The architects of the Euro hung by their own petard

With acknowledgements to the Economist: front cover 26 November, 2011

Dear readers…posted this last night, but  failed to add links…so have updated this morning….And now at 12.54 on 28 Nov, following revelations from Bloomberg, am adding in a reference to the extent that Morgan Stanley was bailed out in 2008.

A petard, I am reliably informed by the Web,

“was a bell-shaped metal grenade typically filled with five or six pounds of gunpowder and set off by a fuse. Unfortunately, the devices were unreliable and often went off unexpectedly. Hence the expression, where hoist meant to be lifted up, an understated description of the result of being blown up by your own bomb.”

Correct or not, this is a helpful analogy for the crisis of the Euro. The grenade that is the Euro has a fizzing fuse that threatens to explode imminently, causing visible panic in markets, in parliaments and treasuries across the world. Mainstream economists are either dodging the bullets and like the cowards they are, pretending that ‘it’s nothing to do with me guv’.  Or else they’re panicking in ways that are crass and unhelpful, banging their heads against the brick wall that is the Bundesbank and ECB, and demanding that someone, somewhere defuses the bomb.

The Economist has a dramatic leader this week (“Is this really the end?”) warning of grave threats and offering Chancellor Merkel and other EU leaders ways of avoiding a comet-like crash. Like many others, leader writers on the Economist, somewhat belatedly, want the ECB to act as a central bank, and to  provide liquidity to sovereign members of the Eurozone.

“Vast monetary loosening should cushion the recession and buy time” argues its leader.

Too late. By calling for ‘monetary loosening’ the Economist is indulging in a form of mindless head-banging.  Like so many others desperate to preserve the Euro, leader writers at the Economist cannot fully face up to the contradictions inherent in their own orthodoxy, and in the Eurozone currency and monetary system created and cheered on by mainstream economists – including those on the Economist. Contradictions that are so strongly held by the ideologues that drafted the Maastricht and other texts, that they are carved in legal stone into the Eurozone’s various treaties – and will not easily be erased.

The fact is that the ECB is designed to be the very antithesis of a central bank. Its purpose is to ensure that sovereign governments do not ever draw on the kind of ‘liquidity’ provided by publicly-backed, nationalised central banks such as the Bank of England. The latter is now providing £75 billion of ‘liquidity’ support to the British government, albeit indirectly, and plans to print more of the stuff in February.  Similarly, the Federal Reserve has provided vast sums in support of the US public and private sectors (see this story on Bloomberg (29 Nov, 2011) about the secret Fed loans to private banks in 2008 and the $13 billion of income reaped by same banks taking advantage of the Fed’s below-market rates. Also see this chart’s revelations of how Morgan Stanley was rescued by the Fed – at a time it pretended to be whole: Felix Salmon, Reuters, 27 Nov 2011.)  The Bank of Japan provides generous support to the Japanese Treasury and Japanese industry.

And good that they do so too. At times of crisis, when private bankers fail – society needs a lender of last resort – a public central bank that stabilises the financial system, allows the real economy to carry on working, and acts as a backstop to a private financial system that regularly fails society.

But this is not the purpose of the Euro, the ECB and the monetary system created first, by the Maastricht Treaty, and then by subsequent Treaties.  Instead its purpose is to deny governments a sound monetary system that acts in this way, and that works for society as a whole. All these Treaties force Eurozone governments to turn to, and depend on the private banking sector for financial resources.

That is why the Euro is the wet-dream of private wealth. (For more on this, see “Open Letter to the people of Greece: restore the drachma.” 21 June, 2011.)

As a result of its construction by conservative and orthodox economists and policy-makers – heavily influenced by private bankers –  sovereign governments (like Greece, Spain, Italy) upon joining the Eurozone have to borrow from private banks. They can no longer rely on a publicly-backed central bank  for borrowing; to help compensate for a slump, mitigate a private financial crisis or manage public finances.

Furthermore, the rules of the Eurozone oblige these governments to borrow in what is effectively a foreign currency – or at least a currency over whose value they have very little influence (unlike the influence that governments have over the Dollar, Sterling and the Yen).  And to do so on the basis of rates of interest set by a group of technocrats – with no real commitment to the health and success of individual sovereign economies. Instead these technocrats – on the board and staff of the European Central Bank – have an overwhelming commitment to an economic ideology that demonises the wider public interest, and upholds, almost as sacred, the interests of the private banking system.

That interest is most clearly expressed as an abhorrence for ‘inflation’ – the phenomenon that lowers the value of a creditor or banker’s chief asset: an outstanding loan. Inflation erodes the value of that loan, and is the thing most loathed by creditors. By its fixation on inflation and private creditor interests, the ECB is inured to, and intransigent when it comes to the wider, public interest: the interests of Europe’s democracies. More frighteningly, the ECB is inured to the much graver threat of debt-deflation. (See Irving Fisher’s Debt-Deflation Theory of Great Depressions.)

That much most of us know. What few will publicly acknowledge is that in persuading policy-makers and orthodox economists to construct the Eurozone monetary system, private bankers had reached a form of nirvana. Not only had they eliminated competition in the sovereign lending markets from publicly-backed central banks; but they had also been given effective guarantees that they could lend vast sums (far more than e.g.they lend to corporates) to sovereigns such as Greece, without fear of loss. Greece would not be allowed to default, the treaties ensured that. And if sovereign governments were slow in paying, the stronger members of the Eurozone (most particularly Germany) could be expected to cover and guarantee no private losses.

Of course it takes two to tango.  Greece also got to borrow at levels she could not do before; and at rates of interest more appropriate to the German economy. So Greece’s reckless politicians turned up at the bankers’ party – and gorged themselves on debt.

The bankers never lost a night’s sleep. They had all those treaty guarantees – drafted by clever economists.

Now imagine if you were a farmer, wanting to sell tomatoes to sovereign governments across Europe. Would such treaties as the Maastricht treaty and the one that governs the ECB not have been of enormous help to a) guarantee sales of tomatoes b) remove competition from other tomato sellers and c) ensure compensation, should buyers go bust and fail to pay up?

Given that conditions were set up in this way for the private banking system – the bleating of the Economist and others for the ECB ‘to print money’ – is a) many years too late; b) hypocritical, but most importantly c): an open admission of the catastrophic failure of economic orthodoxy and its construction of the Euro. Above all, of its complete subordination to the interests of private finance.

The tragedy is this: when the Euro blows up, as it must, harm will not be restricted to its architects, or the private finance sector.

 

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8 comments to The architects of the Euro hung by their own petard

  • Well said. If nothing else good happens from all this, at least economists will (re)discover something about money, and maybe those who know something about money will get better at explaining it to non-economists.

  • Whilst you analysis is I believe correct, you should acknowledge that the current Euro construction was arrived at as a (flawed) compromise between the various members of the Euro zone.

    In any case, the current crisis is simply a symptom of much wider problems: the fractional reserve banking system and our utter dependency on energy at a time of resource depletion.

    The International Energy Agency has acknowledged for the first time last year that conventional oil production world wide has peaked and that it has peaked back in 2006. The consequent oil price spikes which have now stabilized into permanently high price, which is acting as a major drag on world, currently mainly western, economy and which will probably never again allow it to grow.

    The consequences of that are profound: a) not just the Euro zone, but all nations with more than about 60% debt burden are likely to default, b) the world financial system relies on growth for its continued economic existence – so expect the collapse of that whole system, c) democratic countries will be making ever more desperate efforts to minimise the inevitable decline in living standards and thus will waste whatever resources still remain and could have been utilised on building resilience: renewable energy based infrastructure, self-sufficiency in food and essential manufacturing and services, d) that means the whole structure of our society will brake down: food supplies, power cuts, NHS, unemployment support, state pensions (private pension funds will go bankrupt with the rest of the financial system), law and order, civilisation …

    Doom and gloom you may say. I say it is better to face the probably future so that we can analyse it rationally and perhaps manage a few steps to safeguard at least some of our civilisation.

  • The real tragedy is that we are at the end of our civilisation and we don’t even realise it.

  • Ann

    Paula…We have not had a fractional reserve banking system since before 1694, when the Bank of England was founded….

  • Ann

    Correct Tscaff…Have you read Geoffrey Ingham on the nature of money? Will review it soon…also his book on Capitalism. And then there is David Graeber’s book on Debt, which is also refreshingly good at rediscovering money….

  • Ann, yes, I have read Ingham’s book on the Nature of Money, best “money” book that I know of but difficult reading. He predicted in it the problems in the Euro zone we see today. His capitalism book is much easier for a general audience, and Graeber is even easier still but brilliant.

  • Stephen

    Ann, just wanted to say thank you for a beautifully clear, and utterly truthful, explanation of the Euro crisis. The best I’ve come across by far.

    Sadly, apart from Caroline Lucas, I can’t imagine any political leader speaking with such direct eloquence and truth on the banker-induced debt crises, of which the Euro crisis is but one.

  • Ann

    Stephen, thank you very much for this comment. Much appreciated.

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