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EMU Member States should ignore Brussels and do whatever it takes

Last Thursday (March 26, 2020), the European Council met to discuss the way in which the European Union would deal with the coronavirus crisis. Not much happened. Well that is not exactly true. A lot happened in the sense that even when faced with the worst health crisis in a century that is already devastating the populations in Italy and Spain and creating economic havoc throughout, the leadership split along familiar lines and failed to come up with any solution. There was a lot of talk about solidarity and all the buzz words that the European leadership frequently outputs in their wordy statements. But very little action and lots of acrimony, division and back to form behaviour. My view is that the Member States should now just do whatever they consider it takes to bolster their health systems and protect their economies, which will involve significant fiscal deficits (multiples of the allowable limits under the Stability and Growth Pact), and trust that the ECB’s unlimited bond buying spree will back them. And when the Brussels technocrats start talking about Excessive Deficit Mechanisms and the rest of the blather, they should just show them the door. And if push comes to shove, they just should exit the whole rotten structure. But now is the time for defiance and disobedience. Now is the time that democracy fought back and told the elites to be quiet.

In their – Joint statement of the members of the European Council, 26 March 2020 – the Council waxed lyrical (as usual):

The COVID-19 pandemic constitutes an unprecedented challenge for Europe and the whole world. It requires urgent, decisive, and comprehensive action at the EU, national, regional and local levels. We will do everything that is necessary to protect our citizens and overcome the crisis, while preserving our European values and way of life.

They then went on about border control, the provision of medical equipment, promoting research, before they talked about “Tackling socio-economic consequences”.

At that point, more motherhood statements:

1. “will do everything necessary to meet this challenge in a spirit of solidarity.”

2. Support for the ECB.

3. “take note of the progress made by the Eurogroup”

The Council had received a demand from 9 Member States of the Eurozone – France, Italy, Spain, Portugal, Ireland, Greece, Slovenia, Luxembourg and Belgium) – calling for the creation of a common debt instrument – a Eurobond.

This is the familiar story line – weaker state want something that is sensible in the context and the stronger states reject it outright.

And they dither on and the crisis gets worse.

The normal voices came out – Netherlands, Austria, Germany – stating they would never accept any jointly borne risk bond being created.

There were all sorts of excuses.

1. It would take up to three years to establish a coronabond facility.

2. Only existing mechanisms, which are inadequate and biased towards austerity, can be used.

3. This means the flawed – European Stability Mechanism – is it. That hardly inspires confidence.

The – Transcript of Klaus Regling’s interview for the Financial Times (March 31, 2020) tells us in relation to ‘coronabonds’:

It would take 1, 2 or 3 years, and member states have to come up with capital or guarantees, or assign future revenue … If you use existing institutions, the Commission can do much more from next year … one needs capital, guarantees, or assigned revenue. Otherwise, there can be no new European debt that’s issued …

He also claimed that there would not be any need for fiscal stimulus to push deficits out to, say 13 per cent of euro area GDP, which is one estimate of the scale of the response required.

He said that much of the adjustment can come from “automatic stabilizers … there will be a loss of revenue …”

So the same sort of resistance is present as usual.

Things take time.

Germany has made it clear that they do not want the ESM funds used too early – wait and see how bad things get.

The Dutch don’t want them used at all and are implacably opposed to creating a federal debt instrument that would spread risk across all Member States.

The Dutch government, however, is facing a type of internal political revolt over the coronabonds issue. Some of the coalition parties want more solidarity shown to Italy.

The ruling party couldn’t give a toss about Italy.

There has been talk from some of the politicians in the Netherlands for another ‘Marshall Plan’ to help Italy and other nations.

But the Dutch finance minister has been acting in classic European fashion demanding an inquiry into why the poorer countries didn’t set aside fiscal capacity to ensure they could meet the demands of the crisis without drawing on European help.

The Calvinists regularly come out with this sort of morality play and cast aspersions on the wastrels to the south of them.

Remember, the previous Dutch finance minister who claimed the nations that lined up for bailouts were just splurging their cash on “drinks and women”.

As the elites talk about solidarity, we read comments from say Portugal’s PM who accused the Dutch finance minister of making “repulsive” and “senseless” statements.

There was a letter published in the German newspaper by 12 Italian politicians – mayors, regional governors and one Member of the European Parliament – which sought to split the German-Dutch nexus (Source).

The accused the Dutch of lacking in ethics and solidarity

They reminded Germany that after WW2, the other European states allowed Germany to write off its debts, to help it get back on its feet without having to default.

They also noted how the Netherlands was a major tax haven.

We have been hearing the same old narratives – that if the Member States are not disciplined to look after themselves then there will be no pressure on them to engage in ‘structural reforms’ – read:

1. Hack into government spending including reducing the capacity of the health systems.

2. Sell off public assets to corporate vultures at bargain prices – thus shifting wealth from the public sector to the elites in the private sector.

3. Cutting pensions and other income support systems.

4. Creating more precarious work conditions and entitlements and cutting wages.

And all the rest of it.

The same old narrative also tells us that even though the world is enduring a once-in-a-century crisis (just after another similar crisis – GFC) – deficits will rise but they cannot be allowed to rise very much.

And, any assistance from the European institutions will require conditionality and payback, which means the chance of recovery from the crisis for the weaker nations is slim.

We we see a long, drawn out return to tepid growth and a massive legacy of elevated unemployment, underemployment, poverty, suicides and unnecessary deaths from the virus itself.

We have been hearing this sort of stuff for the two decades of operation of the common currency.

So the whole debate comes down to a basic and terminal lack of trust between the countries.

That lack of trust is also buttressed by an overt sort of racism and racial superiority.

Everytime there is economic stress, brought on by the flawed architecture of the EMU, the racism and lack of trust comes to the surface.

There is no European solidarity.

There is no ‘Europe’ in the sense that there is a common understanding and respect.

Suspicion is the norm, which is why the richer nations will do anything but set up financial vehicles to allow permanent transfers from north to south, which would help create the ‘convergence’ the elites always rave on about.

The norm in the EMU is divergence. It has failed badly according to its own objectives.

It is embedded in a sclerotic legal structure that resist reformation.

I have always espoused the view that the EU is incapable of reform. The neoliberalism and the racism is built into the very legal structure of the Union (in its treaties).

The citizens cannot just vote the neoliberalism away. Treaty change is nigh on impossible and as the latest shenanigans about coronabonds is demonstrating there is no chance of a progressive program agenda being accepted simultaneous by the remaining 27 Member States.

The Germans, the Austrians, the Dutch and most likely the Finns, will always scupper change that might help nations such as Italy and Spain, not to mention Greece and Portugal.

My solution

Regular readers will know I advocate unilateral exit as soon as possible, given there is little chance that the 19 Eurozone Member States will agree (as they should) to dissolve the common currency in an orderly manner.

In the interim they can do the following.

1. Adopt the position that their democratic responsibility is to their own people not to Brussels.

2. Realise that the ECB has announced an unlimited public asset purchase program to save the euro.

3. Take matters into their own hands and disregard all the dictates from Brussels and spend whatever is required to meet the health emergency.

The Australian government in one day announced a $A130 billion scheme to save jobs. I don’t like the scheme (there are better alternatives) but I like the fact that the Government is understanding that it must act quickly and in a large way. No delays, save jobs and businesses.

The Member State of the EMU should take a similar position.

Forget the Eurogroup.

Forget the Council.

Ban the European Commission bureaucrats from coming to their Ministries to do surveillance.

4. As well as issuing their own debt to match the increased deficits – given they are still using a foreign currency – the 9 ‘rebels’ could agree among themselves to issue a joint bond, which they would all share responsibility for.

It would be almost certain that the ECB would purchase it once it was issued.

They could then leave the ‘frugal four’ to their own mean-spirited discussions and get on with saving their nations.

5. By going it alone, these Member States would also be able to avoid all the ‘conditionality’ that would follow access to the ESM. They should steer clear of the ESM.

Bailout funds only bring more pain and suffering to the people.

6. And meanwhile, they should be working on the mechanisms to reintroduce their own currencies and restore their monetary sovereignty.

But in the meantime, they should act as though Brussels didn’t exist.

Conclusion

I hope this crisis finishes the Eurozone off for good.

More and more people are realising that it is beyond reform – and that goes for the EU in general. The Eurozone is just the most advanced expression of the neoliberalism built into the EU treaties.

Even though who have vehemently opposed splitting the EU up and were vocal opponents of people like me who advocated Brexit are now admitting that the EU is beyond reform and is at its core destructive and hurtful to ordinary people.

Out of this shocking crisis I hope there is a silver lining for the European nations – to go free of the yoke and leave Mr Hoestra and his peers to their small-minded racism and penal thinking.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.

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    This Post Has 21 Comments
    1. Brilliant !

      It also shows the whole Brexit debate was a farce from start to finish. How we couldn’t afford it and that they sky would have a fallen in and ground open up.

      Even with a “no deal Brexit” they would have created as many blips on a spreadsheet and swapped any number of assets to get the job done.

      The virus exposes the liberal left for never, ever promoting a LEXIT vision when it is plain to see now how easy it would have been to achieve.

      MMT’rs complained that the mainstream always jumped through hoops to appease the financial sector. Created spending rules and other neoliberal nonsense just to try and get policy through. When it was never needed all that needed to be done was for the liberal left to tell the truth how the monetary system operates.

      Instead of supporting a LEXIT vision what did left wing parties do ?

      They jumped through hoops talking about EFTA and all different shades of Brexit. Exactly what they complain about when policy makers try and appease the financial sector. Standing on one leg with both arms ties behind their back. A SNP special, the SNP became experts at it, a Simon Wren Lewis two for one special offer. Richard Murphy was no different jumping through hoops like a grass hopper.

      What they should have done is explain how LEXIT would have been paid for. It is right there right now in front of everybody. We never, ever needed the EU or EFTA to do it.

      Scotland take note.. that ship has sailed.

    2. When the Scottish Growth Commission was produced there was an outcry.

      It was a love letter to the banks they screamed. It was a surrender to the markets and went against every independence vision out there. It was neoliberal nonsense they shouted. That was true.

      Yet, with Brexit these very same people who were enraged by the Growth Commission. They did the exact same thing as those who produced the Growth Commission when it came to Brexit. They just could not see the wood for the trees and see that the Growth Commission was tied in directly with cancelling Brexit or Brexit in name only. The Growth Commission was a blue print of the EU fiscal rules package.

      Oh, the irony of it all. I’m not sure, if even today they understand the ridiculous position they put themselves in.

      That’s the SNP and Indy movement for you. Not lions led by Donkeys but Donkeys led by Chimps.

    3. Infact, The Scottish growth commission was simply an EU convergance Program. A National reform program, laced with Neoliberalism at the heart of it like Blackpool Rock.

      If an independent Scotland joins the heart of Europe. Scotland would have been forced to meet the on going targets for eternity. They are bound by the rules and the SNP did not want to even fight the rules anyway. They would sign anything they were asked to sign and push it through conference on the backs of a dumb electorate. The fact the SNP produced the growth commission shows how eager they are to get on board the neoliberal “national reform program ” gravy train.

      Just look at any country who were stupid enough to join the EU convergance program with or without their own currency and it is a copy and paste job. Just pick one any one will do.

      Give me the UK any day of the week instead of that nonsense !

      As Sunak has proved beyond any reasonable doubt there was simply no need for any of it. An independent Scotland did not need or ever need the EU or EFTA or any shade of nonsense to create blips on a spreadsheet. Or to swap as many assets as they liked with their own currency at their own central bank.

      The whole journey by the SNP was a psychedelic trip of madness. A ship of fools flowing on a sea of shite !!!

    4. “3. Take matters into their own hands and disregard all the dictates from Brussels and spend whatever is required to meet the health emergency.”

      That is what they must do- what their responsibility to their citizens requires them to do. And hopefully we pull through this eventually and then we can figure it out later.

    5. Derek Henry wrote:

      “As Sunak has proved beyond any reasonable doubt there was simply no need for any of it. An independent Scotland did not need or ever need the EU or EFTA or any shade of nonsense to create blips on a spreadsheet. Or to swap as many assets as they liked with their own currency at their own central bank.”

      Indeed. If only they had listened…

    6. When the only truthful analysis on the Netherlands and the EU comes from an Australian professor, it shows the depth of the problem.
      I don’t just yet understand why a joint bond is necessary when Italy can offload all its new bonds issued to the ECB.
      Not that i’m against solidarity, far from it, but what is the advantage of a joint bond vs Italian bonds?

    7. Willem, at the moment, there is no difference. The Italian government is going to have to spend whatever it needs to spend to help their people get through this. And the rest of European governments will have to do that also. And the governments in the rest of the world, for that matter.

      And we will figure it out later what to do with those bonds the ECB is buying. I’m sure Italy will not settle for being treated like Greece has been since 2008. But right now the most important thing is to focus on the medical side of this pandemic and what can save lives.

    8. Well, it only took 2 decades of stagnation (to be nice) for the progressive europhiles to start saying there seems to be a problem with the rules. In just a few mode decades, who knows, maybe they might start demanding things, and a few decades later, when that fails to pan, they might have start making an exit plan!
      Shiny days ahead, my friends, and just around the corner.

    9. There’s a typo: Hoestra should be Hoekstra. I think Bill is completely right (I am Dutch). These people are just stupid cogs in the machine.

    10. How morale-boosting it was to read Bill’s comprehensive and utterly-damning indictment of the EU, which (living within it) i completely endorse.

      It may at last offer a glimmer of hope that “the nine” have actually gone so far as to robustly confront the atavistic Dutch (in particular – not all of them of course, but too many alas) – especially seeing that the “rebels” include Macron’s France. Quite a turn-up.

      But I expect it will fizzle-out like similar initiatives have before. Break-up is the only answer: the EU is as Bill says irredeemable..

      As an aside, one of the worst offenders has I’m sorry to say been Finland – not as some sort of lackey to Germany but out of genuine conviction. They have a debt-repayment fetish born (I strongly suspect) out of the established religion Lutheranism. At least as strongly as the Germans they believe that mankind’s original sin was not that Eve ate that apple but that some wretched debtor somewhere became the first to default and as a result humanity has been going to hell in a handcart ever since. No surprise then that they actually *believe* in the stability and growth (joke!) pact and are adamant that everyone must uphold it and faithfully obey the instructions handed down to them by Brussels bureaucrats who (I feel sure) must be having trouble trying to restrain themselves from laughing while under their breaths saying (like Zuckerberg) “dumb f—s”.

      So it’d be no use at all to call for “defiance and disobedience” from them. Furthermore, they themselves exact subservient compliance with their own demands upon their puportedly autonomous province the Åland Islands, whose inhabitants I contantly seek (unsucccessfully so far) to incite to “defiance and diosobedience” – so they can hardly go in for exactly that themselves without setting the Ålanders the last sort of example they can afford to.

    11. Dear Willem,

      The issue is with the ECB stopping at some point setting the prices of short-term Italian (Greek etc) debt in order to apply the blowtorch to the governments as seen during the Greek crisis. If there were joint bonds they would not be able to do it. Also there needs to be a coordination mechanism and sensible allocation of budget deficits otherwise there is a risk of a “moral hazard” if the ECB blindly sets the interest rate on all the debt instruments and allows all the governments to emit unlimited quantities of bonds. The so-called “market mechanism” was supposed to play this role but as we know it doesn’t and rating agencies are jokers and loanable funds market does not exist so there is no negative feedback mechanism based on pricing signals. So they introduced fiscal rules but these do not make any economic sense either and they had tragic social effects, as seen in Italy and Spain. Yes, these people are dying because of the neoliberalism.

      Right now, Southern Euro countries need to be reflated. In order to reduce the imbalances in the long run, progressive taxes need to be introduced later, etc. But this is impossible if grey economy is the only chance to survive for the many. It is precisely tax avoidance what became the defence mechanism of last resort against austerity in Greece. The underlying issue is that Dutch and German economies are heavily export-oriented. Because of huge trade surpluses, the Dutch government does not need to run deficits except for short periods of time like during the coronavirus lockdown. But if there is a net exporter, there also need to be a need importer. The net global balance of trade is zero (this is an accounting identity). This was already explained on Bill’s blog.

      Either Euro needs to be dismantled or the Euro zone split between South and North and full fiscal integration implemented in these zones or full fiscal integration needs to the undertaken in the whole (current) Euro zone. There is no sensible from the economic point of view fourth option.

      Meanwhile in Poland the right wing media are now openly calling Polish pro-European liberals “Targowica” (traitors of the nation – called after the name of the group of aristocrats who helped destroying Polish state in 1792-1795). I have to admit that old Andrzej Gwiazda, the guy who invented Solidarity, may have a valid point. But I don’t think that reverting back to the authoritarian system from 1926-1939 is the best possible option… however if people have to choose between austerity and second coming of Józef Piłsudski, they will go for the authoritarian option.

    12. Adam K, can you explain the “moral hazard” that is involved with governments trying to save their citizen’s lives? I sure can’t.

    13. Dear Jerry Brown,

      If you look at the dysfunctional way the Eurozone is designed, if let’s say South Macedonia issues over the period of one year 10-years bonds worth 100% of their GDP (which is 2% of the total GDP of the Eurozone), gets the ECB to buy these bonds, setting the return at 1% and hands over the money to the citizens, this will non cause a spike in inflation but will be a free lunch as South Macedonians will import stuff from elsewhere. Of course South Macedonia does not exist as a separate state but the problem does exist.

    14. @ Adam K,
      Thank you for that.
      OK, the problem is that each nation can unilaterally sell bonds indirectly or even directly to the ECB and giveaway or spend the money into its economy. The more each nation does this the better off it is compared to all other nations in the EU. Every nation can also do this. IF there is no limit on this then all nations will do this a lot AND this will likely cause inflation. This the same as if the US decided to deficit spend at a rate of 100% of GDP each year, then there would likely be inflation caused by this alone.
      . . So, the EU or the ECB needs a limit set in some way.
      . . In the US it is set by Congress which alone can decide to do this. It could restart Nixon’s program of grants to the states. And this would be much like the EU, but in the EU currently there is no limit on each nation.

      For this crisis the ECB might be the one who tells each nation how many bonds the ECB will buy and buy them directly. This is a rules violation, but so what? After the crisis is over the ECB can set a limit based on total population and economic need for each nation. Ger. & Holland will howl bloody murder. But, net importers need cash to import and next exporters need customers to export.It is as simple as that. Germany doesn’t want to see this, just like it is impossible to convince a person of X when that person’s income depends on not X.

    15. @ Steve American
      “For this crisis the ECB might be the one who tells each nation how many bonds the ECB will buy and buy them directly. This is a rules violation, but so what? After the crisis is over the ECB can set a limit based on total population and economic need for each nation”.

      The ECB – when it announced its new Pandemic Emergency Purchase Programme – stated that “the benchmark allocation across jurisdictions will continue to be the capital key of the national central banks”.

      The capital key “reflects the respective country’s share in the total population and gross domestic product of the EU”.

      So it seems that the ratio in which its new bond-buying will be allocated is predetermined as being according to the same formula already long in use by which (which it was originally designed for) the capital subscriptions and shares of ECB profits of the respective national CBs are allocated – among other things.

      Does that mean that the countries that need the least help will get the most ECB money, and vice versa? Don’t ask me (I’m no expert)- but it sure looks like that on the face of it.

    16. Hasn’t Warren Mosler outlined the process whereby Italy (as an example) can issue its own currency again in defiance of the Euro zone? I’m not putting any links here in case there’s something in them that Bill doesn’t like, but a cursory internet search brings up several articles and videos.

    17. Introduce a national parallel currency to the euro issued by the country’s trasury, and preferably in electronic form. Eurozone countries should have done it years ago – now more than ever. See: http://paecon.net/PAEReview/issue89/Andresen89.pdf
      The paper also explains that this is not EU illegal (as opposed to what most pundits would think).

      Electronic money today is technically easy, system may be rolled out by reliable suppliers, up and running in a few months. Has worked well for years, in f.inst. DR Congo since 2015 – a country with very inferior telecom infrastructure compared to Europe.

    18. Yanis Varoufakis had the idea of a parallel currency, implemented I think as part of the tax system as a tax credit, as a reserve measure (and an alternative to opting out of the Eurozone), when he was minister of Finance in Greece. But his government wouldn’t back him up. (Cf. his book, “Adults in the Room”).

    19. An attack on the EU using arguments that might just as well be thrust upon the UK. Time will tell which of the kingdoms will be the first to dissolve….

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