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.

An open letter to the leaders of Europe: Abandon the Euro's 'gold fetters'

(Image source: Bloomberg Businessweek)

I am posting below my latest contribution to openDemocracy published on May 28.  In an open letter to the leaders of Europe, I argue that they need to abandon the fetters that chain them to the interests of private wealth, and threaten European disintegration:

“On May 15th, in what can only be described as an act of coercion, an impoverished and effectively insolvent Greece acceded to the handover of a bond payment – €436 million – to private financial ‘vulture funds’. The Greeks had little choice. However, in acquiescing to this handover – facilitated by its paymasters,‘the Troika’ – impoverished Greeks protected reckless private wealth from the consequences of their risks. Namely: losses and bankruptcy, and the discipline of market forces. Continue reading… ›

Will Greece default on its debts?

I appeared on Al Jazeera’s ‘Inside Story’ yesterday to discuss Greece and was joined by Greek Journalist Matina Stavis and Political Analyst George Kapopoulos. During the panel discussion I stated that:

“The Troika are trying to ensure that the money goes straight to the creditors to prevent Greece from defaulting, but in doing so they are stripping Greece of her economic and political sovereignty. They hope to stabilise the situation and make sure that the bankers and hedge funds get paid, and that pensioners and the poor don’t take priority over them.”

Watch the video above to view the whole show.

Reining in Public Debts or Challenging Democracies?

Last week I gave a talk in Brussels at a debate moderated by Pierre Defraigne, Executive Director of the Madariaga – College of Europe Foundation. It was A Citizen’s Controversy with Lars Feld, Professor of Economic Policy at the University of Freiburg and Member of the German Council of Economic Experts.

Below is my slideshow from the talk:

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.)

Greece as Whipping Boy for 'Troika' Bullies

Simultaneously posted on the Huffington Post US >

As mayhem breaks out on stock markets; as Eurozone banks freeze up; and as the global financial system approaches a frightening ‘danger zone,’ the champions of the globalised ‘free market’ and of the Euro are in search of a scapegoat.

Instead of accepting that it is the broken banking system; the de-regulated financial Eurozone, and the deflationary monetarist policies of the Maastricht Treaty that are the roots of the crisis, the Troika (the IMF/EU/ECB) want to identify a convenient whipping boy.

Instead of going after the real culprits — un-regulated bankers that lent recklessly, confident they would always be bailed out by taxpayers — the approach of the Troika is to scapegoat Greece. The implication is that the whole fabric of the Euro, and with it the global economy, is torn apart because one poor country, Greece, will not enforce ever-deeper austerity on her people.

Continue reading… ›

Argentina/Greece: De-fault lines?

So, five of the world’s biggest central banks have decided on co-ordinated action to bail out – once again – the European private banking sector. In other words, central bankers are hoping to shore up private bankers, help their defer their losses, and prevent them being disciplined by market forces for their reckless lending to EU sovereigns.

Shareholders and investors in these banks must be delighted. Once again, reckless speculation and lending has paid off. Once again the world’s taxpayers have ridden to the rescue.

Continue reading… ›

Knowles needs to listen more carefully to ‘hero’ Clinton on deficit reduction

The austerity brigade is rattled. Young Daniel Knowles over at the Daily Telegraph is so worried, he has had to rise to the defence of the Treasury and Office for Budget Responsibility – and then resorts to proposing Greece’s economic strategy for the UK. Why? Because orthodox economic ideology has been challenged by none other than Daniel’s ‘hero’ that notorious womaniser, President Bill Clinton.

Bill gets it. On the deficit that is.  Thanks to Left Foot Forward and Mehdi Hasan we have all read Clinton’s  speech:

“(the) UK’s finding this out now. They adopted this big austerity budget. And there’s a good chance that economic activity will go down so much that tax revenues will be reduced even more than spending is cut and their deficit will increase.”

Daniel Knowles challenges his hero, on these grounds:

  1. “The government cannot spend so much that net revenues actually increase. By Clinton’s logic we should increase spending until our deficit goes away. ”
  2. “The Office of Budget Responsibility..using a Keynesian model, estimates that the fiscal multiplier is about .35”……that means that…overall the deficit is will be smaller than it would have been without cuts….. (Note: Knowles Update:  I actually made a mistake with that statistic – 0.35 is the estimate for the multiplier for VAT. Estimates of the fiscal multiplier overall, including those of the OBR, IMF and others, are closer to 0.)
  3. Greece: spending cuts have reduced the deficit from 15.4% of GDP in 2009 to 9.5% now.

The first two points are rightly, morphed together in Knowles’s argument. The first is to do with the impact of government spending. In a slump – which we are living through now – it is vital for the government to spend to fill the investment vacuum created by an over-indebted and extremely nervous private sector, desperately trying to de-leverage its debt. Right now the UK private sector is busily hoarding cash, because they are – rightly – worried about their levels of debt; and because they fear – rightly – that if they do invest, customers (both private and corporate) will not walk through the door – because customers too, are heavily indebted and worried about the threat of unemployment and falling house prices.

So given these circumstances of widespread fear and paralysis in the economy – what the ONS calls ‘flat-lining’ –  say the government invests £1 billion in libraries. What would happen next?

Continue reading… ›

Greeks refuse to party...

The olive grove harvest. Image source:

As a follow-up to yesterday’s post on Greece: the Greeks are doing the one thing that hurts bankers most – they’re turning down invitations to their party.

In my book, ‘The coming first world debt crisis‘ I tried to spell out what actions individuals could take to defend themselves against the predations of voracious lenders.

“After all,” I wrote, “the finance sector depends on us, the world’s debtor-spenders, to come to the ball. We can turn down the invitation. We can decline the credit card, overdraft or loan. We can refuse to dance to Finance’s tune. We can live within our means.”

Well the Greeks have taken the advice, but gone further. They are taking their money out of banks.

Continue reading… ›

An open letter to the people of Greece: restore the Drachma

Unemployment poster ‘jobless men keep going, we can’t take care of our own’, 1931.

We write to encourage you – to urge you on in your resistance.

In your defiance, you understand Greece is slave to the interests of private wealth.

You must understand too that it is private wealth that needs Greece. Greece does not need private wealth.

As is obvious to you – if not to EU finance ministers – Greek and other EU taxpayers are asked to shore up the immense wealth and reckless lending of private French, German, British and American banks.

Without your taxes, your sacrifices, the privatisation of your government’s assets, these bankers once again face Armageddon – as they did in autumn of 2008.

Just as then, so now they have rushed behind the ‘skirts’ of their defenders at the IMF and the EU. On their behalf, these unelected officials and some elected politicians demand that Greek and EU taxpayers shield private sector risk-takers from the consequences of their risks. The very antipathy of market principles.

In the process, the European Union is torn apart. Politicians, backed by officials, now defy the founding goals of the Community and, in the interests of private wealth, set the peoples of Europe against each other.

On 20 June, 2011 the acting Head of the IMF called for “immediate and far-reaching structural reforms, privatization, and the opening of markets to foreign ownership and competition.”

Which proves our point: private wealth needs Greece. Greece does not need private wealth.

Continue reading… ›