The ECB Has Shaken The Eurozone’s Utopian Foundations

European_Central_Bank_-_building_under_construction_-_Frankfurt_-_Germany_-_14New building of the European Central Bank in Frankfurt Main, Germany by Norbert Nagel, 2014

The 4th February late-night decision by the European Central Bank to reject Greek bank collateral for monetary policy operations will, I confidently predict, precipitate not just a run on Greek banks; not just greater price instability across the Eurozone – but ultimately, the collapse of the fantastic machinery that is the ‘self-regulating’ economy of the Eurozone.

As is well known, the primary duty of the ECB is to promote price stability. Subject to price stability it has a duty to promote the union’s Treaty objectives that include:

balanced economic growth… full employment, social progress and solidarity amongst member states.

Before the decision of 4th February, the ECB had failed lamentably in its primary duty: to maintain price stability and to do so at a self-imposed target, at or close to 2%. In December, eleven out of eighteen Eurozone countries were in annual deflation. This is not just lamentable monetary policy failure, it is technocratic misconduct on a grand scale. The Spanish economy has recorded months of negative inflation. Italy registered -0.1% deflation in December, 2014; Ireland -0.3%; Portugal -0.3%; Belgium -0.4%; Greece -2.5%. Greece has been in annual deflation every month since February, 2013.

While failing in their primary mandate, ECB technocrats bypassed their European political masters and last night flouted wider EU Treaty objectives for social and political stability and for solidarity amongst member states.

But this arrogance, this disregard for the governments and the political will of the Greek people in particular and the peoples of Europe in general – is wholly in line with the Maastricht Treaty’s utopian vision for the Eurozone. As Wynne Godley argued way back in 1992, the architecture of the Eurozone is premised on the notion that economies are

self-righting organisms which never under any circumstances need management at all.

This machinery was made to fit a financier-friendly ideology based on contempt for democratic government. According to this ideology governments are ‘rent-seeking’ and should be marginalized. Economic policy (monetary and fiscal) must be privatized in the hands of financial markets that, surprisingly, are regarded as having no such ‘rent-seeking’ instincts.

The ECB’s mandate, as Godley argued, is premised on a belief that

governments are unable, and therefore should not try, to achieve any of the traditional goals of economic policy, such as growth and full employment.

Instead the fantastic machinery of invisible, unaccountable capital markets is entrusted with the task of managing and above all, disciplining Eurozone economies, governments and peoples.

This enhanced Treaty-embedded role for the private finance sector led to the profligate financing of speculative activities in Greece, Spain and Ireland by German, French and British bankers before 2007. It led to the immense enrichment of the financier class; and to the sector’s co-responsibility for the inevitable financial and economic crises of 2007-15. The crisis in turn demolished the mythology of the free market. Instead financiers socialized losses and extracted government and taxpayer guarantees to protect them from risk.

But just as in the 1930s, the ideologues that laid the foundations of the Eurozone, and those that have against all odds upheld it, were not prepared for the Greek election result. They were not prepared for the fact that, as Karl Polanyi once argued, society would take measures to protect itself from the fantastic, unaccountable and ruthless machinery of capital markets.

For on 25th January 2015 the people of Greece took a second, bold step at reversing austerity and restoring some form of social and political stability. They did so by electing a Syriza government dedicated to resolving the debt crisis and reversing the “fiscal waterboarding” policies of the Troika.

This followed an earlier attempt by Greek society to restore some accountable form of government. In October 2011 an angry reaction to the terms of a Troika-imposed economic programme led to social upheaval. According to the Finanical Times:

thousands of anti-austerity protesters, including rightwing radicals and anarchists, stormed (the President’s) parade route, forcing Karolos Papoulias, to flee.” In a panic, Prime Minister Papandreou called a national referendum.

The capital markets immediately sprang into action and proceeded to discipline not just Greek but other European governments, their firms and their peoples. The Financial Timesagain:

Eurozone bond markets, which had briefly rallied after the Greek debt restructuring was agreed, sold off in a panic. Yields on Greece’s benchmark 10-year bond spiked by 16.2 per cent in a single day. More worryingly, borrowing costs for bigger eurozone governments began to approach levels where others had been forced into bailouts: yields on Italy’s 10-year bond jumped to more than 6.2 per cent.

European leaders, including President Sarkozy and Chancellor Merkel rallied behind the capital markets and forced the Greek Prime Minister into a humiliating climb-down.

Today’s Eurozone’s architecture and associated economic policies are not different in intent from the “fetters” or “corset” that was the Gold Standard, and that regarded the role of governments with the same contempt. They are the same policies that led 1930s Europe into unbearable degradation, poverty, and misery. Today these policies once again threaten to unleash dangerous tensions. Society – locally, nationally, and internationally – is making ‘concerted efforts to protect itself from the market’. History is repeating itself. Current resistance to market liberalism echoes past resistance. As Karl Polanyi argued in his great, and increasingly relevant, work, The Great Transformation, the second ‘great transformation’ of the 20th century, the rise of fascism, was a direct result of the first ‘great transformation’ – the rise of market liberalism.

Adherence to this utopian vision of how economies work explains the ECB’s crude and inept handling of the democratically elected Greek government’s attempt to resolve its debt crisis. Their actions will shake the foundations of the Eurozone.

Just as the collapse of the Gold Standard in Britain and the United States led to a dramatic pre-war recovery in those countries, so the collapse of the utopian blueprint that is the Eurozone may herald good news for Europe’s economies, for its thousands of firms and for its millions of unemployed. Above all it may revive popular faith in a united, peaceful European Union based on collaboration, shared responsibility and solidarity.

Indeed we may yet come to thank ECB technocrats for shaking the very foundations of the current, ill-constructed Eurozone.

Newsnight – economists discuss the ‘graphs of 2011’

This week I appeared on Newsnight with Gillian Tett of the FT and Louise Cooper of BGC Partners. We discussed our graphs of 2011 (see mine below) and wider questions around the global financial crisis this year – and how ecnomists and policy makers need to respond.

Watch the show on iPlayer for the next 5 days here. Our discussion begins at 33 mins.

It's not the public, but the private finance sector, stupid.

Image: acknowledgements to the BBC.

The Autumn Statement reveals but one thing: the Chancellor and his advisers are both ill-advised and dangerously ill-prepared for the forthcoming prolonged Depression. (And if you think I exaggerate, let me remind you that 20 years after the Japanese debt bubble burst, Tokyo house prices are still falling, and the stock market is worth 60% less than 20 years ago. And the Japanese economy was in a healthier state then, than the UK is today, thanks to an export surplus.)

Today’s penalising of the innocent – public sector workers, pensioners and those hundreds of thousands of young people entering the labour market  – is a result of a deeply flawed economic analysis by the Chancellor of the causes of the global financial crisis.

Continue reading… ›

Osborne: Speaking truth to wealth and power? Really?

George Osborne was presumably aiming at himself and his friends, when he vowed “to speak truth to power and wealth” at the Tory party conference this week, but dare he speak economic truth to the rest of us? – simultaneously published on Left Foot Forward >

On the narrowest of bases, he might still claim he spoke “truth” to the weak and powerless when in the House of Commons debate on the economy on August 11th he made this challenge:

“Those who spent the whole of the past year telling us to follow the American example, with yet more fiscal stimulus, need to answer this simple question: why has the US economy grown more slowly than the UK economy so far this year?”

It was a ‘brave’ claim when he made it, and it’s looking even ‘braver’ – and more disingenuous – now.

Continue reading… ›

My verdict on Ed Balls’ conference speech – apologies are not enough

Published in the Guardian Cif alongside responses from Jonathon Freedland and Sheila Lawlor:

Ed Balls said sorry for Labour’s record on ultra-light-touch financial regulation, and that must be acknowledged.

But apologies are just not enough. He and Ed Miliband must stop attacking his electoral base, “hardworking families”, many of whom are trades unionists.

As Balls recognises, unless urgent action is taken, this may be the gravest economic crisis in history – given the global integration of finance and the growth of world population.

So Balls must go further.

First, he must declare loudly and forcefully that Labour will never again be captive to neoliberal central bankers like Alan Greenspan; or private bankers like Sir Fred Goodwin of RSB.

Continue reading… ›

Greece - a symptom, not a cause

I appeared on Newsnight last night, to discuss the Eurozone crisis – and Greece in particular. (You can watch it with the BBC’s iPlayer..our slot is about 7 minutes into the show.)

ABC daily report – ‘Let them default’

While I was in Australia I recorded this interview with ABC’s daily show. This went out on 15th September. Watch it above or on ABC’s website here >

Making the boom interviews and upcoming talks

It has been a busy week in Australia – I will be posting in more detail very soon. But for now you can listen to an interview with me on ABC Radio National Breakfast:

For any of you in Sydney – come along to the Catalyst event: ‘Making the boom pay… if not now, when?‘. I will be speaking along with others, more details are here:

My tour of Australia - with the SEARCH Foundation

Read about my speaking tour of Australia below – from the SEARCH Foundation:

The SEARCH Foundation is currently touring eminent British economist and author Ann
Pettifor around Australia and she is visiting our shores with a warning; the GFC inducing credit
crunch is not over and Australia’s banking sector is vulnerable.

Ms Pettifor is visiting Adelaide, Sydney, Melbourne, Canberra and Brisbane for speaking
engagements over the next fortnight.

“Before the Credit Crunch of 2008-2009 Brits and Americans were convinced that the good
times could last forever. Our orthodox economists, central bankers and politicians encouraged
us in that delusion. Today millions of the unemployed, homeless and bankrupt are paying
a heavy price for the failure to understand the role of the private banking system in causing
systemic and widespread economic failure.” Ms Pettifor said.

“Australians would be well advised not to fall into the same trap.

Continue reading… ›

From Adelaide, Australia

I am staying with my hostess in an old homestead like this one in North Adelaide….

31st August, 2011. G’day from sunny Adelaide. I am here on a short lecture tour organised by the Search Foundation, and supported by the Don Dunstan Foundation,  Catalyst , the think-tank in Sydney, as well as trades unions in Melbourne, Brisbane, Canberra and Sidney.

It’s an interesting time in Australian politics, not only at national level with the controversy around the new carbon tax, and yet another political sex scandal….but also  here in Adelaide, the home state of Don Dunstan, progressive Labour Premier from 1967-79. Dissatisfaction with the current Labour leadership has forced the resignation of Mike Rann, the premier. And today, the Australian Supreme Court has ruled illegal the government policy of deporting refugees to Malaysia…..So interesting times…

But arriving at Adelaide airport, and standing in the slow and long passort queue, more than a little dazed after the long flight from London, I was confronted directly with the crisis back in Europe. There was only one customs official clearing our long queue, and so it moved very slowly….Next to me were a couple with two restless kids, so I handed over my phone and offered to teach them how to play my favourite game: “Angry Birds”. (Although to be honest the reason I really love it is for the sound effects and those had to be turned down in the queue….)  We soon got chatting, and it turned out that they were a family from Ireland. Mum and Dad, they told me with shock written all over their faces, had both lost their jobs in the past few months. Four years ago, they raised a mortgage and built their own home. Now they have abandoned both their home and their families to start a new life in this strange city. The father had found a job, and they had rented a home somewhere in Adelaide – they had no idea where and hoped that the Satnav on the hired car would get them there. They know no-one in this city, and the pain of leaving behind her family was etched in the face of the mother…The teenage daughter looked sulky, and the younger boy grumpy….There was clear anxiety in the father’s face. And incredulity as they discussed the way that private Irish bankers are being bailed out, while they are obliged to pay the cost of the crisis….I wished them well, and hoped that Australians would welcome them….

It’s a bad old world….but great to be among Australians determined to do something about transforming it.