Monday, June 20, 2022

Bill Mitchell — Eurozone anti-fragmentation confusion – its really simple – the ECB has to continue to fund deficits or kaput!

The French National Assembly results from the weekend are a good outcome. Not the best, but good, although the continued presence of the Right is disturbing. At least Macron’s group of Europhiles has lost its absolute majority with the new Left alliance becoming a viable opposition. The polarisation – with a surge from the Right and the strong performance of the real Left rather than the lite Socialist Party version – is indicative of what Europe has become – a fractured, divided, divergent set of nations and regions. If the Left had have seen the value in this unity ticket during the Presidential election things might have been different. But better late than ever. France will now find it hard pushing further neoliberal policies and there will be pressures on the government to defy the fiscal rules and redress some of the shocking deficiencies that the neoliberal period has created. But, those pressures are coming squarely up against the impending crisis facing the monetary union. All the economics talk in Europe at the moment is indicative of the plight that monetary union faces after papering over the cracks during the first two-and-a-half years of the pandemic. After years of holding the bond spreads down, with their asset purchasing programs, things are changing as the ECB is pressured to follow suit and hike interest rates and abandon their bond buying. If they do both things, then there will be a crisis quick smart because nations like Italy will face increasing yields on their borrowing which will run out of control. So, the solution – another ad hoc response – an “anti-fragmentation” tool. If it sounds like a joke that keeps on rolling, you would not be wrong. More paper, same cracks....

There is only one way to fix a bad design and that is re-design. The EZ got off on the wrong foot with Maastricht. They need to revisit the treaty or abandon the euro. The only way to fix the treaty is to go to a political union that includes a fiscal union instead of only a monetary union that requires nations to cede their monetary sovereignty. Is the EZ ready politically for a constitutional shift to a federation? This requires nations to cede even more national sovereignty.

Bill Mitchell – billy blog
Eurozone anti-fragmentation confusion – its really simple – the ECB has to continue to fund deficits or kaput!
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

1 comment:

Matt Franko said...

What about Japan?

They are not in a treaty and yet they are loathe to abandon asset purchases too…

Even the Fed which is allegedly supposed to start the QT this month has INCREASED assets this month…,

The CBs across the board are generally reluctant to reduce assets..

How else are they going to fund their operations?

If you lower your rates to very near zero then you need A LOT of near zero yielding assets in order to make money..,