Bill Mitchell — When old central bankers know what is wrong but can’t bring themselves to saying what is right

Last Friday (October 4, 2019), a group of former central bank governors and/or officials in Europe, issued a statement damming the conduct of the European Central Bank. You can read the full text at Bloomberg – Memorandum on ECB Monetary Policy by Issing, Stark, Schlesinger. The timing of the intervention is interesting given the change of boss at the ECB is imminent. As I explain in what follows, the Memorandum should be disregarded. Its central contentions are mostly correct but the alternative world it would have Europe follow would be a disaster for many of the Member States and the people that live within them. It would almost certainly result in the collapse of the monetary union – which would be a good outcome – in the face of massive income and job losses and the social and political instability that would follow – which would be a bad outcome. What it tells me is that the monetary union is a massive failure. It would be far better to dissolve it in an orderly manner to avoid those massive income and job losses and to support the restoration of full currency sovereignty and national central banks. That would be the sensible thing to do....

Bill Mitchell – billy blog

When old central bankers know what is wrong but can’t bring themselves to saying what is right
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Lars P. Syll — Why a monetary union cannot work without also being a political union

Nicholas Kaldor foresaw what the would happen if the Eurocrats attempted to force a political union using an monetary economic one on top of the then existing common market.

Lars P. Syll’s Blog
Why a monetary union cannot work without also being a political union
Lars P. Syll | Professor, Malmo University

See also

The mess at the heart of the EU

Bill Mitchell — France has received its orders from the masters

Angela Merkel and Bundesbank's Jens Weidmann rain on Charles DeGaulle wannabe Emmanuel Macron's parade. There will be no fiscal union with the North picking up the tab for the South.

This is a long post setting forth the issues standing in the way and why they are unlikely to be overcome. The chief obstacles are cultural and political rather than economic. A federation among sovereign nation states is not possible without restrictive concessions that the German elite reject.

Conclusion

The point is clear.

Macron can say what he likes. But unless he can get it past the masters (Germany) anything he says will be hot air.

And it is clear from history that Germany will never tolerate the creation of a true federal fiscal capacity.

Which tells me the Eurozone is never going to work in the way the leaders claimed it would at the outset – it will always be prone to stagnation and crisis.

Macron destined to be another Hollande? Bill thinks so.

Bill Mitchell – billy blog
France has received its orders from the masters
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Edward Harrison — Why the euro crisis will happen again and Italy will be involved

This morning, as the data were coming in from Europe for Q1 GDP, I got a reminder from Twitter about the inherent deflationary nature of the euro area’s design.| And this goes directly to how to think about credit risk in Europe.

I followed a twitter post to a Charles Goodhart article from 1997, written before European Monetary Union. And he was saying things that the late British economist Wynne Godley was banging on about five years earlier when the Maastricht Treaty set out the terms for euro. Here’s the crux as it relates to credit risk in Europe:

Credit Writedowns
Why the euro crisis will happen again and Italy will be involved
Edward Harrison

Bill Mitchell — German trade surpluses demonstrate the failure of the Euro

The election of Donald Trump has stirred up the IMF and Germany, in particular.|Trump’s trade advisor has claimed that Germany is manipulating the currency to maintain its competitiveness. A more general view is that the massive German external surplus is a reflection of a dysfunctional Eurozone, particularly the failed monetary policy stance of the ECB and the lack of a European-level (federal) fiscal policy capacity and willingness to expand domestic demand in the Member States. In fact, both views have credibility as I will explain. Last week (April 19, 2017), Eurostat released the latest trade data for the Eurozone – Euro area international trade in goods surplus €17.8 bn. It showed that Germany’s trade surplus continues to grow (it was 35.4 billion euros in January-February 2017, up 1.4 billion over the 12 months) in total. In 2016, Germany’s current account surplus was 8.6 per cent of GDP, which is obviously an outlier. What is required to redress this on-going dysfunction within the Eurozone would appear to be beyond the political mentality of the establishment polity in the Eurozone. And with Macron’s elevation to an almost certain Presidential victory in France, it is hard to see any dynamic for now emerging that will create change for the better. So as usual, the Eurozone muddles on – with a dysfunctional design architecture and an even more dysfunctional attitude to policy flexibility held by the powers to be. Germany is seriously responsible for a lot of this dysfunction.

Germany is operating with the euro as a discounted DM. All the other nations using the euro are operating with a currency premium. 

Bill Mitchell – billy blog

German trade surpluses demonstrate the failure of the Euro

Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

zone

Bill Mitchell — Subsidiarity – a European Union smokescreen to justify failure

One of the various smokescreens that were erected by the European Commission and the bevy of economists that it either paid or were ideologically aligned to justify the design of the monetary union around the time of the Maastricht process was the concept of subsidiarity.

In 1993, the Centre for Economic Policy Research (a European-based research confederation) published its Annual Report – Making Sense of Subsidiarity: How Much Centralization for Europe? – which attempted to justify (ex post) the decisions imported from the 1989 Delors Report into the Maastricht Treaty that eschewed the creation of a federal fiscal capacity. It was one of many reports at the time by pro-Maastricht economists that influenced the political process and pushed the European nations on their inevitable journey to the edge of the ‘plank’ – teetering on the edge of destruction and being saved only because the European Central Bank has violated the spirit of the restrictions that a misapplication of the subsidiarity principle had created. It is interesting to reflect on these earlier reports. We find that the important issues they ignored remain the central issues today and predicate against the monetary union ever being a success....

Bill Mitchell – billy blog
Subsidiarity – a European Union smokescreen to justify failure
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Nobel economics prize winner: ‘The euro was a mistake’

The European Union should embark on a process of decentralisation and return certain areas of decision making to the member states if it wants to survive and thrive, according to Nobel Memorial Prize in Economic Sciences winner Oliver Hart.…

Hart argued that “the euro was an mistake” and said that it’s an opinion that he has maintained ever since the monetary union was first introduced.

The economist added that it “wouldn’t be a sad thing at all” if in the future Europe abandoned the single currency and that the British were “very clever” to stay out of it.

EurActiv
Nobel economics prize winner: ‘The euro was a mistake’
Carmen Rodríguez
Translated By Samuel Morgan

Don Quijones — The European Union Was An AMERICAN Idea

As Putin said, everything the US touches [meddles in] turns to shit.

Raging Bull-Shit
The European Union Was An AMERICAN Idea
Don Quijones

Mehreen Khan — Euro depression is 'deliberate' EU choice, says former Bank of England chief

Europe's deep economic malaise is the result of "deliberate" policy choices made by EU elites, according to the former governor of the Bank of England.

Lord Mervyn King continued his scathing assault on Europe's economic and monetary union, having predicted the beleaguered currency zone will need to be dismantled to free its weakest members from unremitting austerity and record levels of unemployment.…

Lord King - who spent a decade fighting the worst financial crisis in history at the Bank of England - has said the weakest eurozone members face little choice but to return to their national currencies as "the only way to plot a route back to economic growth and full employment".…

The former Bank governor has said popular disillusion with EU economic policies are likely to lead to disintegration of the single currency rather than a move towards "completing" monetary union.

The Telegraph
Euro depression is 'deliberate' EU choice, says former Bank of England chief

Mehreen Khan

Bill Mitchell — The Eurozone – being ‘trapped in a dysfunctional monetary system’

On November 6, 2000, the Financial Times correspondent Wolfgang Münchau wrote in his article ‘Weak euro reflects uncertainty of euro-zone’ that “structural reforms alone will not determine whether the Emu is viable … The Europeans have no system of transfer payments and the EU budget is too small for this purpose … the euro-zone countries cannot remain as they are: they must move towards full economic union”. He also observed that the “current is clearly flowing in the opposite direction: EU governments increasingly emphasise inter-governmental co-operation as opposed to a wider role for supra-national institution”. I examined that ‘current’ extensively in my current book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015) – as it was (and is) a major reason the monetary union has failed. And, further, the cultural and national barriers which prevented the creation of a system-wide fiscal union are still insurmountable. Münchau is one of several journalists and commentators who have shifted their positions on the desirability of the common currency yet remains wedded to the idea of retaining it – as if returning to national currency sovereignty would be a disaster. I opposed the Maastricht proposal when it was made public and remain opposed. Restoring national currencies, while initially disruptive will not in the long-term prove to be worse than what Münchau admits is a state where nations are “trapped in a dysfunctional monetary system”.….

Bill Mitchell – billy blog
The Eurozone – being ‘trapped in a dysfunctional monetary system’
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

David Beckworth — Who Predicted the Eurozone Crisis?

Not so fast?

According to a recent Bloomberg article, nine people saw the Eurozone crisis coming years before anyone else. Wow, only nine people saw it coming? That is remarkable, these folks must be truly prescient if only they foresaw the crisis.

Except that this claim is terribly wrong. There were many economists who saw the problems of a European monetary union before it formed. One prominent economist not on the Bloomberg list is Martin Feldstein…. 

Feldstein was one among many American economists who doubted a currency union in Europe would work. In fact, an entire article in Econ Journal Watch provides a survey of the skeptical tendencies of most American economists over the Euro prior to its inception….

Macro and Other Market Musings
Who Predicted the Eurozone Crisis?

David Beckworth | Associate Professor of Economics at Western Kentucky University in Bowling Green, Kentucky. 

Ellen Brown — Grexit or Jubilee? How Greek Debt Could Be Annulled

Prof. Richard Werner, who was on the scene as the European Union evolved, maintains that the intent for the EU from the start was the abandonment of national sovereignty in favor of a single-currency system controlled by eurocrats doing the bidding of international financiers. The model was flawed from the beginning. The solution, he says, is for EU countries to regain their national sovereignty by leaving the euro en masse. But he acknowledges that this is not likely to happen soon. Brussels has been instructed by President Obama, no doubt instructed by Wall Street, to hold the euro together at all costs.

The longer they hold off taking the currency union apart the bigger the implosion is going to be. As the stakes and risks rise, it will become less and less a possibility to do voluntarily.

The Web of Debt
Grexit or Jubilee? How Greek Debt Could Be Annulled

Ellen Brown

Dae Woong Kang and Ashoka Mody — The birth of European macroeconomics

Summary of the development of the EZ.

"European macroeconomics" = "groupthink."

Vox.eu
The birth of European macroeconomics
Dae Woong Kang and Ashoka Mody

Brad DeLong — Must-Read: Nicholas Kaldor (1971): On The Common Market

Kaldor predicted the folly of the Eurozone long before it was designed.

WCEG — The Equitablog
Must-Read: Nicholas Kaldor (1971): On The Common Market
Brad DeLong

William Hague — Greece does not mark the end of the euro debacle, merely the beginning

Economics has few laws, which is why economic forecasts are so maddeningly unreliable. If it has one law, it is this: that if you fix together some things which naturally vary, such as interest rates and exchange rates, other things, such as unemployment and wages, will vary more instead. And in a single currency zone, which has exactly this effect, you can only get round these problems by paying big subsidies to poorly performing areas, and expecting workers to move in large numbers to better performing ones.… 

Economics has few laws, which is why economic forecasts are so maddeningly unreliable. If it has one law, it is this: that if you fix together some things which naturally vary, such as interest rates and exchange rates, other things, such as unemployment and wages, will vary more instead. And in a single currency zone, which has exactly this effect, you can only get round these problems by paying big subsidies to poorly performing areas, and expecting workers to move in large numbers to better performing ones.… 

In future decades, in the very business school where I spoke in 1998, I believe students will sit down to study the folly of extending a single currency too far. Sad though it will be to see it, their textbook is likely to say that the Greek debacle of 2015 was not the end of the euro crisis, but its real beginning.

The Telegraph

Greece does not mark the end of the euro debacle, merely the beginning

William Hague, British Conservative party leader when the euro was introduced

Michael Nevradakis and Greg Palast — GREECE’D: We Voted ‘No’ to slavery, but ‘Yes’ to our chains

What’s simply whack-o is that, while voting “No” to austerity, many Greeks wish to remain shackled to the euro, the very cause of our miseries....

Sorry, Alexis, if you want to use the Reich’s coin you have to accept the Reichsdiktat....

The imposition of the euro had one true goal: To end the European welfare state....

It would be refreshing to hear political leaders say the honest economic truth: “Workers of Europe unite! You have nothing to lose but the euro—and your chains.”

Greg Palast

GREECE’D: We Voted ‘No’ to slavery,  but ‘Yes’ to our chains

Greek journalist Michael Nevradakis and US investigative journalist Greg Palast

ht James in the comments

Matthew O'Brien — Why the Euro Is Doomed in 4 Steps

MMT-consistent. Analysis right on schedule.

The Atlantic | Business (March 30, 2013)
Why the Euro Is Doomed in 4 Steps

Matthew O'Brien

Timothy B. Lee — The euro was a big mistake, and Greece is paying the price

Not the best analysis around, but on the right track anyway.

Vox
The euro was a big mistake, and Greece is paying the price
Timothy B. Lee

ht Brad DeLong

Matias Vernengo — Greece on the verge

I discussed to a great extent the debate between Sergio Cesaratto and Marc Lavoie on the nature of the European crisis, that is, whether it is a balance of payments crisis or a monetary sovereignty one.

Cesaratto argues that a balance-of-payment crisis is possible in a currency union, and that the financial crisis of the Eurozone is indeed such a balance-of-payment crisis....

Yet, as noted by Lavoie, the Eurozone crisis seems to have been caused instead mainly as the result of an initial banking problem, which transformed itself into a public debt problem. In other words, the currency issue, and the functioning of the monetary union seem to be at the core of the crisis, not a balance of payments one....

My argument, discussed briefly here before, is that the Cesaratto and Lavoie hypotheses are one and the same. The balance of payments and the monetary sovereignty views of the European crisis are two sides of the same coin.....

Naked Keynesianism
Greece on the verge
Matias Vernengo | Associate Professor of Economics, Bucknell University

Lars P. Syll — Greece and the true purpose of the euro

Robert Mundell devised it that way. It was anti-democratic out of the gate and bound to be disruptive of social democracy in Europe. As Wynne Godley pointed out in Maastricht and All That.

Lars P. Syll’s Blog
Greece and the true purpose of the euro
Lars P. Syll | Professor, Malmo University