Dirk Ehnts — The euro zone crisis: What would John Maynard do?

Abstract

In his letter to US President Franklin D. Roosevelt Keynes (1933) wrote about "the technique of recovery itself". An increase in output is brought about by an increase in purchasing power, Keynes argues, which can come from three sectors: households, firms and government. Using the IS/MY macroeconomic model developed by Ehnts (2014), which features sectoral balances and endogenous money, the situation of some euro zone members is examined with a focus on the three techniques of recovery: increases in debt of the respective sectors as defined by Keynes. A fourth technique, an increase in spending by the rest of the world, is added. The conclusion is that the policy recommendation given by Keynes in his letter also holds for the euro zone at present: a rise in debt-financed government expenditure. Some reform at the institutional level in Europe would enable "the technique of recovery" to work via the TARGET2 payment system, which is organized along Keynes' International Clearing Union proposal and a solid foundation to build on.

The euro zone crisis: What would John Maynard do?
Dirk Ehnts

Martin Armstrong — The Euro on the Brink of Disaster

Martin Armstrong predicts the imminent collapse of the euro.

The is starting to illustrate what I have been warning about. The EURO is in effect like a gold standard. When crisis hit, everyone had to suspend the gold standard for World Wars I and II and then upon the fall of Bretton Woods. The currencies were tied to gold which they could not increase its supply. This is the same crisis now with the EURO. Despite the EURO is really just electronic/paper, its quantity is still fixed by the EU membership. No single member state can just increase its supply unilaterally. That would be like trying to maintain a gold standard and one nation revalued its gold to three times that of what everyone else uses. That becomes impossible. The Silver Democrats nearly caused the bankruptcy of the USA for overvaluing silver relative to the world in the 19th century.

This is why the euro CANNOT SURVIVE. You have sovereign states with their own crisis and that demand measures separate and distinct from other members. This is how the euro system will break. It is extremely urgent that you understand the crisis ahead

It's looking, too, like Deutsche Bank many be the new Creditanstalt.

Of course, none of this is necessary operationally. but sticking to the rules, as Germany insists upon, will likely bring the entire house of cards down.

Armstrong Economics
The Euro on the Brink of Disaster

Martin Armstrong

See also

Naked Capitalism
Deutsche Bank Chief Economist Joins SocGen Chairman in Trying to Foment Banking Crisis to Get Germany, Brussels to Blink
Yves Smith

Pepe Escobar — Europe’s Slow Motion Debacle

Beneath the analysis presented herein is the view emerging among analysts is that the chaos being created in MENA, EU, Ukraine, and Central Asia, Afghanistan is not accidental but rather engineered by "the empire of chaos." It is ultimately directed at maintaining global hegemony irrespective of the cost globally, excepting to North America. Pepe Escobar suggests this in the ending line. I expect that he and others will be developing it.

Strategic Culture Foundation
Europe’s Slow Motion Debacle

Pepe Escobar

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

system failure — The European industry of sell-off public property

Just like Michael Hudson predicted.

the unbalanced evolution of homo sapiens
The European industry of sell-off public property

system failure due to insufficient evolution?

Eric Schliesser — The Euro Survival Explained By One Graph (which also helps explain why the crisis will not be resolved)

Digressions&Impressions
The Euro Survival Explained By One Graph (which also helps explain why the crisis will not be resolved)
Eric Schliesser | Professor of Political Science, University of Amsterdam’s (UvA) Faculty of Social and Behavioural Sciences

Bloomberg gives props to 9 people who saw the euro crisis way before it happened and 5 of them are MMT people!

Bloomberg calls out 9 people who predicted the euro crisis before it happened and 5 of them that they mention are MMT people.

They are, Wynne Godley, Matt Forstater, Stephanie Kelton, Warren Mosler and Randy Wray. Kudos!

Former Finance Minister of Cyprus on the Greek crisis — Branko Milanovic interviews Michael Sarris

While on vacations in Greece, I had a chance today (Sunday 28 June) to have a long discussion with Michael Sarris who was Cypriot Minister of Finance between 2005 and 2008 when the Euro was introduced in Cyprus and then again Minister of Finance during the March 2013 crisis when Cyprus faced negotiations with “the institutions” very similar to those faced today by Greece. Very few people in the world have as informed and first-hand knowledge of the situation as Michael Sarris does. Here are my questions and his answers.

Global Inequality
Former Finance Minister of Cyprus on the Greek crisis
Branko Milanovic | Visiting Presidential Professor at City University of New York Graduate Center and senior scholar at the Luxembourg Income Study (LIS), and formerly lead economist in the World Bank's research department and senior associate at Carnegie Endowment for International Peace

Bill Mitchell — Eurozone unemployment – little to do with international competitiveness

The so-called ‘Informal European Council’ released a document on February 12, 2015 – Preparing for Next Steps on Better Economic Governance in the Euro Area: Analytical Note – which has been used as a background paper to batter the Greeks into submission in the latest round of the Eurozone crisis. It was published under the authorshop of Jean-Claude Juncker (President of the European Commission) with “close cooperation” with Donald Tusk (President of the European Council), Jeroen Dijsselbloem (President of the Eurogroup of Finance Ministers) and Mario Draghi (ECB boss). All that is missing is the Madame from the IMF to complete the Troika. This is a very dishonest document, deliberately framed to advance the austerity agenda and damage the living standards of some of the nations within the monetary union. It is hard how any serious economist would put their name to this sort of analysis.....

Well, we know that these people are not serious economists but serious politicians flogging an ideology they can't admit has resulted in failure. Perhaps, Christine LaGrande's signature isn't on this because she recognizes it. But if she doesn't speak up, silence is consent.

The Eurozone is now locked down in a straitjacket of economic austerity, driven by an economic ideology that is blind to the evidence of its own failure.

The concern:

The Keynesian era emerged out of the Great Depression, which taught politicians that without major government intervention, capitalism is inherently unstable and prone to delivering lengthy periods of unemployment.
Full employment came only with the onset of World War II as governments used deficit spending to prosecute the war effort.

Failing to recognize this and imposing fiscal austerity in the face of economic and financial crisis that is morphing into social unrest and political crisis, Europe is now sliding into instability and toward war, with a hot war raging on its eastern border with Russia. Is history rhyming? How many times do we have to run this?

Bill runs through the history.

Bill Mitchell – billy blog
Eurozone unemployment – little to do with international competitiveness
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Ramanan — 20 Years Of Maastricht And All That

Ramanan reminds us that it was 20 years ago today that Wynne Godley presciently warned about the impending future of the EZ in an article published in the London Review of Books (Oct 8, 1992).

The Case for Concerted Action
20 Years Of Maastricht And All That
Ramanan

Jacob Funk Kirkegaard — Protests, riots, rightists rage in Europe – but to no ill effect

Political pressures are rising again in Europe. This column argues that reactions in parliaments, central banks and on the street are well within the bounds of predictable reactions to hard times. These developments change nothing of significance in the calculus concerning the eventual success of the Eurozone crisis response.

VOX
Protests, riots, rightists rage in Europe – but to no ill effect
Jacob Funk Kirkegaard | Research Fellow, Peterson Institute for International Economics

Blood running in the streets? No big deal to those in the corner offices.

Holland and Varaoufakis — Unanimity is not essential to cutting the ‘Gordian debt’

Profs. Stuart Holland and Yanis Varoufakis sent a letter to The Financial Times about resolving the euro impasse. It is re-posted at YanisVaroufakis.eu

Read it at Yanis Varoufakis
Unanimity is not essential to cutting the ‘Gordian debt’: our letter to the FT as published today

by Stuart Holland, Dept of Economics, University of Coimbra, Portugal, and Yanis Varoufakis, Dept of Economics, University of Athens, Greece

EU takes legal action against Hungary European Commission launches challenge against government, saying new reform laws fail to comply with EU legislation.

European Commission launches challenge against government, saying new reform laws fail to comply with EU legislation.

Read it at Al Jazeera
EU takes legal action against Hungary

Reuters — Linde CEO says Germany should mull euro exit

"if we do not succeed in disciplining countries then Germany needs to exit."

Reuters
Linde CEO says Germany should mull euro exit

My  position from the beginning has been that Germany would likely be the first to exit, owing to political opposition objecting to "carrying the rest of Europe on the back of German taxpayers."

If Germany exited and went back to the DM, the EZ could probably survive with the euro, since the major opposition to a monetary and fiscal policy that could work would be gone, as would the mercantilist power causing the major asymmetry.

Zero Hedge — Gaming the euro

This post is an interesting application of game theory to the euro crisis. It's a bit long and somewhat wonky if you are interested just in skimming, but it's an interesting read if you are interested in this sort of technical approach and don't mind thinking it through.

I like the way it is framed in terms of the free rider problem. I don't agree with the assumptions about the "free ride," but it is instructive as an insight into how this type of mind looks at the issues, i.e., in which matters like common good are considered aspects of a free ride when  a neoliberal/Austrian view of "fiscal discipline" is taken as the overarching criterion.

The Euro Is Dead

Germany makes bid to gut national sovereignty of EZ states to save euro

BERLIN (Reuters) - German Chancellor Angela Merkel is seeking to speed up reform of the European Union treaty and wants all 27 EU member states to give their approval by the end of 2012, government sources said on Sunday....

This would involve the right to challenge states at the European Court, to have their budgets declared void, without meddling further in the details.

Under the German proposals, the EU commission would also play a stronger role in monitoring budgets....

Read the whole article at The Huffington Post

Angela Merkel Wants To Reform EU Charter By 2012

The fly in this ointment is that in many EU countries, changes to the EU charter require a referendum, which may be difficult to pass.

Iberia on the ropes

 Spain’s right-leaning opposition will thrash the ruling Socialists in November 20 elections, polls showed Sunday, as anger over an economic crisis spilled into the streets....

Spain’s [Socialist] government is paying the price of an economy that stalled in the third quarter with zero growth and unemployment that soared to 21.52 percent in the same period, the highest in the industrialized world. 

 In the only televised debate of the campaign, on November 7, Rubalcaba tried to skewer the Popular Party leader, accusing him of hiding plans to cut jobless benefits and financing for healthcare and education.

But Rajoy hammered the government’s economic and jobs record, arguing that the best way to protect social welfare was to create jobs and increase tax revenues.... (emphasis added)

Read the whole article at Raw Story

Spain’s right storming towards election win: polls
by Agence France-Presse

Spain is poised to tank if it elects an austerian government, as now seems baked in.

Portugal is also on the ropes.

LISBON, Nov 11 - Portugal's parliament approved the 2012 budget bill on Friday in its first reading, which promises sweeping austerity and the deepest recession in many decades as the country slashes spending to meet the terms of its 78-billion-euro bailout.

Reuthers: Portugal parliament approves 2012 budget


Europe continues to sink into the mire of euro-induced fiscal austerity as Ireland, Greece, Spain Portugal, and Italy, not to mention the EZ countries in Eastern Europe, buckle under, and even core-country France now is concerned about losing its AAA credit rating.

Euro crisis is over.

The Euro crisis is over and from what I can see that view is being embraced more broadly.

Yields on Italian gov’t bonds are down sharply again today. The markets and more importantly—the ECB—are coming to realize that the ECB is the rate setter in the Eurozone, just as the Fed is the rate setter in US dollar bond markets and the BOJ is the rate setter in yen. And the mechanism by which the central bank, in this case the ECB, sets rates is by buying or selling the securities of the government in the secondary market. NOT DOING SO would be an abrogation of their role. Just as the Fed can set rates anywhere along the term structure or, even on mortgages, the ECB can set rates on Italian, Greek, Irish, Spanish, German, French or any other debt in the Eurozone. That is its role even if it is reluctant to do it. It is finally coming to terms with that and doing it as needed.

So this removes the solvency issue entirely at this point. As the markets come to realize this, and I believe it will be rather quickly now, there can be a huge relief rally.

Where we go from here depends on policy measures related to ongoing austerity. Austerity deflates economies and that means weaker growth, higher unemployment, not just in the Eurozone, but here as well. That will take time to play out because it is a political process, however, I see nothing in terms of policy that would suggest austerity will not be the norm going forward.

One final note, this is NOT MONEY PRINTING and NOT INFLATIONARY as some analysts are saying. That’s because the buying of bonds by the ECB is merely the removal of one asset from the public—the bond—and replacing it with a cash balance at the ECB. The only thing that has changed is the interest rate and the duration. The public is stripped of a bond interest coupon that pays a pretty high rate and gets a cash balance at the ECB that pays 1.25%. It is therefore stripped of income. This is not inflationary. The duration of the public’s assets has shifted from longer term to zero term (cash). That’s all that happened.

To the extent that markets perceive this as money printing or inflationary they will buy gold or commodities or sell bonds or whatever, but those moves are not likely to hold up.