreements and the investor-state dispute mechanisms, in particular, that are embedded in these neo-liberal documents. Such mechanisms essentially prioritise international capital over elected legislatures.
No progressive political party should agree to these agreements.
Let us return to the macroeconomic currency issues that FN have raised.
FN’s plan will clearly involve fiscal stimulus to restore growth to France and increase jobs. That should be supported and would probably break the Growth and Stability Pact (and related Fiscal Compact) rules, which means that France will leave the Eurozone.
That is certainly implied by the plan to restore the independence of the Banque de France, in terms of it exiting the European System of Central Banks, which is effectively the ECB and the Member State central banks.
France could not remain in the Eurozone with a separate central bank setting its own interest rate.
But more importantly, FN proposes to use the newly-restored currency issuing powers of the Banque of France to facilitate Treasury fiscal policy – that is, credit bank accounts on behalf of the elected government, thereby reducing (or eliminating, depending on the scale) the dependence of government deficit spending on private financial markets.
I have written about OMF before in several blogs, including the following:
This is the preferred Modern Monetary Theory (MMT) arrangement linking the central bank and the treasury, as a consolidated government sector.
From an MMT perspective, OMF is a desirable option that allows the currency issuer to maximise its impact on the economy in the most effective manner possible.
Neo-liberals hate the idea. They magnify a sense of fright among the population, by demonising what are otherwise sensible and viable explanations of economic matters.
They know that by elevating these ideas into the domain of fear and taboo, they increase the probability that political acceptance of the ideas will not be forthcoming.
That strategy advances their ideological agenda. They have vested interests in ensuring that the public does not understand the true options available to a government that issues its own currency manipulate that suspicion.
In the place of these simple truths, neo-liberals advance a sequence of myths and metaphors that they know will resonate with the public and become the ‘reality’.
OMF is one such ‘taboo’ and such fear is totally unjustified.
The idea of OMF is very simple and does not actually involve any printing presses at all. While the exact institutional detail can vary from nation to nation, governments typically spend by drawing on a bank account they have with the central bank.
An instruction is sent to the central bank from the treasury to transfer some funds out of this account into an account in the private sector, which is held by the recipient of the spending.
A similar operation might occur when a government cheque is posted to a private citizen who then deposits the cheque with their bank. That bank seeks the funds from the central bank, which writes down the government’s account, and the private bank writes up the private citizen’s account.
All these transactions are done electronically through computer systems. So government spending can really be simplified down to typing in numbers to various accounts in the banking system.
When economists talk of ‘printing money’ they are referring to the process whereby the central bank adds some numbers to the treasury’s bank account to match its spending plans and in return is given treasury bonds to an equivalent value. That is where the term ‘debt monetisation’ comes from.
Instead of selling debt to the private sector, the treasury simply sells it to the central bank, which then creates new funds in return.
This accounting smokescreen is, of course, unnecessary. The central bank doesn’t need the offsetting asset (government debt) given that it creates the currency ‘out of thin air’. So the swapping of public debt for account credits is just an accounting convention.
Nothing could be more simple. The government funding its own spending with its unique currency issuing capacity and regulated politically by the electoral process.
The point to note is that the inflation risk lies in the spending not the monetary operations (debt-issuance etc) that might or might not accompany the spending.
All spending (private or public) is inflationary if it drives nominal aggregate demand faster than the real capacity of the economy to absorb it.
Increased government spending is not inflationary if there are idle real resources that can be brought back into productive use (for example, unemployment) or grows in proportion to the growth in productive capacity in the economy.
Related propositions include the claims that OMF would devalue the currency whereas issuing bonds to the private sector reduces the inflation risk of deficits. Neither claim is true.
First, there is no difference in the inflation risk attached to a particular level of net public spending when the government matches its deficit with bond issuance relative to a situation where it issues no debt, that is, invests directly.
Bond purchases reflect portfolio decisions regarding how private wealth is held. If the funds that we used for bond purchases were spent on goods and services as an alternative, then the budget deficit would be lower as a result.
Second, the provision of credit by the central bank (in return for treasury bonds) will only be inflationary if there is no fiscal space.
Fiscal space is not defined in terms of some given financial ratios (such as a public debt ratio).
Rather, it refers to the extent of the available real resources that the government is able to utilise in pursuit of its socio-economic program.
So in this regard, FN is the only political party in France and nearly the world that is prepared to break through the neo-liberal taboo and advocated OMF, which is facilitated by currency sovereignty.
It would clearly violate the Treaty of Lisbon rules regarding direct central bank funding of deficits, and, as such, puts Le Pen’s claim’s that she wants France to remain in the European Union into question.
But then things get mirkier when we explore the question of currency. Things are not so clear and suggest the pieces of the ‘sovereignty’ puzzle have not really been well thought through.
In effect, in trying to walk the political tightrope, FN have compromised their basic ambition, outlined in Item 1 of the 144-point Manifesto that they want to:
Retrouver notre liberté et la maîtrise de notre destin en restituant au peuple français sa souveraineté (monétaire, législative, territoriale, économique).
That can only happen, if as article in Le Tribune (February 8, 2017) – Financement du déficit: mais où va Marine Le Pen? – notes:
Reste alors une seule solution pour garantir une réelle souveraineté monétaire et budgétaire : la sortie pure et simple de l’euro.
That is, the only guaranteed solution to real fiscal and monetary sovereignty, is an outright exit of the euro.
Le Tribune went on to say that FN is now avoiding an outright exit because it doesn’t want to deal with the debate during the election campaign.
So it is a hollow claim that FN will restore sovereignty as a matter of course.
In various interviews that Marine Le Pen has given in recent months she has introduced a new plan to try to straddle both camps – exit and remain.
These concoctions reduce her economic credibility, a point that the Petit manuel économique anti-FN makes well.
The compromise was proposed in this 23 minute interview – L’invitée de Bourdin Direct: Marine Le Pen – on January 3, 2017, a month or so before she formally launched her Presidential campaign.
Far from exiting the Eurozone, Le Pen proposed the reintroduction of the national currency (franc) but also to retain the euro as a common currency.
I want a national currency with the euro as a common currency. What was the Ecu [European Currency Unit]?
What is that? Well, it is not a currency and never was. The Ecu was the European Currency Unit, introduce as part of the European Monetary System (EMS), which replaced the failed ‘snake’ (fixed exchange rate system) in 1978.
Recall that after the breakdown of the Bretton Woods system (in August 1971), various attempts were made to restore it (for example, the Smithsonian Agreement).
The Europeans introduce the ‘le serpent l’intérieur du tunnel’ as an outcome of the Basel Accord in 1972. The Member State currencies could snake along in value a rather tightly constricted tunnel (fluctuation bands).
That system took effect on April 24, 1972.
It didn’t take long for the snake to escape its tunnel, such was the impossibility of tying all these Member State currencies together in a formal arrangement.
So once the snake started slithering out of control a few months after the Basel Accord the central banks were put under tremendous pressure to stabilise the currencies within the agreed parities.
Britain couldn’t and left. Italy left. Switzerland left.
The remaining Basel Accord partners (Benelux, Denmark, France, Germany and the Netherlands), however, chose to ignore the ‘sword of Damocles’, such was their fear of floating exchange rates, and on March 12, 1973, announced they would jointly float against the US dollar, effectively keeping the ‘snake’ (Basel Accord) but abandoning the ‘tunnel’ (the Smithsonian Agreement).
The problems deepened and it was only the use of capital controls that allowed central banks to maintain any sense of stability.
By 1977, it was clear the ‘snake’ was falling apart after France had withdrawn in 1976 and Germany’s trade strength put pressure on all other currencies.
There were legal disputes as Italy, Denmark and the United Kingdom chose to defy EEC rules regarding free trade (under the customs union) and impose import restrictions, in an effort to stem their persistent balance of payments deficits.
By 1978, the snake was done and Helmut Schmidt and Valéry Giscard d’Estaing met in relative secrecy in early 1978 to develop a joint strategy to replace the ineffectual ‘snake’ with a more integrated level of monetary cooperation. T
After working out a deal that both nations could live with, the two leaders unveiled their plan for a renewed attempt to introduce a European Monetary System (EMS) at the European Council summit in Copenhagen on April 7 and 8. The proposal became reality at the European Council meeting in Bremen on July 6-7, 1979, when the leaders decided to push ahead with the creation of the EMS along the lines laid out in Copenhagen.
The EMS introduced the European currency unit (ECU), which was effectively identical to the previously created European Unit of Account (EUA).
The ECU was intended to be the benchmark accounting value against gold, which other currencies would be paired against.
It was also to be used by the EEC central banks as a means of settlement.
The ECU was to reflect a basket of European currencies with each participating central bank subscribing 20 per cent of their US dollar and gold reserves to the initial pooled ECU fund.
Initially, this allocation of ECUs to the Member States was to be administered through the EMCF, established in 1972 as part of the ‘snake’. The proposal also extended the European credit facilities available to central banks to make it easier to maintain the agreed parity ranges. For example, the Very Short-Term Financing (VSTF) facility was designed to automatically extend credit to any nation that required funds to defend its currency.
On the question of symmetry, the so-called ‘bi-lateral parity grid’ was created with the individual currency values expressed in terms of the Ecu. This meant that the individual currency parities against the Ecu also defined their values against each other.
The French, particularly, wanted the ECU to be a central part of the system and to be used as the intervention unit because they assessed it would reduce the importance of the German mark.
Germany opposed the use of ECU as the basis for intervention for various reasons, which need not concern us here. Essentially, it wanted a system that would free the Bundesbank from having to bear all the responsibility of maintaining parities in the face of on-going upward pressure on the mark.
In this context, there were on-going disputes about the creation of a central fund (that is, a central bank) that could use the Ecu to intervene to maintain parities.
That is the historical background necessary to get the next point.
The ECU was a linking unit within a fixed exchange rate system. That system (EMS) failed badly and instead of realising that the Member States could not reasonably maintain the agreed parties, without seriously compromising their sovereignty (and capacity to maintain full employment), the Member States went one step further into madness – and signed the Maastricht Treaty.
So the exchange rate variability was eliminated by the common currency but the economic pressures that had created the exchange rate variability remained – and now show up as massively diverging unemployment rates and growth rates.
Now governments impose austerity to stop their fiscal balances breaching the SGP rather than facing pressures to devalue their currencies against the mark.
Not much has changed. European governments started compromising their sovereignty when they signed up for the Common Agricultural Policy (CAP) and fixed exchange rates.
FN is thus suggesting some half-way house, which will clearly be dysfunctional.
If FN is proposing to reintroduce the franc (and all other national currencies). They want to make the franc the currency that the French government spends and taxes in.
But they then want to link these currencies with each other through the ECU (or effectively the euro). In trying to salvage some relationship with the euro via the ECU, FN is suggesting maintaining fixed parities with the euro.
That won’t work.
Another reading of the FN compromise is that they want to use the franc within France but allow French companies to use euros for their cross border transactions.
So this is also not the situation under the EMS and the ECU, where francs were the sovereign currency and foreign currencies were purchased in foreign exchange markets.
So any attempt to use the franc locally and the euro globally would raise questions about the exchange rate. Then France is back to the bad old days of trying to prevent the franc from crashing (against the mark – or in this case the euro) and having to raise interest rates above the levels of its trading partners (to attract capital denominated in francs) and cut national income growth (to curb imports).
That system didn’t deliver prosperity and it is hard to match the stimulus plans they propose (OMF or not) with the currency arrangements they hint at.
To repeat, the only one solution to guarantee real monetary and budgetary sovereignty involves an exit from the euro and the free float of the new currency on foreign exchange markets.
Then the government can use its newly acquired currency-issuing capacities to target full empoyment and forget about the austerity bias that is the inherent in the Euroepan Union.
That is enough for today!
(c) Copyright 2017 William Mitchell. All Rights Reserved.