24 November 2011

A Very European Financial Coup d'état

The attempt to create a monetary union before a political and fiscal union placed the cart before the horse. Or was it... an attempt to steal the cart?

To achieve a fiscal union and political union would have required the democratic consent of the voters of each member state. Such an acceptance of this might then have implied an acceptance of a monetary union and its consequences. 'Acceptance' should not be underestimated.
Hyman Minsky: “Anyone can create money; the problem lies in getting it accepted
It was never likely that all Europeans would have accepted the idea of an United States of Europe. The  European Monetary Union was essentially an undemocratic method of press-ganging euro members into the Euro ship by financial force without their consent.

School kids are told that democracy is about listening to the people. When they grow up they are told it is about listening to the markets. Now we are all told to listen to un-elected bank clerks who (in Greece) are then forced to sign another piece of paper for approval by another set of banking clerks residing in the head office. The argument being of course one of 'trust'. Democracy, meanwhile, is forced to hide behind a tear gas mask.  In Greece there are now anit-semitic anti-islamic neo-nazies in the government.

via @Irategreek on twiiter

Why should anyone pay their taxes to pay the wages of such men? Indeed everyone has a duty not to pay for a regime that marches, increasing taxation in one step and decreasing representation in the other, towards a repressive dictatorship. It's like paying for your own firing squad.

Are economists to blame for this Euro disaster? Ancient economic papers (Monetarists, Keynesian, etc - choose your favourite school of economic thought) go back over 50 years giving detailed reasons why it would fail (see biography in this publication). Let me even apply a quote from F. A. Hayek to the Euro:
The curious task of economist is to demonstrate to men how little they really know about what they can imagine they can design F. A.Hayek The Fatal Conceit 1988)
To think of 'internal devaluation' and austerity as providing a way of adjusting to shocks that occur in the world beyond the EC borders is very naive. It is akin to a Napoleonic way of standardizing and metricizing economies into homogeneous diary products with fines on diary producers for failing to meeting these standards.  Milton Friedman, the monetarist,  made the following comment in 'The Times' (19/11/97) on the European project:
"...Europe exemplifies a situation unfavourable to a common currency. It is composed of separate nations, speaking different languages, with different customs, and having citizens feeling far greater loyalty and attachment to their own country than to a common market or to the idea of Europe". Milton Friedman
The Euro was a political exercise, but lets wipe the dust off more economic texts.

Brother Can you Spare A Euro.. "They used to tell me I was building a dream"
Or, how do we empty Greece to make the economy work?

M. Corden  (1972) warned that, if investment was sensitive to the business cycle, a monetary union would be heavily dependent on labour mobility and involve significant migration costs. United States, in the 1930's Great recession, produced "Hoovervilles"

In the 1960's, during the post-war American dream this was a more psychedelic experience, with some  'tripping' across states.

In Europe, neo-nazism rises, even becoming members of a government, Greeks emigrate to Australia and mobility tends to wear army boots 'making war 'not love'.
One of the things that makes the American common currency work across the country is we have a common fiscal authority and high migration - we're willing to allow North Dakota to become empty. In Europe, there's no fiscal authority, migration is more difficult and most of the countries are not willing to let themselves become empty.  Joseph Stiglitz: Austerity not the way to go for Europe
EuroVision and rigged voting

The European Commission's “One Market, One Money” Report (1990) concocted a modern version of Monetary Union theory. It did not deny that crises would occur but looked forward to them.
"I am sure the euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created." Romano Prodi, EU Commission President. Financial Times, 4 Dec 2001
"The future will belong to the Germans... when we build the House of Europe. In the next two years, we will make the process of European integration irreversible. This is a really big battle but it is worth the fight." Helmut Kohl, German Chancellor 1982-1988
And a strong dislike of referendums and elections
"A true European cannot not want a referendum [on the European Constitution]."
Jean-Pierre Raffarin, French Prime Minister from 2002. Quoted in 2003.
(The meaning of true?  Someone with direct lineage to 'Conon the Accountant' or, culturally, not those who disagree) 
"Europe's nations should be guided towards the super-state without their people understanding what is happening. This can be accomplished by successive steps each disguised as having an economic purpose, but which will eventually and irreversibly lead to federation." Jean Monnet, Founder of the European Movement. Former Cognac salesman and bureaucrat at the League of Nations. 30 April 1952. 
French and Dutch in 2005 voted against a European Constitution. When Ireland voted no, it was made to vote a second time to get it 'right'. This time changes to European Treaties are being force through by the argument of economic necessity in a crisis; one that is supposedly caused by a small troublesome nation in the periphery.

The Ring that binds - the sovereignty debt entrapment 

How did this Press Ganging of economies into the euro ship happen?

Any country that can issue its own currency (and is not pegged to any other currency or precious metal) does not risk default solvency risk. It cannot be forced into debt. It controls its own currency and can always spend, by crediting bank accounts to create money.

Hence flexible exchange rate economies like Japan can run far higher debt to GDP ratios than Euro-zone members while still having low interest rates on their sovereign debt. Thus there is no default risk premium.

The Euro maintained a stable currency that destabilized governments with uncontrollable default risk. It achieves this in three ways by: (1) generating trading account deficit with other euro-zone economies without any automatic means (exchange rates) to adjust competitiveness;  (2) restricting the controls to finance these deficits and (3) imposing external or self-imposed fiscal discipline that renders the economy helpless in times of crisis.  With one global storm economies begin to capsize and sink.

When an economy is hit by a recession from an unexpected shock in the global economy there are automatic increases in government expenditures (social security and unemployment payments) and reductions in government's tax revenues (as output falls).  This part of the government budget deficit is 'unplanned'.

If it tries to reduce expenditures and/or raise taxes it may exacerbate the impact, by reducing aggregate demand at exactly the wrong time to do so, and deepen the recession.  An Euro-zone economy running a budget deficit means that its central bank is using up reserves from its ECB account which it will need to replace.  Individual Euro-zone governments do not have the choice of monopoly issuer of currency to create money (by crediting bank accounts) to finance its budget deficit. The Euro-zone government will need to recover this by selling bonds, adding to its sovereign debt.

Just by maintaining existing government plans, an adverse impact on the economy increases the Euro-zone government's borrowings. Sovereign indebtedness for an Euro-zone country is not a simple choice; it is often beyond its control.

The Euro Bond-Age .. 

Recessions may be beyond the control of governments but a double-dip recession is generated by their collective stupidity and a denial collective responsibly. Ponzi financing (named after a fraudster “pyramid scheme" in the 1920s) occurs when a debtor must borrow just to pay interest, which means debt grows - typically in an unsustainable manner. A government that controls its own currency can never be in this Ponzi position. A euro-zone member can.

Euro-zone members, with trading deficit accounts, are therefore exposed to debt dynamics. The more they borrow, the more the markets demand higher interest rates to compensate for the increasing risk of insolvency.  The more the government attempts to solve its budget deficit, by cutting expenditure and raising its tax, the more it cuts it growth rate and its ability to repay its sovereign debt.  Moral hazard by the government comes into play here as the covering up off statistics will aid it to obtain lower interest rates its bond issues.

At some point it goes critical, as in Ireland and Greece at about bond rates of 7%, and the government spirals into a vicious circle of borrowing more and more to pay ever higher interest rates. The government finds itself locked out of the market.  This leads the Euro nation at the mercy of the intervention of the ECB and the Euro-zone credit nations for bail outs.
... the thought that monetary union may in time force the evolution of a deeper, more fundamentally political level of unification is probably not inconsistent with what the euro’s original architects had in mind. (Benjamin Friedman (1999))
 It is also an invitation for vultures (funds) to scour for opportunities.

The Blame Game

The blame is attached to insatiable, bureaucratic, corrupt governments. Greece is an easy target since it is  in fact corrupt and bureaucratic. (eg. How German Companies Bribed Their Way to Greek Deals - Der Spiegel).  Then it is attached to ethnics, morals and latitude. Germans blame Greeks, Greeks blame Germans and trust breaks down.

It is then argued that elected governments  should not be trusted as they may be guilty actually following the wishes of their electorate and break agreed (by who? nobody was allowed vote on) the fiscal rules. Their powers are therefore removed and administrated by un-elected super authority.

Elected officials its seems are corrupted by the voters. Unelected officials are not. European Commission President José Manuel Barroso spending a week on the yacht of the Greek shipping billionaire Spiro Latsis (a month before the approval of 10.3 million euro of Greek state aid for Latsis' shipping company). They just like swimming together.

The financial coup d'état is completed

with the creation of a euro-zone Ministry of Finance justifying its un-elected authority to oversee national budgets and other economic policies. Germany and France propose new intrusive powers over Eurozone budgets on the moral argument that gains should then to the virtuous and pain should to sinners.

The defunct electorate or sinners may tell them to go to hell.

......so there is just the small matter of pacifying the natives (when they stop blaming each other). Supply-side economics is then reduced to a form of crowd control encouraging the demand for new consumer products, such as this one from Taiwan

Mount Doom:

There is, however, one small problem. The ECB itself. To be effective, a central bank must act as a monopoly."It, just like Sauron, must control all." (FTalphavillebut...

The ECB not a real monopoly. It controls euro reserves but there are no common Euro bonds and individual Euro-zone central banks issue their own. Before the 2007-8 global crisis sovereign default risk did not seem to matter. Those with greater dependency on ECB liquidity, as in the case of Greece, found more of their bonds ending up at the ECB. The less bonds available for the market, the smaller the market and the more vulnerable it becomes. Holding a monopoly of them has little value, if no one wants your bonds.

The solution to this is a common euro bonds with collectively responsibility of sovereign debts. But, in order to be 'saved' by this, each member must not only surrender its sovereignty but also yield to a budgetary slavery that whips financial indiscipline.

There is a problem, the 'one ring of power' corrupts its owner. The present ring bearer (Germany) does not yet want to yield this power and agree to Eurobonds. The ECB, with the EFSF, is running out of time, and cannot forever support the bonds of Euro-zone states who are insolvent.

Austerity everywhere cannot last. Once one of the major Euro-zone economies, Spain or Italy, goes pass the point of no return (in its bond rates) everything falls. A bailout for one will trigger a chain reaction.
@Nouriel (Nouriel Roubini on twitter):  To rescue Italy, Spain & Belgium for 3 years you need at least a €2trillion rescue package. Hard to see how EZ & intl comm can mobilize that
@Nouriel It took 4 months to convince core EZ parliaments to approve modified 440bn EFSF. How long - 1year? - to have them vote a €1tr ESM, 2X original?

Pity the real world doesn't have a pause button.

1 comment:

  1. Ευχαριστώ πάρα πολύ. Good post. Twitter: @lukas_papademos