My view on the euro is that it has become a project to restore the rule of money over humanity. To move us back toward a world where in every sphere of life, and especially in collective choices made through government, the overriding question is, “what is most consistent with the accumulation of money claims?” or, “what will the markets think?” The euro is a project to roll back social democracy and to reimpose the “discipline of the market” on the state — or in other words to restore the logic of the gold standard, whose essential condition was that preservation of money-claims had priority over democratic government. From this point of view, crises are not a failure of the system but an essential part of its functioning, since discipline requires that punishment be sometimes visibly meted out.
This kind of Polanyian perspective is typically found on the left. But it’s increasingly clear that many of those on the other side think this way too. Here is a striking recent op-ed from the FT, by one Thomas Mayer:
Germany relied on the Maastricht treaty to make it possible to share a currency without sacrificing political accountability. The idea was to create an economic framework that was in some ways the modern equivalent of a gold standard. Monetary decisions would be made by the European Central Bank, whose only goal would be price stability. The lack of shared political institutions did not matter, because the ECB was to operate in total independence from all political influence. It would never lend to member states, even ones that were at risk of going bankrupt.
Despite these provisions, the Germans did not entirely trust their partners’ fiscal discipline, so they imposed strict limits to government budget deficits and debt…. With the benefit of hindsight, it was all rather naive. Germany should have insisted on a procedure for government insolvency, and a way of showing the door to states that were unable or unwilling to respect the rules.
Mayer, the head of a German think tank, does not mention that in the first decade of the euro Germany was one of the most frequent violators of the “strict limits” on fiscal deficits. But it’s helpful to see the idea of the euro as a new gold standard stated so plainly by a supporter. And he makes another important point, which is that even under a new gold standard, the discipline of the markets is unreliable, and needs to be supplemented with (or simulated by) overt political authority.
From early 2010, when a Greek default was narrowly avoided, until early 2012, Angela Merkel, the German chancellor, attempted to re-establish the Maastricht model … and contemplated the possibility that Greece might leave the euro. But she is risk-averse by nature and, confronted with the incalculable risks, she changed course in the spring of 2012. The Greek debt restructuring, she now said, was “exceptional and unique”. Leaving the euro was out of question for any member country. Since this decision meant markets would no longer pressurise governments into sound economic policies, she built a pan-European “shadow state” — a web of pacts to ensure that countries followed policies consistent with sound money.
It has not worked. From Greece to France, countries resist any infringement on their sovereignty and refuse to act in a way that is consistent with a hard currency policy. The ECB is forced to loosen its stance. Worse, it has allowed monetary policy to become a back channel for transfering economic resources between eurozone members. This is Germany’s worst nightmare…
A century ago, Eugen Böhm-Bawerk, the Austrian economist and finance minister, proclaimed laws of economics to be a higher authority than political power. Some Germans say that a hard currency is an essential part of their economic value system. If both are right, politicians will be powerless to prevent Germany’s departure from a monetary union that is at odds with the country’s economic convictions.
The FT’s review of “Lords of Secrecy,” for instance, acknowledges that we increasingly seem to be subjects of “a vast secret state beyond control.” That sounds bad! But the reviewer concludes on a cheerful note:
The “lords of secrecy” do need to be kept in check, of course. But that may soon happen anyway. After all, principles go only so far in holding the clandestine arms of the state to account; money goes a lot further. But money is one thing that is not quite so freely available in Washington, or many other capitals in the west, no matter how many secrets they have.
Here, subservience to the bond markets doesn’t just require limits on democracy or the rule of law, it makes them superfluous.
Returning to the euro, here, via Bill Mitchell, is Graham Bishop on the “revolutionary political implications” of unified interbank payments in the euro area:
While payments are an intensely technical area, the political implications are immense… SEPA establishes an effective ‘referendum veto’ to be exercised by citizens whose national governments might contemplate leaving the euro. In SEPA, citizens are empowered to embed the freedom and the choices associated with the single market so deeply in the economy to make it impossible for any EU government which adopted the euro to abandon the common currency. It is hard to imagine that citizens and enterprises accustomed to these choices would want to leave the euro once they considered what they individually would give up by way of returning to narrow, national offerings for trade in goods and services.
With SEPA, any citizen who fears that his home state is about to leave the euro to implement a major devaluation can protect themselves by transferring their liquid funds into a bank in another euro country – in an instant and at negligible cost. In effect, this is a free option for all citizens and amounts to an instantaneous referendum on government policy. Such an outflow of retail liquidity from a banking system would cause its rapid collapse. The quiet run out of deposits in the Irish banks last year demonstrated the power of depositors to force radical political change.
There’s not much to say about that unctuous, preening first paragraph, with its cant about freedom and choices, except to hope that some future novelist (or screenwriter, I guess) can do justice to the horrible people who rule us. (Also, notice the classic bait-and-switch in which the only alternative to complete liberalization of capital flows is autarchy.) But what’s interesting for the argument I’m making here is the claim that the great political innovation of the euro is that it gives money-owners the right to a veto or referendum over government policy — up to the point of forcing through “radical change,” on pain of a bank crisis. And to be clear: This is being presented as one of the great benefits of the system, and an argument for the UK to join the single currency.
(Also, if I’m correct that the effect of a withdrawal of ECB liquidity support for Greek banks would just prevent transfers to banks elsewhere, this suggests the threat is self-negating.)
The masters of the euro themselves talk the same way. The “analytic note” just released by European Commission President Jean-Claude Juncker, “in close cooperation with Donald Tusk, Jeroen Dijsselbloem and Mario Draghi,” begins with the usual claims about the crisis as due ultimately to lack of competitiveness in the southern countries, thanks to their “labor market rigidities.” (They don’t say what specific rigidities they have in mind, but they do nod to a World Bank report that identifies such distortions as minimum wages, limitations on working hours, and requirements for severance pay.) “While the Maastricht Treaty was based on the assumption that market discipline would be a key element in preventing a divergent development of the euro area economies and their fiscal positions, with increasing government bond interest rates having a signalling effect.” But in practice divergent policies were not prevented, as bond markets were happy to lend regardless. Then, “when the crisis hit… and markets reappraised the risk and growth potential of individual countries, the loss of competitiveness became visible and led to outflows.” [2] What’s most interesting is their analysis of the political economy of removing these “rigidities” and restoring “competitiveness”:
The policy commitments of euro area countries, made individually or collectively, to growth-enhancing structural reforms have not been implemented satisfactorily. Often, commitments are strong in crisis times and then weakened again when the overall economic climate has improved. In this sense, the stabilising effect of the single currency has certain counterproductive effects with regard to the willingness of national governments to start and implement the necessary structural reforms…
Naomi Klein couldn’t have said it better. Crises are a great time to roll back “employment protection legislation” and force down labor costs — the unambiguous content of “structural reforms” in this context. If your goal is to to roll back protective legislation and re-commodify labor, then resolving economic crises too quickly is, well, counterproductive.
A couple years ago, Paul Krugman was expressing incredulity at the idea that prolonging the European crisis could be a rational act in the service of any political agenda. Last week, he was still hoping that Draghi would emerge as the defender of European democracy. No disrespect to my CUNY colleague, who understands most of this stuff much better than I ever will. But in this case, it seems simpler to take Draghi at his word. Restricting the scope of democratic government was the entire point of the euro system. And since the automatic operation of bond markets failed to do the job, a crisis is required.
UPDATE: Schauble today: “If we go deeper into the [debt] discount debate, there will be no more reforms in Europe. There will be joyful celebrations in the Elysée and probably in Rome, too, if we go down this path.” Thee is not even a pretense now that this is about resolving the crisis, as opposed to using the crisis as leverage to promote a particular policy agenda. It’s surprising, though, that he would suggest that the Euro zone’s second and third largest economies are on the side of the debtors. Would that it were so.
[1] It’s almost too good that he hosts a lecture series on “The Order of Money.”
[2] The funny thing is that, after talking about the “misallocation of financing” by markets, and describing the crisis as “a crisis of markets in terms of their capacity to price risk correctly,” they go on to recommend the removal of all remaining restrictions on capital flows: “we need to address remaining barriers to investment and the free movement of capital and make capital market integration a political priority.” Reminds me of the opening paragraphs of this Rodrik essay.
the view that "The euro is a project to roll back social democracy and to reimpose the "discipline of the market" on the state" doesn't seem very consistent with the fact that germany has one of the strongest social democracies in europe. if what you say were true, wouldn't we see a big effort from germany to roll back its own welfare state?
or what am i missing?
You're missing the Hartz IV project.
Right. German labor markets are a lot more deregulated than they were 15 years ago, and the relative standard of living of German workers is a lot lower.
In a sense you could even say that the crises in the European periphery are collateral damage in the war of German employers on their own organized labor. I'm not sure how far I'd want to push that, but we do need to resist the frame that this is primarily or exclusively a conflict between nations.
My guess is that the euro project was largely blundered into rather than being properly thought out and is now being co-opted after the event by those wanting some plutocratic agenda like that you describe.
I guess Germans also may have a tendency to want to try and mold the rest of Europe into being more under German control. I don't think it is rational. It is just a good old fashioned quest for imperial control. The UK has a very long, sorry, history of international meddling just for the hell of it and I think the euro project is largely a sort of intra-europe mirror of that type of impulse.
My guess is that the euro project was largely blundered into rather than being properly thought out and is now being co-opted after the event
Oh for sure. Or maybe more accurately, it initially embodied a number of different, inconsistent agendas, and only evolved into a coherent neoliberal project in the 1980s or 1990s. But there's no conflict between the blundering of day-to-day politics and the pursuit of a consistent program over time. We shouldn't think of class interests as something that stands outside of and prior to the concrete political process.
I agree, I think tere is tendancy of people on the left to see neo-liberals as hyper competent capitalist mastermids, when in fact the economic ideas it rests on are a farce.
A lot of this is just incantations of "Hard Money" and "Free Capital Flows". Of course it is still extremly destructive.
Might it actually strengthen a future Drachma if, prior to Drachma-isation, Greek citizens moved all their savings to euro deposits outside of Greece? Then in order to spend their savings in Greece, those savings would be converted into Drachmas. That would avoid a currency slide that might occur were Greece to Drachma-ise the Greek euro bank deposits and then everyone raced to convert out of Drachmas in fear of an ongoing currency depreciation.
It might ruin the Greek banks having this outflow of bank deposits but perhaps for Greece overall it is less of a problem?
Interesting question! Of course, the official creditors could then attempt to seize those assets in lieu of payments from the Greek government. But it is precisely Syriza that proposes this! A big part of the fiscal problem for Greece is the failure of governments elsewhere in Europe to help the Greek government enforce any claims over flight capital.
The whole situation is kind of unprecedented, so it is hard to think through this stuff. For example, the counterpart of the flow of deposits out of Greek banks is the accumulation of TARGET2 liabilities by the Bank of Greece. What happens to those in these various scenarios?
My nagging worry is that one thing history does tell us, is that in the end these kinds of questions are often resolved not by legal or economic principles but by the direct exercise of coercive power by the stronger state.
And more of a problem for the euro as the area using it shrinks will mean increased inflation for it, thus thwarting impossible dreams.
"Of course, the official creditors could then attempt to seize those assets in lieu of payments from the Greek government."
In which case the next country in crisis would find that people are moving their money into US $ or UK pound accounts.
In addition, such a move by – well, Germany – would provide a massive incentive to move one's money out of the reach of German banks and governments, and possibly out of the reach of the ECB/EU. In other words, US $ or UK pound accounts.
And this would not just be for citizens of small crisis countries, but anybody who decided that the extra costs of doing so outweighed the risk of not doing so.
To me, this sounds like a recipe for a total EU collapse.
Now, I'm not saying that German/EU leadership would not do such a thing……..
I share Stone and JCE's thoughts. This seems like a fundamental debate not just about the European project but about the "neoliberal" project.
"But there's no conflict between the blundering of day-to-day politics and the pursuit of a consistent program over time. "
There is and it concerns legitimacy. Krugman points out there's difference between what they say they want – democracy and prosperity for all – and what they do. Yglesias writes about the German obsession with "competitiveness."
http://www.vox.com/2015/2/15/8042021/greece-unit-labor-costs
"On blogs, people talk a lot about "austerity" and whether or not it "works."
But the conversation that European Union officials have is much more about competitiveness. Their view is that the continent as a whole (and especially its wayward members like Greece) need to improve competitiveness by increasing productivity and decreasing wages. The scary message of this chart is that Europe's prescription for Greece is doing something worse than failing — it's succeeding. Wage cuts really are making Greece more competitive. But while wage cuts have managed to reduce incomes and living standards for the employed, they haven't succeeded in creating any jobs for jobless or restoring economic growth.
You can see why Greek voters recently decided to give an alternative approach a try."
Austerity doesn't work. It seems like Naomi Klein is almost saying that they bring on these crises on purpose in order weaken income and financial security. Was the intention to get Syriza and Podemos elected?
Krugman points out there's difference between what they say they want – democracy and prosperity for all – and what they do.
Right, we're all on the same page that far. The question is, how do we explain the disconnect? Is it just about ideological blinkers, or is there a consistent goal being pursued, just not the official one? (Of course it can be both.)
Re unit labor costs, in a closed economy the average change in ULC is just the change in the labor share. Here the case is a little more complicated, but the content is the same — what Draghi and co. are proposing — and this is not hidden, it is what they say — is that the labor share needs to fall. Which means that the political power of working people needs to be undermined and constrained.
It seems like Naomi Klein is almost saying that they bring on these crises on purpose in order weaken income and financial security.
Naomi Klein does say that — and so do the people who run the ECB. That's been the lesson of the past five years, and it's also the point of this post. What Graham Bishop is saying, in so many words, is that a good thing about the euro system is that it will cause countries whose elected governments follow bad policies to suffer banking crises. Mayer and Juncker and co. aren't quite that explicit, but they do say that resolving crises too quickly is a bad thing, because it removes the incentive for "structural reform."
But no, the intention was not to get Syriza and Podemos elected. This is not an exact science. It's precisely the threat of antisystemic parties taking power that limits the use of the crisis weapon.
If you're looking for smoking gun, the best one is probably still the memo the ECB sent to the Italian government in 2011, making support for Italy's sovereign debt contingent on a bunch of labor-market reforms and privatizations that had nothing to do with public finances or the banking system.
In some ways the issues are less clearcut with Greece since, unlike the rest of the crisis countries, it really did have a fiscal problem. But I don't think the issue here is really about Greece. It's about establishing a system of rules that apply across Europe. Greece is just being squeezed pour encourager les autres.
Thanks for your reply. I am trying to work these issues out while keeping an open mind.
My instinct is that these people aren't that smart, organized, etc. as Naomi Klein's thesis seems to imply.
It's not that we don't agree they're that evil or greedy or whatever. That they don't mean well. That psychological stuff is debatable and probably a mix of things.
Compare the memo to Italian with Geithner's uncensored thoughts. According to Geithner they're not thinking this through or giving it much thought. It's all about vengeance and punishment.
Would Naomi Klein argue that "they" created the Great Depression in order to force through neoliberal "reforms"? If so it backfired in that we got Piketty's Great Reset instead as social democracy and communism fought it out with fascism.
The 2008 and 2010 crises were just smaller scale, or rather they were mitigated by governments' actions.
France and England's war reparations demands after WWI weren't to encourage others or to serve as an example. It was pure vengeance. And stupid as Keynes pointed out.
"Wage cuts really are making Greece more competitive."
I wonder. The government's in trouble, people can't even get treated at hospitals…
The infrastructure has got to be deteriorating quite quickly.
I agree Mr. Anonymous. Mason mentioned at Noah Smith's column!
http://www.bloombergview.com/articles/2015-02-18/econ-bloggers-take-to-internet-to-hash-out-big-ideas-of-our-age
"But in this case, it seems simpler to take Draghi at his word. "
My opinion about the politics of Euroland is that there are more or less 4 different groups:
1) The 100% austerians, like Merkel or Trichet. They are the one who are mostly in command together with group (2), and resemble very much the kind of guy you speak about in the OP. I also suspect that they mostly don't understand the concept that all nations cannot be contemporaneously net exporters. They are the "center right" of the EU (sad times).
2) The "yes to austerity, but slowly" group, such as italian premier Renzi, previous Greek governments and most of the "center left" of the EU (sigh). They basically believe in the same models of group 1, and they as a consequence they also believe that southern europe has to gain competitivity, but they understand better the paradox of thrift, so they agree to austerity, but they think that it has to be praticed slowly but gradually in order to avoid a "debt deflation" crisis. Note that in reality those views aren't cnter left but center right, and those of group 1 are hard right, but the Overton window shifted so much that now they pass for center left and center right. I think that Draghi is part of this group. I think that the reason that group 1 could dominate EU politics that much until now is that their hopponents in reality basically agree with them. However these are people that have been democratically elected. I think also that the biggest flaw in their logic is that they don't think that the wage share can fall across all europe because they implicitly assume that the wage share is somehow fixed by some equilibrium level, so they see the problem just as a problem of relative competitivity, they don't get that the wage share can fall in the whole of EU because of these policies.
Note that the view of, for example, Krugman and DeLong are very similar to this option 2, as they believe that the main fault of the Euro is that it prevented competitive devaluation in the periphery and caused a loss of competitiveness. As a consequence, Krugman likes Draghi a lot: they have in facts the same ideas.
3) There are some leftist that actually care for the wage share, represented by Syriza, who actually think that austerity is crazy and is a plot against workers (a very different point of view from 2). Syriza is the only actually leftish party to have a position of power in Europe today, and thus this point 3 was never present in the political debate until now. However, the parties that believe in (2) are seen as leftish, and this causes a lot of confusion because the position 3 is seen as an extremist version of position 2, while in facts the two are very different.
4) There are then all sort of anti-EU parties that are based on nationalism and identity politics, that usually are on the far right. However since today EU policies are dominated by 1 or at best 2, these parties seem closer to 3, while in reality they aren't.
Thanks, this is helpful. (And with any luck soon we will add Podemos to box 3.) However, my interpretation of the "hard right" group is slightly different.
You suggest that the logic is: Competitiveness must rise to generate exports, therefore markets must be deregulated and wages must fall. Whereas I think the real logic is: Markets should be dereglated and wages should fall, therefore countries should face pressure to boost competitiveness and raise exports.
In your interpretation, the fact that everyone cannot export more simultaneously makes the program nonsensical, and suggests that the people in power are confused. Whereas in my interpretation, the program makes perfect sense even if it does not result in any changes in trade flows at all, since the point is the competition for exports itself (and the policies it requires domestically), not the result of that competition.
Incidentally, Martin Wolf points out in his column this morning that the euro area as a whole has moved from trade balance to a substantial surplus. So it is possible that the "competitiveness" program can succeed on its own terms, at least to some extent.
Who will be the consuming country then? The US is the best canidate.
If this is going to happen it makes sense to put a lot of money in US real estate right now.
Then we might get a global version of the 90s peso crisis. First a consumption boom in the US driven by surpluses every where else. Just like in Mexico was held up as an example of the success of the Washington Consensus, everyone will declare the victory of the neo liberal policies.
But this can't go on forever. Foreign claims on US assets can only rise so high before becoming politically unsustainable.
In the end there will be no world wide fed to bail everyone out. We have that to look forward to.
Is there really no worldwide fed equivalent? Maybe the collapse of the Eurozone countries middle class (along with other industrialized nations) is what is intended all along and another step toward a complete control of populations via a globalization leaning towards world governance including money. Considering all the confusion recently between the world's central banks, especially in Europe, maybe it will be the BIS who will finally step in after the collapse, claiming that had they had control, all the pain could have been avoided and propose a behind the scenes, new worldwide currency in the form of a SDR? This would objectively respond to thesis set forth in the initial sentence of this article. It suddenly occurs to me that this is already occurring in a limited capacity. I also believe an international plan was proposed and developed to institute such a global system which began to develop worldwide in 1992. Maybe we are almost at the point whereby such a monetary cartel will finally be realized and a new monetary playing field established?
What about a geopolitical approach to the debate?
Let's not forget about who conquered Europe after WW2 and finished the deal after 1989 -United States of America.
American power hinges on USD. Euro project, Maastricht limitations make sure this currency won't be able to pose a real threat to the dollar as a main reserve currency.
Now it's basically "export or die" paradigm.
This raises a good question — what is the attitude of American elite toward "Europe"? It's not actually clear to me. And to be honest, I don't see any evidence that the US is in the driver's seat.
Europe is under American occupation. Why are US military bases still over there if not to keep an eye on assets? Germany is strangling its labor in order to be "competitive" and export BWMs to America in exchange for net financial assets. IMHO evidence of US domination over Europe is clearly there.
It's clear that the only way to growth in EU is to net export. Who are they going to export to if not US? American elite's attitude toward Europe is colonial exploitation.
Mayer neglects to mention that at the same time the Germans were exercising their famed prudence by setting gov't debt and deficit limits in the original Maastricht treaty , they imprudently ignored private debt which , with the exception of Greece , is much the bigger problem throughout the Eurozone. Only since the crisis have Eurozone guidelines been established for private leverage.
Had this been done at the outset , Germany could not have flooded other Eurozone members with their surplus savings , as they would have been contributing to those members' violation of the private debt limits. Of course , without this "vendor finance" , Germany would not have enjoyed their outsized surpluses all these years.
The more I think about this , the more I think this whole mess was planned by the US-UK-EU elites from the start , a la Naomi Klein. And as bad as the plan was , it's still going to work out well for them in the end. Not so well for the rest of us , however.
One factor in the current crisis that shouldn't be overlooked is that Deutsche Bank by most accounts is the most thinly capitalized mega-bank in the world. (There are differences between U.S. and international financial accounting standards, mostly due to reporting net rather than gross derivatives, but even correcting for that, the factoid stands). Ostensibly, DB meets the required 3.5% raw leverage requirement, but remember that it's the "valuations" on the right side of the balance sheet as much as the liabilities on the left side that determine "equity". And at 1.6 tn in "assets" DB amounts to 40% of German GDP. Given the foot-dragging by Merkel et alia on a banking union, this seems mighty suspicious. With low interest rates, a stagnant economy, huge fines for past transgressions, and a large trading desk in a highly volatile and uncertain global environment, DB has zero profits, and that might be what Merkel and her gang are desperate to cover up.
Also, looking up data on Greece under the Troika, (partly to correct Daniel Davies, who was wildly inaccurate, but that got deleted anyway), I came across the fact that Greek inflation was rather high. Obviously, it was much higher before the Euro, and muted before the crisis, but it was higher after the crisis than before, (until last year). Ordinarily I would say import price inflation, but that can't happen here, even though, as Argentinians and Brazilians of yore know well, uncompensated inflation can yield large cuts in wages and wage shares, (while permitting crony capitalists interest-free or even negative interest loans). Since wages and prices are partly obverses of each other. Could it just be tax rises and subsidy removals infecting the official inflation measures in an otherwise deflating economy? And since most of the austerity measures funding the "bail-out" ended up exported abroad to creditors, just how did the comprador elites that collaborated benefit? Can you figure something of this out, JWM?
In the meantime, though no one doubts that Germany has a highly proficient and productive industrial sector, not only has German inflation since the Euro been below the 2% average, while above thaqt in the south, as Heiner Flassbeck pointed out several years ago, due to domestic wage-suppressing "reforms", which have left real German wages lower than before the Euro, but German productivity growth has actually been quite mediocre, and below levels achieved in some of the southern economies. IOW most of the German CA surplus is not due to any increased "competitive advantage, other than pre-existing ones, and has everything to do with predatory mercantilist policies. SO much for fetishizing "unit labor costs" as the key to productivity growth.
There is a counterargument against the view that Germany clawed its way toward an intra-eurozone trade surplus by suppressing wages; see http://ineteconomics.org/sites/inet.civicactions.net/files/PED_Paper_Storm_N.pdf
The claim is that Germany's economy dualized as a result of the Hartz reforms; the manufacturing export sector was sheltered and its increased productivity should be seen as a success for exactly the kinds of "anti-market" policies the EZ is out to suppress. Along with Josh, I don't see this as a contradiction. The point of the euro is to create an opening for capital to escape the embeddedness from which it "suffers" at the national level in Germany and everywhere else.
Thanks for the link! Completely agree that wages are given way too much attention when analyzing performance of such advanced economies as Germany. I'm a victim of this tunnel vision as well most obviously.
So informative blog and thank you for sharing us.
Thank you,
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