Saturday, September 29, 2012

Al Jazeera — Anti-austerity rallies hit Spain and Portugal

Protesters surround parliament in Madrid, while thousands take to the streets of Lisbon in new anti-austerity protests.
Al Jazeera
Anti-austerity rallies hit Spain and Portugal


Jose Guilherme said...

Europe is in turmoil, particularly its southern part, with the situation deteriorating by the hour and MMTers are hard put to come out with specific policy proposals – probably because they basically do not feel much at ease with the way the payments system really works in the eurozone.

For instance, European authors such as Peter Garber and John Whittaker claim any government inside the eurozone can go on deficit-spending by using Target2.

If this is so, then austerity could be overcome tomorrow by a government willing to use the rules of Target2 – and this while keeping the euro as the official currency.

Let’s suppose Spanish demonstrators manage to force the present government’s resignation. A new government could then put Spain back on a growth track by simply deciding to spend more via publicly-owned financial institutions.

What do MMTers have to say about this specific scenario that could become reality in a very short time frame?

Basically, not much.

Perhaps the time has come for Mosler & others to quickly concentrate on the subject “EMU payment mechanism” in order to come out with practical policy recommendations – for otherwise MMT may be unfairly condemned to irrelevance at the exact moment when it will be needed most.

Matt Franko said...


IIRC the ECB started by threatening the Greek govt with disqualifying their Greek Treasury securities from being acceptable collateral for Euro system operations...

I believe they had the Greek govt bonds under some sort of "conditional approval" for some time and now it looks like they have temporarily disqualified the Greek bonds:

So looks like a Greek bank cannot currently receive ECB funding using the govt bonds of their own country... pretty sick and twisted...

Warren has proposed letting Euro system banks have a guaranty that they can always redeem the Greek bonds to pay Greek taxes inorder to make them more attractive for buyers.... but if the ECB has flat out prohibited use of the Greek securities at the ECB I dont know if even Warren's idea could help at this point....

As far as Target2 suggest get with Ramanan at his site:

Ramanan has been studying Target2 for some time now.


Jose Guilherme said...


The ECB document you link to also mentions that

"Liquidity needs may be addressed by the relevant national central bank in line with existing Eurosystem arrangements".

This is the key point, because according to Whittaker:

"(The ECB) could make it hard for the BoG (Bank of Greece) to refinance its banks, by ruling that Greek government debt is no longer eligible as collateral. But then the BoG could extend its use of Emergency Liquidity Assistance (ELA) which is not subject to ECB collateral rules".

And in fact both Greece and Ireland have been massively using ELA - for a long, long time.

But even if the ECB decided to finish off the ELA for Greece, then - again according to Whittaker:

"If the ECB did prohibit ELA, depriving the BoG of any approved means of lending to its banks, the
BoG would have no option other than to defy the ECB and continue to lend anyway, given the consequence of not doing do: the closure of its
banks for the want of liquidity".

So it seems financing of deficits via Target2 is always possible, even with the "opposition" of the ECB.

Given that the EMU is a single currency area, there is no way its central bank can mess with the payments system - a false step, a check that does not clear abroad and the whole euro edifice would blow up.

And the fact remains that the MMT experts have not studied the details of the Target2 system. This constitutes a major loophole in the MMT edifice, IMO.

And no, Ramanan has not spent much time on the subject either. What he has done is republishing other authors' papers on aspects of Target2 on his site (that btw broadly confirm the ideas referred to above) - a positive, but very different thing.

So there you have it. Periphery governments can finance deficits and evade austerity even under the euro - according to non-MMT authors.

What's the MMT take on this vital political (and monetary) issue?


Sad indeed.

Matt Franko said...


Yes this was a thought I had a year or two ago, the Greeks could just "dare" the ECB to cut them off... like you say, it would collapse the whole system...

But Jose, this is an authoritarian move, iow as we say over here in the US, it would take someone with a large pair of cajones to do this ;)

Is there anybody left in Greece with, first, the understanding of these operational details, ie how it is really Greece that has the ECB by the balls, and then they would also have to possess the boldness to proceed this way?

I think they would first have to nationalize the Greek banks as I doubt the banks would definitely cooperate in this course of action, eg check history and see how here in the US the NY banks backed off on "financing" the Union in the Civil War...

It would be "high stakes poker" but I agree with you it could work.... or at least force some sort of quick conclusion rather than "death by 1,000 cuts" that they have now in Greece and perhaps soon in Espana...


Matt Franko said...

Most of the MMT thought leaders seem to me to be Libertarians... your idea would take a modern day Alexander to prosecute ... rsp,

Tom Hickey said...

Matt Yes this was a thought I had a year or two ago, the Greeks could just "dare" the ECB to cut them off... like you say, it would collapse the whole system...

Seems to me that Syriza and its leader, Alexis Tsipras, get this. If elected that's the approach that likely would have been taken.

Matt Franko said...

Might take another election cycle over there Tom, although I saw this:

Tsipras is "touring Europe"... lets see if he returns the same man...


Tom Hickey said...

Matt, Most of the MMT thought leaders seem to me to be Libertarians

I would make that "libertarians" with a small "l" (in contrast to authoritarians).

"Libertarianism" with a capital "L" pretty much means Rothbardian anarcho-capitalists these day, which Bob Roddis continually reminds us that MMT economists are not. See Murray N. Rothbard, For a New Liberty: The Libertarian Manifesto and Ludwig von Mises, Liberalism: The Classical Tradition.

Jose Guilherme said...


Very good point on the Greeks (or Spaniards, or Italians, or Portuguese) needing to have the 2cojones" to do it. Looks like they would need a Hemingway pretty badly.

On the matter of nationalized banks, the Portuguese already have one - in fact, I understand the government has recently leaked out plans to privatize it. Maybe they are aware of the possibilities of Target2 and want to exclude the chance that a future government might use it to undermine austerity from within the system?

Anyway, I think this changes a bit the matter of moral responsibility for austerity. If the periphery governments:

a) have a legal and operational mechanism to escape austerity without exiting the euro


b) it only takes a bit of courage to dare to use it

then, in a sense it's not only the ECB, the EU and the IMF that should be blamed for the massive suffering that the budget cuts and tax increases are causing.

No. The electorates should direct their anger at the governments of the "south" because they are the willing accomplices of core Europe, not just the passive implementers of their sadistic directives.

Matt Franko said...


You understand the situation wrt Target2 but I dont know if the political leaders in southern Europe do.

This is my "thing" here at MNE, I take the position that these people are "stupid" (not conspirators, or at least they are not doing this "on purpose"), and they are clueless about the true, mathematical aspects of Target2 which you can see, but they cannot...

They do not see that they could have the ECB "by the balls" mathematically.

Jose, they are semantic libertarians (small "L" Tom ;) with insufficient mathematical cognition to be able to see all of their options...

So the question becomes: How do we combat this?

Can we convince them semantically? Or can we get them up to speed mathematically for them to see it like we do mathematically?

these are tough questions... rsp,

Jose Guilherme said...


You are 100% right - and introducing the key questions that are also the toughest nuts to crack.

Though based in Brazil, I have many acquaintances in Portugal, particularly in the business and political sectors. In theory, people who could make a difference and influence events.

I recently wrote a short, rather technical paper on the possibilities available for financing the budget via Target2. It included some accounting tables/spreadsheets but also had an introductory text where I tried to explain in clear English (or rather, Portuguese) how it could all be put to work.

The purpose I had in mind was to both convince with words and credibly demonstrate with technique that it could be done and implemented right now by any willing government of the eurozone.

I sent the paper to dozens of said people in Brazil and Portugal. On this side of the Atlantic I had a generally positive reaction, but from the Portuguese, well I got "nada", just silence.

I'm feeling quite frustrated about this, because I happen to know real people who are starting to feel the effects of the "austerity depression" of southern Europe on their skins. I'd like to use my knowledge of accounting and (MMT) economics to help them but to no avail until now.

I've noticed that when I try to explain the mechanism of Target2 during face to face meetings I generally get more receptive reactions. IMO, this shows the possibilities for using this type of argument to good effect during political campaign against austerity, for example.

The question of using Target2 for promoting the political emancipation of the periphery is perhaps the key issue in Europe today. Properly used, it could mean better lives for millions of people and an insurmountable obstacle to the Malthusian plans of (most of) the Eurocratic elite.

It's up for us MMTers to prove the relevance of economic theory by picking up the issue, decoding the technical details in clear terms and then forcing it on the political agenda of Europe.

That could work wonders for putting MMT where it belongs - at the center of contemporary events.

Ignacio said...

Jose the technicalities have been never a problem. It's the politics that have been a problem.

We know the system will create the necessary liquidity and financial assets (currency) at will using whatever mechanism is necessary, but it has to be allowed politically.

As long as we converge to 'balanced budgets' and 'deficit reduction' policies because that's what current leaders and 'technocrats' have decided to do it does not matter if TARGET2 can be used to increase spending or not, because it won't be allowed.

Ignacio said...

Ok I've read the rest of the comments, but again is a political problem.

Germany (and probably other nations) will threaten to quit the euro if any of this was done. Would they actually do it (given they enjoy lower exchange rates thanks to euro importing jobs via exporting goods; and reducing private debt via importing financial assets in exchange of these good)? Probably not, but the southern nations with problems would actually be scared about it.

The 'european project' is of such importance to european elites that will trump anything, and Germany will force its way. Eventually we will have banking union, and fiscal union, but it will be on Germany terms.

IMO the conundrum will happen when German realize that you can't 'export yourself into prosperity' because the world can't be a net exporter. (Not that any of that made ANY sense from a real consumption and production point of view ever, as I don't see why accumulating currency balances in exchange of giving up goods is any good.)

Ignacio said...

Also forcing a depression, or better, a long recession in southern nations suppresses aggregate demand, which will help keeping inflation at check.

There are real concerns of inflation in northern Europe and real concerns about resource scarcity, so this all reinforces these pro-cyclical policies while maintaining a manageable situation in northern nations. How long this can happen... it's an other question.

Jose Guilherme said...


You're absolutely right, the problem is political.

The lack of political will of the periphery governments to use Target2 in order to escape the austerity imposed by the EU and the ECB, that is.

They don't dare to defy core Europe.

Still it's ironic that the EU itself has created a mechanism that - if used by member states - would transform the euroze, by stealth, into a transfer Union.

Matt Franko said...


I dont know if you have seen that Warren has responded to some of your comments over at TCOTU...

Looks like perhaps step 1 is helping as many people as possible to understand mathematically that deficits are not "bad" per se under our western systems of non-convertible state currency.


Jose Guilherme said...

Yes, I've just read Warren's comments.

His conclusion is essentially similar to the one we've reached here: he writes that "the member nation must (first) have the political will to run larger deficits" and that's truly the crux of the matter. Political will is lacking in the periphery

Protesters must understand that and also that there is a mechanism available to increase the needed deficits right now: Target2.

Otherwise, their demonstrations will lead to a dead end similar to what happened after hundreds of thousands marched against the Iraq war.