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[UPDATED] Merkel and Sarkozy's disastrous new 'economic government'

by Migeru Wed Aug 17th, 2011 at 04:17:31 AM EST

According to EUObserver.com: Merkel and Sarkozy plan 'true economic government'

Following the two-hour talks in Paris, President Nicolas Sarkozy and Chancellor Angela Merkel said they would work towards a common corporation tax by 2013 and to co-ordinate their annual national budgets.

More generally, they suggested eurozone leaders should meet twice a year and that all single currency countries should enact constitutional changes requiring balanced budgets.

...

The two leaders pledged to revive the idea of a financial transaction tax - a proposal that has been regularly mentioned in Brussels in recent months but has failed to get traction among member states.

...

The two measures that many analysts believe will help ease the eurozone's debt crisis - the issuance of eurobonds and increasing the size of the eurozone's €440 billion rescue fund - were not on the table, however.

Update [2011-8-18 4:21:25 by Migeru]: The letter from Markel and Sarkozy to van Rompuy has now been made public. here [PDF] is the copy hosted by ElPais.com


In other words:

  1. corporate tax harmonization
  2. replacing the Eurogroup with a summit of the heads of government (currently the Eurogroup is a meeting of finance ministers of Euro countries - therefore a subset of the Ecofin, the configuration of the European Council in which  the economy and finance ministers of the whole EU meet)
  3. constitutional balanced budget amendments
  4. a Tobin tax
  5. no Eurobonds
  6. no expansion of the EFSF

My assessment:
  1. and 4. are positive but won't solve the crisis nor prevent a new one from arising after the next business cycle;
  2. is neutral. It just reflects Merkel and Sarkozy's annoyance at Juncker and Merkel's disagreements with Schäuble. It may not be such a a good idea to take the finance ministers out of the Eurogroup, but who knows. In any case, despite the hype this is all there is to the "true economic government" being ushered in: the heads of government of the Euro will meet together rather than their finance ministers;
  3. is also neutral because, as currently configured, the EFSF is not part of the solution to the crisis;
  4. is neutral because Eurobonds are not the only way out of the sovereign insolvency crisis: there's also sovereign default;
  5. is an absolute disaster;

I'll just quote Wolfgang Münchau's FT column from 2 years ago: Berlin weaves a deficit hair-shirt for us all (21 June 2009)
A decision was taken recently in Berlin to introduce a balanced-budget law in the German constitution. It was a hugely important decision. It may not have received due attention outside Germany given the flood of other economic and financial news. From 2016, it will be illegal for the federal government to run a deficit of more than 0.35 per cent of gross domestic product. From 2020, the federal states will not be allowed to run any deficit at all. Unlike Europe's stability and growth pact, which was first circumvented, later softened and then ignored, this unilateral constitutional law will stick. I would expect that for the next 20 or 30 years, deficit reduction will be the first, second and third priority of German economic policy.

...

Either of those scenarios, even the positive one, is going to be hugely damaging to the eurozone. In the first case [Germany fails to return to pre-crisis levels of growth by 2011], the German economy would become a structural basket case, and would drag down the rest of Europe for a generation. In the second case [Germany returns to pre-crisis levels of growth by 2011], economic and political tensions inside the eurozone are going to become unbearable. Over the past 25 years, France has more or less followed Germany's lead at every turn, but I suspect this may be a turn too far. Deficit reduction has not been, nor will it be, a priority for Nicolas Sarkozy, the French president. On the contrary: he has listened to bad advice from French economists who told him that budget deficits are irrelevant, and that he should focus only on structural reforms. Budget deficits and debt levels matter in a monetary union. But a zero level of debt is neither necessary nor desirable.

...

What is the rationale for such a decision? It cannot be economic, for there is no rule in economics to suggest that zero is the correct level of debt, which is what a balanced budget would effectively imply in the very long run. The optimal debt-to-GDP ratio might be lower for Germany than for some other countries, but it surely is not zero.

(Google link)

For a discussion of why (or why not - a position also articulated there) balanced government budgets imply zero sovereign debt, and consequently monetary deflation, in the long term see this recent thread here on ET.

Display:
[Migeru's Crystal Ball of Doom™ Technology]

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 04:18:02 AM EST
[Drew's WHEEEEE™ Technology]

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Aug 17th, 2011 at 06:20:02 AM EST
[ Parent ]
[Drew's Crystal Ball of GAAAAAHHHHH™ Technology]

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 07:10:32 AM EST
[ Parent ]
The correct reaction would be tepid applause for 1,2,4 and 6, and scorn and fury on 3 and 5.

It shouldn't be that hard to present a compelling historically-based narrative to sink the balanced-budget howler. Two or three examples from history.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Wed Aug 17th, 2011 at 04:30:45 AM EST
You may have missed my latest diary, which dispelled any illusion that the French Socialists know what they're doing:
The French Socialist quickly fell in the trap. David Webb Show: FRENCH SOCIALISTS HARDEN DEFICIT PLEDGE
"We have to balance the public accounts without delay"and cut the deficit to 3 percent of gross domestic product by 2013, Francois Hollande, the leading contender to become the Socialist candidate for president, said in an interview with today's Le Monde newspaper. "Debt is the enemy of the left and of France."

Martine Aubry, who's also seeking her party's nomination, echoed that view. "It's a question of sovereignty," she said today, also promising to meet the 3 percent goal. "Nothing would be worse than becoming president in 2012 and being attacked by financial markets," she said on Europe 1 radio from Avignon, France.

It's poignant. It's almost as if she's doing it on purpose, but sadly she probably doesn't even realise what that sounds like to a bond trader.
The remarks suggest a shift from April, when the Socialist Party laid out its campaign platform for the 2012 election and avoided a firm commitment on the deficit. Since then, concern about the ability of euro-area nations to repay their debts has increased, with borrowing costs surging last week for Italy, the region's third-largest economy.
This is all that the Markets need to hear - France's politicians have explicitly and publicly made themselves a target. At that point, the precise details of when France would be attacked, or the excuse or rumour that would trigger the attack, are not all that important. In fact, what's interesting is that France may well be an easier target than, say, Italy or Spain, because all the attack needs to achieve to succeed is a downgrade of France from its AAA rating, not a full-on default or the need to tap the EFSF, which would be the much harder goal of a market attack on Italy or Spain.


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 04:35:15 AM EST
[ Parent ]
Rencontre Sarkozy - Merkel : Sarkozy aligne la France sur les conservateurs allemands contre la solidarité européenne | PS - Parti socialiste Merkel Meets Sarkozy: Sarkozy aligns France with the German conservatives against European solidarity | PS - Socialist Party
Face à la crise historique que traverse la zone euro, la rencontre entre Nicolas Sarkozy et Angela Merkel marque un nouveau sommet d'impuissance.Faced with the historic crisis which the euro area is traversing, the meeting between Nicolas Sarkozy and Angela Merkel marks a new level of helplessness.
Incapables de proposer une réponse commune ambitieuse contre la spéculation et la récession, les conservateurs français et allemands ne savent coordonner que l'austérité qu'ils imposent aux peuples d'Europe. Nicolas Sarkozy et Angela Merkel forment désormais le « couple de la croissance zéro » pour la France et l'Allemagne.Unable to propose an ambitious joint response against speculation and recession, the Conservatives do not know French and German co-ordinate the restraint they impose on the peoples of Europe. Nicolas Sarkozy and Angela Merkel are now "couple of zero growth" for France and Germany.
Le soi-disant pacte de compétitivité Sarkozy-Merkel n'est en réalité qu'un pacte d'austérité.The so-called Pact of competitiveness Sarkozy-Merkel is really only a pact of restraint.
Le président français et la chancelière allemande n'ont fait que des annonces vagues concernant la taxe sur les transactions financières et le gouvernement économique européen, sans aucune mesure précise pour en faire des réalités.The French president and German Chancellor have only vague announcements about the tax on financial transactions and the European economic government, without any specific measures to make it a reality.
Cette rencontre est en fait un recul pour la France et un revers pour Nicolas Sarkozy. Le plus inquiétant c'est que le président de la République en est désormais réduit à aligner la France sur les conservateurs allemands, qui refusent toute véritable solidarité européenne. Nicolas Sarkozy a dû ainsi abandonner toute idée d'euro-obligations et de renforcement du Fonds européen de stabilité financière, et s'est aligné sur l'exigence d'une soi-disant « règle d'or » imposée à toute l'Europe.This meeting is actually a setback for France and a blow to Nicolas Sarkozy. Most disturbing is that the president is now reduced to align France on the German conservatives, who refuse any real European solidarity. Nicolas Sarkozy had well abandon any idea of ​​Eurobonds and the strengthening of the European financial stability, and aligned himself with the requirement of a so-called "golden rule" imposed on all of Europe.


It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Wed Aug 17th, 2011 at 05:35:16 AM EST
[ Parent ]
on the disastrous endorsement by Hollande and Aubry of the principle of budget balancing :

they have a rather better understanding of what's going on than it would appear. They don't want to take the blame for the Euro disaster; and any other position would enable Sarkozy to play blame games.

This doesn't prejudge actual policy once one or the other actually takes power. And they now have a golden opportunity to promote Eurobonds, which Sarko and Merkle will eventually be obliged to endorse.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Wed Aug 17th, 2011 at 05:39:27 AM EST
[ Parent ]
Um, the entire goddamn 20th century?

They're not even talking about cycle-averaged deficits, which would still be insane but at least somewhat understandable given the cargo cult that passes for economic wisdom these days. This is full frontal Hooverism.

It's like watching people repeal the law of gravity... and then amending the building code to prohibit any doors below the third floor, because they mar the street level aesthetics.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 17th, 2011 at 04:40:10 AM EST
[ Parent ]
Oh, come on. Your reading of the economic history of the 20th century is a case of happenstance being confused with causality.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 04:42:51 AM EST
[ Parent ]
Did anyone here comment on the Aubry Op-Ed in Le Monde a few days ago? It seemed fairly sensible to me.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Wed Aug 17th, 2011 at 10:39:15 AM EST
[ Parent ]
It may be sensible as we want, but it got zero play in the news cycle on the teevee so it just didn't matter (remember the French media in 2007?).
The only "important" event was our president single-handedly saving the Eurozone (with a little help from Frau Merkel): a "serious" event by and for "serious" people (and a substitute for action as kindly reminded by Keynes).
by Bernard on Wed Aug 17th, 2011 at 04:28:20 PM EST
[ Parent ]
"and a substitute for action as kindly reminded by Keynes"

I think you meant Galbraith -in a quote that seems to be trotted out an awful lot these days (or when talking about Sarkozy).

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Wed Aug 17th, 2011 at 05:16:57 PM EST
[ Parent ]
Galbraith père, indeed -- my mistake. And speaking of Sarko, TBG sure got his number:

ThatBritGuy:

Don't forget Sarko is the runty little prince of press release politics - big on the big scheme announcements, reliably useless on the practical follow-through.
by Bernard on Thu Aug 18th, 2011 at 03:52:35 PM EST
[ Parent ]
Yanis Varoufakis: Why Eurobonds are Essential and Fiscal Union a Folly (Or how to escape the equally untenable positions of German economists Thomas Straubhaar and Otmar Issing)
The context: In the middle of a mighty bushfire the fire brigade just held a summit between its chief fire fighters (Mrs Merkel and Mr Sarkozy) to discuss the importance of biodiversity, leaving the flames to destroy the forest. Italy and Spain are collapsing. The EFSF, the only institution that was set up to deal with the fall of member-states, is both too feeble and too toxic, while the ECB is, knowingly, fighting a losing battle in the secondary bond markets. Eurobonds are the only short term brake that may slow down, indeed reverse, these developments. And yet Mrs Merkel and Mr Sarkozy were the only Europeans yesterday that did not discuss... eurobonds. Elsewhere, even in Germany, eurobonds are appearing as a fait accomplis. The trouble is, they are erroneously identified with fiscal union.

The argument here: Eurobonds are the only impediment to the euro's unravelling. But a transfer or a fiscal union (that most Germans fear) is neither necessary nor desirable. The way forward must involve eurobonds issued and guaranteed exclusively by the ECB - as proposed by the Modest Proposal [PDF]

...

Summing up

The debate in Germany, and of course elsewhere, has left Europe's leadership behind. However, the polarisation between advocates and opponents of fiscal union is unhelpful. Eurozone consolidation, debt homogenisation, an end of the banking crisis and a pan-European New Deal can all be effected without loss of national autonomy, without forfeiting the truly precious Bostonian Principle (of No Taxation without Representation) and without having the surplus countries guarantee the debt of the deficit nations. The key to achieving this golden rule are ECB-issued eurobonds guaranteed by no one else than the ECB itself.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 04:39:07 AM EST
The thing I'd like to know a detailed description of how the tranche transfer of debt would work in practice. Who would do what, ad in what order, and so on. The mechanics of the transfer process itself.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Fri Aug 19th, 2011 at 11:33:14 AM EST
[ Parent ]
You can find a description of the process here I have to admit it's still unsatisfactory. I have submitted the following question:
Yanis, I'm afraid I have to reiterate Penny's question on the Tranche Transfer of bonds to the ECB. Among other things, you didn't answer how it is that the transferred bonds are no longer trader in the secondary market.

Following your example, take an Italian bond maturing on 3/2013. This is currently a liability of the Italian treasury and an asset of some investor or other.

What you propose is that the ECB take the bond on its books as a liability in exchange for an Italian Treasury commitment to repay any balance on its debit account with the ECB, a balance which will accrue as the ECB services the bond. The bond remains an asset of the investor but now the ECB is an intermediary between the Italian Treasury and the bond investor.

So, the first question is, given that when the bond is transferred to the ECB it remains an asset of the original bondholder, and that there may be other financial intermediaries involved (such as a bond broker holding and servicing the bond for a non-financial-institution investor), what prevents the bond from being traded in the secondary market? And, if the bond is no longer tradeable in the secondary market, it becomes an illiquid asset which causes a number of problems.

The second question is, how does the debit account of the Italian Treasury with the ECB, to which the ECB would debit the bond service payments giving Italy time to pay back, not constitute an "overdraft facility" or at least be construed as a "credit facility" in violation of Article 123 of the Treaty on the Functioning of the European Union?

Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as "national central banks") in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.
Is it because a "credit facility" or "overdraft" implies that the Italian Treasury (say) would have access to funds on demand whereas a debit account is neither a demand account with an overdraft nor an available credit line that Italy cannot "draw on"? Is the fact that the ECB simply announces to Italy that it now ows this or that much sufficient to circumvent Article 123? Will this semantic nuance be approved by the German Constitutional Court?

Your comment is awaiting moderation.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Sep 2nd, 2011 at 06:23:39 AM EST
[ Parent ]
Yanisv:
Great questions. To make them justice, I shall devote my next full post to them. Within the next day or so.


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sat Sep 3rd, 2011 at 03:38:11 AM EST
[ Parent ]
The answer, such as it is: Eurobonds: Not a question of `whether' but one of `who will issue them' and `who will back them'
Two questions on our Modest Proposal's eurobond mechanism (see our Policy 1)

Here we try to answer two excellent questions put to us by reader MigeruET  regarding the mechanics of the transfer of the Maastricht-compliant debt to the ECB. Readers not familiar with the Modest Proposal and related arguments are advised to read up on them before proceeding.

Question 1: Given that when a bond is transferred to the ECB, as part of the transfer of the Maastricht-compliant debt to the ECB, it remains an asset of the original bondholder, and that there may be other financial intermediaries involved (such as a bond broker holding and servicing the bond for a non-financial-institution investor), what prevents the bond from being traded in the secondary market? And, if the bond is no longer tradeable in the secondary market, does it not become an illiquid asset which causes a number of problems?

Our response: The asset remains that of the original bondholder but, according to our Modest Proposal, is now is in an untraded ECB debit account - unlike the Breugel proposal for a European debt agency. The point of it becoming an illiquid asset is to address and avoid the central problem of market volatility which threatens defaults and risk for both governments and bondholders. This thereby protects bondholders from a financial meltdown against which they cannot individually protect themselves. There is mutual advantage as the bond transfer to the ECB (that is financed by means of ECB-issued eurobonds) would make the original bondholder more secure.

Question 2: How does the debit account of, say, the Italian Treasury with the ECB, to which the ECB would debit the bond service payments giving Italy time to pay back, not constitute an "overdraft facility" or at least be construed as a "credit facility" in violation of Article 123 of the Treaty on the Functioning of the European Union?

Our Response: The ECB would not be offering either an overdraft facility or net credit on the debit account. This is easy to understand once one grasps the difference between a debit and a credit card. Just like an individual cannot overdraw on a debit card, under our Modest Proposal member-states cannot overdraw on their debit account with the ECB. Note also the relevance of the distinction between stocks and flows. We are not proposing overdraft facilities with the European Central Bank (for this would be a `flow') but a transfer of debt to it (a `stock').  Nor are we proposing "the purchase directly... by the European Central Bank or national central banks of debt instruments". Our Modest Proposal merely recommends a debt conversion without any debt purchase. This policy was not anticipated by the Maastricht or other Treaties but, by the same token, it is not constrained by Article 123 of the Lisbon Treaty.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 5th, 2011 at 02:20:17 AM EST
[ Parent ]
To which I reply:
Yanis, thank you for answering my questions.

Regarding the first issue, that bonds would become untradeable after the tranche transfer to the ECB, it seems to me that this is a fundamental restructuring (change of contractual conditions) of the debt. Bonds are tradeable because they are 'bearer securities' that are paid to the holder. They would be replaced with 'registered securities' where the payments would be made to the bondholders that comes forward at the time of the tranche transfer. I cannot see how the tranche transfer doesn't constitute a default or restructuring from the point of view of the bondholders, which doesn't mean I think it's a bad idea. Unlike other restructurings, this would appear to improve, not deteriorate, the value of the restructured bond. This is because the bond would go from being priced according to the issuer's (say, Italy, per your example) ability to pay to being priced according to the ECB's ability to pay. In other words, the 'risk premium' would be greatly reduced. Also, on the balance sheets of the bondholders, the bonds would go from mark-to-market accounting to hold-to-maturity accounting, so not only would the balance sheet of the bondholders be repaired but their asset-value volatility would be reduced. The only problem would be the loss of the fetishistic feature of liquidity, on which Keynes famously said

The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only. But a little consideration of this expedient brings us up against a dilemma, and shows us how the liquidity of investment markets often facilitates, though it sometimes impedes, the course of new investment. For the fact that each individual investor flatters himself that his commitment is 'liquid' (though this cannot be true of all investors collectively) callms his nerves  and makes him much more willing to run a risk. If individual purchases of investments were rendered illiquid, this might seriously impede new investment, so long as alternative ways in which to hold his savings are available to the individual. This is the dilemma. So long as it is open to the individual to employ his wealth in hoarding or lending money, the alternative of purchasing actual capital assets cannot be rendered sufficiently attractive (especially to the man who does not manage the capital assets and know very little about them), except by organising markets wherein these assets can be easily realised for money.
Illiquid assets are much less valuable to 'investors' than liquid assets, even if the book values are larger. Another way to state this is that rendering the bonds illiquid makes the term structure of the 'investors' assets more rigid. So the ECB might end up having to accept these bonds at the discount window anyway.

In relation with this tranche transfer you have argued here that the ECB would be perceived as highly solvent by the market:

The ECB itself. Note that the eurobond issue, as described above (Policy 1 of our modest Proposal) is revenue neutral: In the long term, it will be costing the ECB nothing. Zilch. You may, of course, ask how the ECB (and the markets) can be so sure that Italy and the rest will honour their long term debts to the ECB (the equivalent of how Jack and Jill will make their payments to the bank after their parents have taken out a new loan on their behalf). Simple: The ECB has a great deal of clout over member states, courtesy of the complete dependence of the member states' banks on the ECB for liquidity. Moreover, the member state debt to the ECB could be given super-seniority status, just like that of the IMF's. Lastly, the market will be factoring in the ECB's capacity to monetise its debts, if it comes to that. The ECB will never have to do this, under our proposal. But knowing that it can adds a powerful boost to the ECB's credit-worthiness.
You also argue that the tranche transfer does not constitute a fiscal transfer. I think this brings us to the issue of central bank solvency and capitalization, as well as the limits of the ECB's 'monetization' ability, on which I have seen nothing more readable than Willem Buiter's Can central banks go broke?. There he points out that the ECB is actually a tiny bank. In addition, the ECB is capitalised by the EU (not Eurozone) member states in proportion to their GDP because the ECB is owned by the 27 National Central Banks of the EU, even though only 17 NCBs are in the Eurosystem. At the end of 2010 the ECB asked the EU member states to double its capital from 5 to 10 billion euros. The Maastricht-compliant 60% of GDP would amount to about €6 trillion for the whole of the Eurozone, so unless we're comfortable with a central bank with a leverage ratio of 600, the tranche transfer would require massive recapitalization. And then I would envisage not only loud complaints about fiscal union through the back door. It's quite possible that 'the market' would not give the ECB the solvency rating you envisage in the Modest Proposal.

Together with the second issue, the semantic distinction between a debit account and a credit facility, I would expect legal challenges to the whole approach, at the very least before the German Constitutional Court. After all, the German President recently made big waves with his public statement that in his opinion the ECB is violating the spirit if not the letter of the Maastricht Treaty with its secondary market bond purchases. If the tranche transfer were to pass, it would elicit even stronger complaints of violation of the spirit if not the letter of the treaties. You are of course aware of this as, in the declaration signed by Amato, Verhofstadt and others, you replaced the ECB with the EFSF:

Readers familiar with the Modest Proposal will have noticed a difference between this suggestion and the Modest Proposal: Whereas in the latter we recommend that the ECB handles the tranche transfer and issues the Eurobonds, in this Declaration, in an attempt not to ruffle the feathers of those who do not want to be seen to be challenging the independence/current role of the ECB, we offer as alternatives to the ECB either the EFSF or the EIB group (which includes the EIB and the European Investment Fund). The point here is to the principle of the tranche transfer. Once that is established, we can debate whether perhaps it is better to give that role to the ECB. In the context of the present Declaration we judged that this was appropriate to allude to different existing institutions as the agency that is assigned the central role of managing the tranche transfer so as to drum up the widest possible level of support.
Yours is a valiant proposal, but I am afraid the chances of it becoming policy are nil.

Your comment is awaiting moderation.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Sep 5th, 2011 at 03:20:48 PM EST
[ Parent ]
With the caveat that I probably have no idea what I'm talking about I find Buiter's case for the need to recapitalise CBs unpersuasive.

On page 7 he writes:

When the central bank increases the growth rate of
the nominal base money stock, it raises the rate of inflation,
at the very least in the medium and long term. To
a reasonable first approximation, the long-run real
interest rate, r, and the long-run growth rate of real
GDP, g, are independent of the rate of growth of the
stock of base money, and thus of the rate of inflation.

Now one of the key aspect of our financial system the MMTers keep harping about is that the CB accommodates private credit creation and has no direct control over the rate of growth of the monetary base. Conversely excessive reserves do not cause bank lending. So how can he be sure that the rate of growth of base money will change? And that that will lead to inflation?

Von überall könnte das Volk, Urbrut alles Undemokratischen, Zelle des Terrors, über die gewählten Hüter von Wachstum und Wohlstand® kommen. - flatter

by generic on Thu Sep 8th, 2011 at 01:27:33 PM EST
[ Parent ]
Because he is talking about the case where the CB moves beyond its role in a normally functioning reserve banking system and takes on a fiscal policy function. Performing what operationally amounts to fiscal policy operations does inevitably alter the stock of high-powered money, and it is possible to create inflation that way. Though if you do it with the good sense that God gave a mildly concussed kitten, inflation will not become a problem until long after you have stabilised the economy enough that you can stop doing the Treasury's job.

Unfortunately, I would not bet money, let alone my industrial plant, on our current crop of central banksters being able to outperform a concussed kitten.

What is more questionable is the assumption that the real rate of growth is independent of inflation, though I suppose that to sufficiently low order it might be.

The bit about long-run real interest rates being independent of inflation is simply nonsense. The central can always set any non-negative risk-free nominal interest rate, which means that the risk-free real interest rate is very much a function of inflation and CB policy.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Sep 8th, 2011 at 09:39:17 PM EST
[ Parent ]
I just have a difficult time imagining a scenario where the CB has enough assets going bust on its balance sheet to force it to create so much base money as to pose an inflation risk without a simultaneous collapse in bank lending.

At least non that don't involve large scale criminality at the highest levels.

Oh

Von überall könnte das Volk, Urbrut alles Undemokratischen, Zelle des Terrors, über die gewählten Hüter von Wachstum und Wohlstand® kommen. - flatter

by generic on Thu Sep 8th, 2011 at 10:18:01 PM EST
[ Parent ]
A domino of sovereign defaults in nations whose bonds the CB has been buying en masse on the secondary market to bail-out private investors... But that surely can't happen here.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Sep 12th, 2011 at 05:38:09 AM EST
[ Parent ]
That's not enough to pose an inflation risk in and of itself.

It's still criminal, because what should have been done is let the current bondholders eat shitpile and then rediscount the new, pristine bonds instead. But not all criminality is inflationary.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 05:54:24 PM EST
[ Parent ]
This proposal is just another step to push already existing German laws into the eurozone?

I've not heard yet details on what 'a balanced budget' practically means for the euro nations, or what level of defcit would be acceptable for them. My first guess would be a tighter adherence to the Maastricht treaty. It makes common sense that Merkel will push for the German example, but how will all the other EU nations, including France, ever going to accept a zero level of debt?

Also, doesn't a balanced government budget enshrined in national law (but overseen by the EU) invite for more creative bookkeeping, similar to what happened in Greece?

by Nomad on Wed Aug 17th, 2011 at 04:45:45 AM EST
It makes common sense that Merkel will push for the German example, but how will all the other EU nations, including France, ever going to accept a zero level of debt?

By not understanding the consequences of what they're agreeing.

"Balanced budget constitutional amendment" is a great soundbite. The French Presidential election may even revolve around it, with the argument that it's the only way to preserve France's AAA rating. Some fringe economic commentators will protest loudly, but they will be ignored. Then a couple of decades from now everyone will discover to their surprise that the economy is broken.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 04:49:31 AM EST
[ Parent ]
Sarkozy's camp is certainly pushing to make "the Golden Rule" as they call it, the defining fight with the Socialists - who, to their credit, are against it, and are accordingly festooned with "tax and spend" and "taxes will go up with a PS president" ribbons.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Aug 17th, 2011 at 05:25:07 AM EST
[ Parent ]
Then a couple of decades from now...

Optimist!  Within a couple of years, if not a couple of months, the whole eurozone banking situation is likely to blow up. Liquidity is being withdrawn as we post.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Aug 17th, 2011 at 10:05:14 AM EST
[ Parent ]
Not that there's a European banking crisis just yet. We can see how close we are coming, though. As US money market funds cut back on their European exposures, even the best European banks have to fill the gap by borrowing euros short term from the ECB, and swapping those into dollars. Last week the cost of that process for large banks reached between 80 and 85 basis points. Measuring that against the 100 basis point penalty rate for the Federal Reserve dollar swap facility with the ECB, the system was about 15 or 20 one hundredths of 1 per cent away from a crisis.

All Ur Bankz R belong 2 US

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Wed Aug 17th, 2011 at 12:16:19 PM EST
[ Parent ]
A "balanced budget amendment" is drinking the koolaid. In the original death-cult sense of the term.

It will be broken - that is a mathematical certainty. And then you'll have a constitutional crisis on top of an economic one.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 17th, 2011 at 05:16:27 AM EST
[ Parent ]
A constitutional crisis on top of an economic crisis is precisely what's going on at the EU level right now with the breach of the Growth and Stability Pact and the attempt to reinforce it.

The chosen solution is to harden the rule, remove decision-making power to the EU level where the balanced budget constitutional requirement already exists, and force the lower levels of decision-making to adopt similar constitutional shackles.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 05:21:05 AM EST
[ Parent ]
A constitutional crisis at the policy level that has tanks and fighter-bombers and riot police is a lot scarier than a constitutional crisis at a level that does not.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 17th, 2011 at 05:50:39 AM EST
[ Parent ]
Is the suggestion even slightly viable constitutionally?

Won't it depend on how individual signatories have wrapped the EU constitution inside their own local constitutions?

Anyway - at this point I'm sad to say that I'm pleased the UK didn't join the Euro. We have plenty of hair shirt issues of our own, but not even George 'Psycho' Osborne is pushing a return to pre-Keynesian fiscal insanity.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Aug 17th, 2011 at 06:52:42 AM EST
[ Parent ]
Is the suggestion even slightly viable constitutionally?

Assuming that your constitution contains provisions for amending said constitution, yes.

What makes this proposal so very, very scary is that they're talking about bullying and browbeating The Serious People of every EMU member into amending their own country's constitution with a death pact clause.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 17th, 2011 at 07:02:32 AM EST
[ Parent ]
Hmmm. If unanimity of consent is required, I don't think there's any chance at all of that plan working.

This looks to me more like electioneering by Merkozy, and perhaps a bit of a trial balloon.

I have my doubts they really believe they can make it stick when there are so many Eurozone countries with serious anti-EU sentiment.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Aug 17th, 2011 at 07:06:14 AM EST
[ Parent ]
I don't see why unanimity should be required. They can corrupt the EMU members one by one.

Germany already has this cyanide pill in its constitution. If Merkozy can browbeat the PS into acceding to a French version, then together they have a viable power bloc. Remember, they're going to be bullying individual member states, not impose new EU policies, so resistance by a single member will not in itself suffice to prevent this abomination from going ahead everywhere else. And given the total absence of any viable opposition anywhere...

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 17th, 2011 at 07:12:02 AM EST
[ Parent ]
And "the Markets" and the ECB can always do their tried and tested one-two routine culminating with an ECB threat to crash the national banking system of the member state in question.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 07:13:37 AM EST
[ Parent ]
They can't corrupt the EMU members one by one because it will take too long - Sarko may not be around next year - and there are local constitutional issues which would mean that unwilling participants can always stall and say 'I'll get back to you'.

Then they can wait until Sarkozy gets his pack of directorships. And by then, Merkel may be too busy dealing with a German economic pancake landing to find the time.

It still looks more like a negotiating position to me. It's not impossible they can make it stick, but it's really not going to be easy. And neither of them seems like the kind of pol who has the relentless determination it's going to need.

Don't forget Sarko is the runty little prince of press release politics - big on the big scheme announcements, reliably useless on the practical follow-through.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Aug 17th, 2011 at 08:30:25 AM EST
[ Parent ]
But the Germans in recent past have run federal deficits. What are they actually saying in this proposal?
by asdf on Wed Aug 17th, 2011 at 03:25:40 PM EST
[ Parent ]
They are saying rules used to apply to everyone except France and Germany, but no longer.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 04:46:12 PM EST
[ Parent ]
Particularly when they are not even putting eurobonds on the table as a "carrot" - just a six-monthly council chaired by Hermann van Rompuy...
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Aug 17th, 2011 at 08:08:48 AM EST
[ Parent ]
JakeS:

Assuming that your constitution contains provisions for amending said constitution, yes.

But that could take a while. I do not know about other constitutions, but Swedens's could not be changed earlier then to christmas 2014.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Wed Aug 17th, 2011 at 07:52:00 AM EST
[ Parent ]
Changing the Danish constitution requires a majority in Parliament (or perhaps a 2/3 supermajority, I don't recall precisely); followed by a ratification in a referendum by a 2/3 supermajority of the cast votes, with 40 % of the eligible votes being quorum; followed by a ratification by a new parliament.

So it takes at least one general election and one referendum. Hypothetically, you could do the whole thing in the space of two months... but that's only if you have a "national consensus" type situation.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 17th, 2011 at 08:01:58 AM EST
[ Parent ]
You don't need a general election to assemble a supermajority in parliament.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 09:51:10 AM EST
[ Parent ]
No, but you do need a general election to get a new parliament, which is a constitutional requirement. For precisely that reason.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 17th, 2011 at 10:44:21 AM EST
[ Parent ]
I missed the followed by a ratification by a new parliament bit at the end.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 10:49:41 AM EST
[ Parent ]
In Sweden it is majority of parliament, election, then majority of parliament. If a motion to hold a referendum is presented in the first parliament it takes 2/3 in the first parliament to stop it or a referendum with veto-powers (only a no is binding) would be held at the same time as the election.

In real terms the election of 2014 is the shortest time, but theoretically I guess an extraordinary election would do in Sweden (I am not certain). If an extraordinary election does the trick, then an election can be called three months after the decision, but it still has to pass nine months between the decisions, unless you can muster 5/6 of the first parliament to say otherwise. So with 5/6 in the first parliament and majority in the second, the constitution can be changed in 3 months. Probably.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Wed Aug 17th, 2011 at 02:50:08 PM EST
[ Parent ]
But Sweden is not in the Euro, so: pannkaka!

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 04:45:02 PM EST
[ Parent ]
But a signatory to the EMU. Just constantly failing to qualify for the eurozone (to volatile currency).

Which is irrelevant if you go country by country, then of course only the eurozone members is needed.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Thu Aug 18th, 2011 at 06:54:51 AM EST
[ Parent ]
The Commission statement calls in a debt brake.

Do we know the detail of what's being proposed yet?

Anyhow, there's no fucking way that any of this gets into the Irish Constitution. Not a chance - unless Merkel wants to write off all our public debt in exchange. Maybe then. Any such change to treaties that wasn't approved in a referendum would probably fall in the courts, and there's no way it gets past a referendum. So it goes into national law, which can be changed in a very small number of days in an emergency.

by Colman (colman at eurotrib.com) on Wed Aug 17th, 2011 at 05:21:37 AM EST
[ Parent ]
Also, doesn't a balanced government budget enshrined in national law (but overseen by the EU) invite for more creative bookkeeping, similar to what happened in Greece?

Yes.

(This has been another edition of Aimple Answers to Simple Questions.)

I've told you guys about Colorado, right?

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Aug 17th, 2011 at 06:18:01 AM EST
[ Parent ]
Pray, tell!

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 06:19:09 AM EST
[ Parent ]
Pretty sure it was Colorado.  Anyway, as you know, most states have balanced budget amendments.  They can issue bonds to finance highways and housing projects and other big investments, but they're not supposed to borrow to meet non-investment expenditures.

So one year Census was gathering CO's state finance data, and they reported to us that they had no debt.  We were, of course, amused by this.

Turned out Colorado was setting up these "finance agency" things that issued debt for the state, but that were "private".  Nice little way of getting around the laws.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Aug 17th, 2011 at 09:09:52 AM EST
[ Parent ]
This proposal is just another step to push already existing German laws into the eurozone?

It's a way to appear to be dealing with the situation instead of dealing with the situation.

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Wed Aug 17th, 2011 at 01:20:35 PM EST
[ Parent ]
"Such meetings are more than a substitute for action. They are widely regarded as action."

- J.K. Galbraith, The Great Crash 1929

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 17th, 2011 at 01:26:20 PM EST
[ Parent ]
By the way, Spain already has a Budget Stability Act 18/2001 of 21 December. I'm sure most other EU countries must have them, too.

Spain also has an article in its constitution mandating that "the public authorities shall carry out policies conducive to full employment".

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 04:55:38 AM EST
Which just goes to show that what's written in constitutions is bollocks. It is the current configuration of power (and that includes manufactured consent and the CW) that decides what will apply and what will not.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Aug 17th, 2011 at 05:31:53 AM EST
[ Parent ]
Well, sort of. Until the courts actually make a decision that closes down avenues of action. I'm sure the employment provision is soft and cuddly and aspirational and hard to get the courts to act on. I'm betting the balanced budget one won't be.
by Colman (colman at eurotrib.com) on Wed Aug 17th, 2011 at 05:33:09 AM EST
[ Parent ]
I was thinking of trying to get a Nobel Prize economist to write a paper arguing that balanced budgets are inimical to full employment and using it to launch a challenge in Spain's constitutional court.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 05:34:26 AM EST
[ Parent ]
Ah, but Krugman is on a hiking holiday ;-)

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
by Cyrille (cyrillev domain yahoo.fr) on Wed Aug 17th, 2011 at 05:36:19 AM EST
[ Parent ]
I'm thinking Stiglitz...

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 05:42:25 AM EST
[ Parent ]
I was initially going to write "that only leaves Stiglitz then" but dropped it as kind of too obvious (and therefore best left suggested).

It was was always going to be one or the other (both would agree to your point) -though I guess I would have even greater difficulties contacting Stiglitz, but maybe you have your own channels.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Wed Aug 17th, 2011 at 05:19:37 PM EST
[ Parent ]
Did you hear Stiglitz made a surprise appearance and spoke in the middle of a 15M gathering in Madrid recently?

ElPais.com in English: 15-M forum receives a Nobel speech Economist Joseph Stiglitz attends open meeting of activists in Madrid's Retiro park (26/07/2011)

These economists, who form part of the economic commission set up by the activists camped in Madrid's Puerta del Sol during the fledgling days of the 15-M movement, suggested Stiglitz might like to participate in the forum. The free-market skeptic and author of Globalization and its Discontents and Whither Socialism? delivered his discourse with the aid of a translator.

"The economic crisis has demonstrated the problems that capitalism is currently suffering, with markets that are run without regulation. The experience of the last three decades shows us that there is a necessity for states to recover an important role and to regulate the markets," Stiglitz said. "There are great necessities in the world that are not being covered - not just in Europe but in the USA as well. Seven million Americans have lost their homes because of the crisis and the situation is going to get worse because policies of austerity and tax reductions are being applied."

The economist said that the USA should take advantage of low interest rates to invest in education, technology and infrastructure, which bring significant returns. Stiglitz signed off with a message of support for the 15-M movement. "You cannot change bad ideas with the absence of ideas, but by seeking good ideas. It will be a tough fight because these bad ideas are well established in the dominant political and economic discourse."



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 05:24:28 PM EST
[ Parent ]
Except, as Jake says, it is bound to be broken, and will be. So the courts will do what?
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Aug 17th, 2011 at 05:38:47 AM EST
[ Parent ]
The courts don't have to act sensibly here: they could order the government to stop spending.
by Colman (colman at eurotrib.com) on Wed Aug 17th, 2011 at 05:44:11 AM EST
[ Parent ]
I'd argue that it is more likely the courts would act sensibly. Apart from anything else, they depend financially on the state, too.

But, supposing they declared further spending illegal, the government could argue its case before the country and go ahead. Can the courts order the army out?

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Aug 17th, 2011 at 06:02:27 AM EST
[ Parent ]
Are you willing to bet your constitution that they can't?

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 17th, 2011 at 06:04:03 AM EST
[ Parent ]
Do you know of courts that possess the constitutional power to order the army out?
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Aug 17th, 2011 at 06:20:39 AM EST
[ Parent ]
No, but if the courts say the government is in violation of the constitution, the army might not feel constrained to obey government commands to stay quartered.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 06:23:50 AM EST
[ Parent ]
And let's not forget there are a couple of places where the military still remember running the place ... the idea is pretty laughable in Ireland (what tanks?), maybe not so much in Greece or Spain.
by Colman (colman at eurotrib.com) on Wed Aug 17th, 2011 at 06:26:11 AM EST
[ Parent ]
That is true.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Aug 17th, 2011 at 06:38:22 AM EST
[ Parent ]
Remember how the recent wildcat air traffic control strike in Spain was resolved by mobilizing the striking air traffic controllers under military command? It turns out the Spanish military was more mindful of the legal niceties than the cabinet, at least according to the account by ElPais.com: "¡No entienden nada, Fomento ya no existe, están hablando con Defensa!" (07/12/2010)
En ese tránsito, cuando las televisiones aullaban protestas y los ciudadanos aún soñaban con apañar el largo fin de semana, surgió el primer gran debate entre los miembros del gabinete de crisis. Algún ministro defendía a esa hora, con el respaldo del abogado del Estado, que en cuanto el JEMA tomara el mando del espacio aéreo de España los controladores civiles dependerían orgánicamente de él. Es decir, que el general José Jiménez o los comandantes del aire que él nombrase para dirigir cada torre de control o cada centro de mando, podrían ordenar a los controladores civiles que se sentasen a trabajar ya. El propio José Jiménez vio claro el problema. Una cosa era tener el mando genérico y otra obligar a ejecutar instrucciones a un civil. La discusión no duró mucho. La asistencia del general José Luis Poyato Ariza, asesor jurídico de la Defensa, ilustró a todos. No podía ser. Hacía falta otro decreto para instaurar la militarización y que los controladores pasasen de hecho a ser personal militar. Fue lo que se aprobó en el nuevo Consejo de Ministros convocado para las nueve de la mañana del sábado. Desde las nueve de la noche y hasta las dos de la madrugada, cuando Rubalcaba volvió a aparecer en las pantallas, ya más ojeroso y aún más firme, los ministros y demás asesores compartieron bocadillos y bebidas. Intercambiaron despachos y salas.
You don't get it! There's no more [Ministry of] Public Works, you're talking with Defence!
In the interim, as the TV stations screamed bloody murder and citizens still dreamed of repairing their long weekend, the first big debate broke out amonf the members of the crisis cabinet. Some minister argued at that time, with the support of the State Counsel, that as soon as the Air Force Chief of Staff took command of the airspace the civilian controllers would report to him. That is, that General José Jiménez or the commanders he nominated to direct each control tower or command centre could force the civilian controllers to sit down to work already. José Jiménez himself saw the problem. It's one thing to have generic command, and another to force a civilian to carry out orders. The discussion wasn't long. The help of general José Luis Poyato Ariza, legal advisor to Defence, illustrated it for everyone. It couldn't be. Another decree was needed to effect militarization and that the controllers became in fact military personnel. That's what the Council of Ministers spproved at 9am on Saturday morning. From 9pm to 2am, when [interior minister] Rubalcaba appeared on the screens again, with deeper bags under his eyes but more firm, ministers and advisoors shared sandwiches and drinks. They exchanged offices and rooms.


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 06:55:10 AM EST
[ Parent ]
I do know of armies that are tasked with upholding the constitution.

You are talking about the government breaking the constitution. I can predict which side the Danish army and police would take if the Danish government told the EU to fuck off. I can't predict which side the police and army would take if the government told the Danish courts to fuck off, in so many words. (Actually, in the case of Denmark, I can, because Denmark has no tradition of judicial review, and Danish governments break the constitution with the same routine indifference that most people break the parking regulations. But that is unusual for a mature democracy.)

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 17th, 2011 at 06:31:37 AM EST
[ Parent ]
At the very least, assuming the government  - and this would likely happen to multiple governments at once - is dependent on market lending, it would be very difficult to get people to lend you money when the courts have said it's illegal to borrow it. What credit rating would you give a government who has been told by its consitutional court that it would be acting beyond its powers to borrow more money?
by Colman (colman at eurotrib.com) on Wed Aug 17th, 2011 at 06:12:11 AM EST
[ Parent ]
As ever, the mindset of lawyers frames the political debate among a political class that seems inhumanly uneducated in matters of economics. If economic voices are heard at all, it is usually the voice of the [Central Bank]. It is a peculiar democracy that expects either its constitutional court or central bank to have the final word of wisdom.
(Jörg Bibow on Eurointelligence)

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 06:15:06 AM EST
[ Parent ]
The position wouldn't be tenable for long, I agree.

The courts could also satisfy the balanced budget requirement by ordering taxes to be raised.

Why they would not is a question of the configuration of power and ideological hegemony I brought up above. Of course, following that to its logical conclusion, a government might pursue a deficit policy in order to obtain a court ruling against spending, justifying disaster capitalism.

I'm assuming, however, that both courts and government have no particular wish to break their country, and that the constitutional rule would be passed by or set aside in the higher interests of the nation.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Aug 17th, 2011 at 06:37:02 AM EST
[ Parent ]
The courts could also satisfy the balanced budget requirement by ordering taxes to be raised.

They can try.

If the private sector is deleveraging, they can't actually succeed. But I guess that the courts could interpret the amendment to only demand the attempt, not the reality, of a balanced budget.

I'm assuming, however, that both courts and government have no particular wish to break their country, and that the constitutional rule would be passed by or set aside in the higher interests of the nation.

Assuming emergency powers to set aside constitutional strictures "in the higher interests of the nation" is called a coup d'etat when it is done by people you find disagreeable.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 17th, 2011 at 06:45:29 AM EST
[ Parent ]
JakeS:
Assuming emergency powers to set aside constitutional strictures "in the higher interests of the nation" is called a coup d'etat when it is done by people you find disagreeable.

you like your humour dry, huh? and when it's people you like it's the adults coming in because it's mayhem when they leave the room.

on whom do you rely when governments fail to keep public order?

the military? aren't they off bothering brown people some-else-where oily?

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Wed Aug 17th, 2011 at 11:59:43 AM EST
[ Parent ]
I don't think that the supreme court here could order the government to do something positive like raise taxes. They can decide actions are unconstitutional, they can nullify laws, they can impose penalties for actions but I don't think they can order the executive to raise taxes.

I'm assuming, however, that both courts and government have no particular wish to break their country, and that the constitutional rule would be passed by or set aside in the higher interests of the nation.

I didn't have you down as an optimist! The potential ramifications of coming up against the limit could be sufficient to justify a TINA approach to cutting deeper and deeper and spiralling further and further into a hole.

by Colman (colman at eurotrib.com) on Wed Aug 17th, 2011 at 07:02:29 AM EST
[ Parent ]
I'm not particularly optimistic about the power and ideology set-up, so it's possible courts and government would go for shock and awe. But, in general, I'm not so impressed by constitutional amendments dictating policy. I think courts and governments would seek a way of not pushing the country over the edge.

I'd be quite amused to see the situation play out in legalist Germany, for example, which bypassed the binding 3% and 60% treaty obligations.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Aug 17th, 2011 at 07:48:59 AM EST
[ Parent ]
Best case: Strike down the amendment as being inconsistent with the ability of the government to provide for the general welfare.

Worst case: Declare further government spending illegal. Constitutional crisis. Riots in the streets as government checks bounce. For some countries, food imports cease. One faction or the other (or both or all) declares a national emergency and assumes emergency powers. Tanks in the streets.

Winter is coming.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 17th, 2011 at 05:47:27 AM EST
[ Parent ]
Riots in the streets as government checks bounce.

No, never

The total sum of bills unpaid by regional and local governments has hit the 50-billion-euro mark, five percent of GDP and four times more than two years ago, according to EL PAÍS' calculations.

...

The failure of the Castilla-La Mancha government to pay pharmacies in the region for the past two months led to the closure of drugstores in protest last Thursday and has unleashed a war between the local Popular Party administration and pharmacies.

...

The non-payments most affect construction companies working on public projects - which are owed a collective 15.05 billion euros, according to industry employers' organization Seopan - and freelancers - 14.983 billion - as well as the pharmaceutical, waste collection and cleaning industries, 5.450 billion and four billion and one billion, respectively.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 05:52:17 AM EST
[ Parent ]
No society is more than three missed meals away from revolution. When food imports stop, the tanks will come out.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 17th, 2011 at 05:55:10 AM EST
[ Parent ]
Oh, please. You're in blowhard mode today.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Aug 17th, 2011 at 05:57:43 AM EST
[ Parent ]
What, you think IMF riots can't happen here?

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 17th, 2011 at 06:04:21 AM EST
[ Parent ]
Greece is not here, don't be silly.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 06:06:58 AM EST
[ Parent ]
You know perfectly well afew does not think that.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 17th, 2011 at 06:14:00 AM EST
[ Parent ]
But we have already had IMFECB riots in the Eurozone, haven't we? Just not in any country that matters.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 06:17:21 AM EST
[ Parent ]
You're still being unfair.

And we haven't had food riots yet. You think what we've seen so far is bad? Imagine the rioters being actually hungry - real, honest-to-God hungry, not just a bit peckish - for what will for most of them be the first time in their lives.

I can't imagine that. I can't even model it in the abstract. And I hope I won't get empirical data to refine my modeling abilities on that point.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 17th, 2011 at 06:23:20 AM EST
[ Parent ]
I think once it got to that stage some element of sanity might creep in. But it would be sanity in the form of rationing and emergency food deliveries.

So we'd have a Soviet-style anti-prosperity sort-of-at-war economy without actually being in a war.

Anyway - presumably Merkel and Sarko still aren't quite running the entire EU, and other heads of state will have a say on this before it becomes something that might pass for policy.

Anyway too - now might be a good time to stock up on booze, toiletries, sacks of rice and beans, and other essentials that become useful during a failed economy.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Aug 17th, 2011 at 07:01:49 AM EST
[ Parent ]
other heads of state will have a say on this before it becomes something that might pass for policy

ElPais.com: Zapatero: "An important step forward" for the Eurozone.

Of course, other countries may yet put up a fight in the Ecofin or the European Council...

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 07:08:50 AM EST
[ Parent ]
Well - Zapatero is One of Them. So that's not a surprise.

But if this proposal happened to become more public, to the point where it became a campaign issue, there might be more robust resistance elsewhere.

Not that this is any way a suggestion to make it a campaign issue. Obviously.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Aug 17th, 2011 at 07:13:25 AM EST
[ Parent ]
Zapatero is One of Them

This crisis is turning into a bad remake of the Invasion of the Body Snatchers...

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 07:20:10 AM EST
[ Parent ]
To me it looks more like Doctor Strangelove - Or How I Learned To Stop Worrying And Love Hooverism.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 17th, 2011 at 07:23:03 AM EST
[ Parent ]
It's more a question of the "three meals" rhetoric.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Aug 17th, 2011 at 06:16:17 AM EST
[ Parent ]
Sure, but a week or two or three of unpaid benefits would make things interesting, to say the least.
by Colman (colman at eurotrib.com) on Wed Aug 17th, 2011 at 06:17:13 AM EST
[ Parent ]
How about 5 days of truckers' strikes and roadblocks?

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 06:18:21 AM EST
[ Parent ]
Oh.

"No society is more than three missed meals from revolution" (or anarchy, in some versions) is an idiomatic phrase. Of course it takes more than three days for a middle-class European to get really hungry.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 17th, 2011 at 06:24:56 AM EST
[ Parent ]
When food imports stop, the tanks will come out.

Or food distribution. Maybe we're set for a repeat of the events described by Luis de Sousa in Post Peak Iberia (June 11th, 2008)

It all started in Spain, it quickly spread to Portugal and southern France. Lorry drivers are on the streets and on roads protesting against high fuel prices and bringing normal day life to a stand still.

...

Life is slowly coming back to normal in Spain. A deal was struck between government and representatives of the vast majority of hauliers during last nigh, granting several fiscal and social benefits to the industry, but leaving diesel taxes untouched. The hauliers' associations behind the blockade reunited today after lunch and rejected the government's proposals, vowing to continue protests (the main claim for a minimum service fare remains unattended). Check striker's demands and the government's offers [hat tip Migeru].

The police is on the roads, clearing blockaded routes and facing the picket lines all around the country; there have been insistent reports of arrests throughout the day. Escort is being provided by the police to hauliers that request so, protecting lorries from raging blockaders. There's an all round improvement in traffic. Today's reported actions have been mainly of slow marches that didn't had much impact on the returning normality.

Note that the Interior Minister that broke the hauliers' strike is now the PSOE PM candidate for the upcoming general election. See here.

Also, regarding food imports or distribution, Luis de Sousa also explained in What makes them PIIGS? (Apr 10th, 2010) that the European periphery is more oil-dependent than the core, especially for domestic transportation of goods.

In orange, all lined up to the left, are found the PIIGS, the most Oil reliant states in the Union. Coincidence? Certainly not. The riddle is now understanding if they are PIIGS due to their Oil reliance or are Oil reliant because they are PIIGS.
The common cause underlying this correlation is the dearth of investment compared to the EU core, and which EU policy is not addressing.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 06:06:17 AM EST
[ Parent ]
Spain already has a Budget Stability Act 18/2001 of 21 December

Therefore, Spain has solved the problem and can move onto other things.

I suggest Zapatero, Merkel, Sarkozy, et.al., start a political initiative to change the EU Constitution to make pi = 3.  That .14159268 & etc. is annoyingly untidy and creates a lot of unnecessary work, at great expense.  

After that, they can change the EU Constitution to enforce every country in the EU to have a trade surplus with each other.

Finally, I strongly urge the EU to repeal those pesky Laws of Thermodynamics. By so doing, they will enable the EU to replace oil and gas imports with Perpetual Motion Machines.

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Wed Aug 17th, 2011 at 01:37:12 PM EST
[ Parent ]
Don't forget amending the law of gravity. I've always wanted to be able to fly under my own power.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 17th, 2011 at 01:46:13 PM EST
[ Parent ]
Should we turn that into an LTE to ElPais.com?

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 04:54:18 PM EST
[ Parent ]
Would it do any good?

Skepticism is the first step on the road to truth. -- Denis Diderot
by ATinNM on Wed Aug 17th, 2011 at 07:23:18 PM EST
[ Parent ]
No, just for laughs.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 08:28:14 PM EST
[ Parent ]
Let me see how the rest of the week works out.  Have a couple of "Must Do" items on my plate.


Skepticism is the first step on the road to truth. -- Denis Diderot
by ATinNM on Thu Aug 18th, 2011 at 02:12:15 PM EST
[ Parent ]
No matter: Zapatero propone incluir la ley de techo de gasto en la Constitución

  • Rajoy está dispuesto a apoyar la decisión por "coherencia"
  • El PP propuso la medida hace un año en un foro de empresarios
Zapatero proposes to include the law on spending limits in the Constitution

  • [Opposition leader] Rajoy is prepared to support the decision "out of consistency"
  • The PP proposed the measure a year ago in a business forum


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Aug 23rd, 2011 at 05:48:23 AM EST
[ Parent ]
La regla de oro?
by Bernard on Tue Aug 23rd, 2011 at 07:35:35 AM EST
[ Parent ]
Just a week ago they were saying that the existing budget balance law was sufficient...

What's scary is that ZP is not running for reelection and has convinced himself that his role is to do what's needed at any cost. So they might well manage to get the constitutional amendment in before parliament is dissolved for the November 20 election.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Tue Aug 23rd, 2011 at 08:24:01 AM EST
[ Parent ]
ElPais.com: "Si se reforma la Constitución, #yoquierovotar"

  • Cientos de ciudadanos reclaman en Twitter un referéndum sobre la reforma constitucional
  • Zapatero y Rajoy acuerdan reformar la Constitución para limitar el gasto
"If the Constitution is reformed #IWantToVote"

  • Hundreds of citizens demand on Twitter a referendum on the constitutional reform
  • Zapatero and Rajoy agree to reform the Constitution to limit spending


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Aug 23rd, 2011 at 09:16:14 AM EST
[ Parent ]
Zapatero propone reformar la Constitución para limitar el techo de gasto
Sin embargo, Zapatero sí podría salirse con la suya y sacar adelante la segunda reforma de la Constitución antes del fin de esta legislatura. Lo ha confirmado el presidente del Congreso, José Bono, que ha advertido de que para ello la iniciativa parlamentaria debería presentarse antes de este viernes. En ese caso a los diputados les esperan otros dos plenos extraordinarios, uno el 30 de agosto y otro el 1 de septiembre. Pese a que con el apoyo del PP, el Gobierno contaría con los 3/5 necesarios para sacar adelante la reforma, el éxito de la propuesta no es tan seguro. Si una décima parte de los diputados se opusiera, habría que disolver las Cortes y convocar un referéndum para votar la modificación.
Zapatero proposes to reform the Constitution to limit spending
Notwithstanding [the opposition of minor parties], ZP could get away with it and carry through the second constitutional reform [since 1978] before the end of this [parliamentary] term. This was confirmed by the Speaker of the Congress, José Bono, who warned that the parliamentary initiative must be introduced by this Friday. In that case, the Deputies could face two more extraordinary plenary sessions, one on August 30 and one on September 1. Despite the fact that, with the help of the PP, the Government would have the 3/5 [majority] needed to carry through the reform, the success of the proposal is not assured. If one tenth of the Deputies opposed it, the Parliament would have to be dissolved and a Referendum called on the modification.
The hastily written headline actually says "to limit the spending ceiling".

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Aug 23rd, 2011 at 10:26:09 AM EST
[ Parent ]
ElPais.com: Bruselas apoya "el compromiso político" de Zapatero para el techo de gasto
La Comisión Europea cree que contribuirá a "la sostenibilidad a largo plazo de las finanzas públicas"
Brussels supports ZP's "political commitment" on the spending ceiling
The European Commission believes it will contribute to "the long-term sustainability of public finances"


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Aug 23rd, 2011 at 11:12:13 AM EST
[ Parent ]
Not satisfied with being a SINO, Zapatero escalates his game to the level of saboteur of socialist bulwarks.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Aug 23rd, 2011 at 09:27:53 PM EST
[ Parent ]
with a heads-of-government meeting seems like a positive, to me.

The HOGs will be less able to hide behind the experts and technocrats, and may well find themselves obliged to make political decisions.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Wed Aug 17th, 2011 at 06:23:42 AM EST
And they are now politically possible. The proof of this is that "the market" expects them, and "was disappointed" by their non-announcement by Sarkel/Merkozy.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Wed Aug 17th, 2011 at 08:45:49 AM EST
Reuters: France details joint Franco-German euro proposals
In the text, President Nicolas Sarkozy and German Chancellor Angela Merkel -- who unveiled the broad lines of their proposals on Tuesday -- said they wanted to freeze European Union structural funds for euro zone members that do not respect EU recommendations on deficit-reduction.
I guess how they're going to justify shuffling all the structural funds to Greece as part of that "Marshall Plan" of theirs...

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 10:06:34 AM EST
France and Germany just voted everybody off the island but them.
by tjbuff (timhess@adelphia.net) on Wed Aug 17th, 2011 at 11:11:28 AM EST
Nah, Austria, Finland and the Netherlands get to stay, too.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 17th, 2011 at 11:37:05 AM EST
[ Parent ]

I think this post misses the two major issues (though some comments alluded to at least one):

  1. Last time I checked there is more than France/Germany in the Eurozone. How long till somebody (rightfully by the way), in the periphery starts noticing that this arrangement is vaguely similar to Lebensraum? The other 15 countries actually do exist. What about at least FAKING that we count for something?

  2. Any democracy planned? Again, people might start noticing that this "European government" is not going to be voted in any way. In fact people are noticing: Around here some Labour politicians (extremely pro-EU) as tweeting sarcastic things like "When will the elections to the new European government be?"

A French/German Axis, plus no democracy. This is not going to end well.
by cagatacos on Wed Aug 17th, 2011 at 05:22:04 PM EST
But who's gonna take the lead instead? I'm as uncomfortable as anyone with the 'shotgun wedding' approach to 'European integration', the lack of democracy and accountability. As the FT article stated, there is no way to win for good ole Deutschland. Either it takes the back seat and is accused of provincialism (not caring about Europe(tm) enough) or it dictates a solution and the Fourth Reich is coming. Incidentally:
Soros: Yes. The future of the euro depends on Germany. This is the point I really want to drive home. Germany is in the driver's seat because it is the largest country in Europe with the best credit rating and a chronic surplus. In a crisis, the creditor always calls the shots. Sure, this is not a position Germany or Chancellor Merkel ever desired and they are understandably reluctant to embrace it. But the fact is that Germans are now in the position of dictating to Europe what the solution to the euro crisis is.
The irritations become mutual on all sides. Ze Germans are saying "What do you want from us?" We were happy to play along. The problems of the Euro and peripheral economies are now supposed to be solved with another adventure for which no one seems to know the end of? We'd love for everyone to be able to solve their own problems, especially us."

My own view is a bit more pessimistic whether the 'deep EU project' can be sustained. "Hurry slowly" would be a good slogan. And whether Germany's 'boom' survives for a longer time is uncertain to say the least. Yet still, people are angling to join the EU and get the Euro!? Step back and regroup. Democracy on that scale is difficult: 17 (27) and counting - the complexity is self-defeating.

by epochepoque on Wed Aug 17th, 2011 at 07:08:36 PM EST
[ Parent ]

But who's gonna take the lead instead?

Let it explode. Do you think it is worse? No it is not.

This France + Germany decision making is creating a nationalist narrative. In the short term it might be seen to be "leading", but in the medium term it will be seen as bullying.


The irritations become mutual on all sides. Ze Germans are saying "What do you want from us?"

There are only "irritations" because we are letting the banker narrative to win. The Germans (and Finns, and Dutch) should pay nothing! Portugal, Ireland and Greece should default (or restructure). The Germans are transferring money to Piggys so that they can pay the banks. I am willing to wage the following bet: the Piggys will restructure as soon as enough debt has been transferred from the banks to other sovereigns.

People should be death scared of such "irritations". These mutual irritations are the creeping up of the national narratives. We know how that tends to end around this continent. The solution is not more union, it is less. If Portuguese public finances are not dependent on Finish bailouts then there is less room for attrition.


Democracy on that scale is difficult: 17 (27) and counting - the complexity is self-defeating.

The complexity is self-defeating. That is why large systems are better broken in smaller pieces with reduced interactions.

by cagatacos on Wed Aug 17th, 2011 at 09:17:07 PM EST
[ Parent ]
We're not that far away from each other. Restructuring and so on was my preferred solution but what do I know? It's the Euro-Paradox: The EU/Euro project was supposed to fold Germany into Europe and assuage the paranoia of the other nations especially after reunification. Now the whole thing (because of economic/political blunders) is generating blowback and alienation. Who would have thought? Some commentators in Germany (former statesmen) invoke the war-or-peace narrative to justify TINA.

But what's up with the 'Lebensraum', Hitler, and Petain? Fiscal union or an EU economic gov. will be perceived as invasive and anti-democratic. Maybe even colonial but what's that got to do with Lebensraum, i.e. territorial neo-darwinistic expansion?

by epochepoque on Thu Aug 18th, 2011 at 03:34:09 AM EST
[ Parent ]

We're not that far away from each other.

I suppose most people here see defaults/restructure as the "way to go" (TM).


But what's up with the 'Lebensraum', Hitler, and Petain?

Lets see:

  1. The ECB seems to have policy that mostly benefits the German export model. Or not?

  2. This is being sold as "Merkel and Sarkozy decided". Even if it is not the case, does anyone doubt that it is the narrative flowing to most people's ears?

Of course that there is a gap in INTENSITY (not to say a measure of provocation on my part), but there are quite a few similarities in principle. Very disturbing similarities.

A part of my argument is against such a decision procedure, but equality important is the narrative setting: This thing is ripe for a populist/nationalist politician somewhere (from Helsinki to Lisbon) to start branding the current decision process in the EU as very malign.

My point is not to increase the bickering (though I an not unhappy with provoking people here), it is precisely to note that the current setting is perfect for a narrative of increased bickering.

by cagatacos on Thu Aug 18th, 2011 at 05:41:26 AM EST
[ Parent ]
I'm going to Troll Rate this and here's why:

There's PLENTY of blame to go around.  No government in the EU is guiltless.  Nobody stuck a gun at the Greek, Spanish, & etc. forced them to load up on debt and then fritter the money away.  

Further, taking the attitude expressed in your post is a guar-and-teed route to blowing the EU into itsy-bitsy pieces.  To get through this it can only be through a united effort.  Blowing-up the French and German economies isn't going to save anybody else's just as the French and German economies aren't going to be saved if the rest go.

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Wed Aug 17th, 2011 at 07:20:12 PM EST
[ Parent ]
If you read my previous opinions, you will notice that I am far from being a defender of the so called PIGS. Moreover I talked about 15 being ignored (that includes NL, FI, ...). I had in the past noticed (here on ET) how obnoxious the spending has been in my own country. And the corruption. Corruption from top to bottom.

This is not an EITHER Pigs OR France/Germany issue. You can point errors in all sides.

BUT IN THIS PARTICULAR QUESTION, it is clear that when 2 decide for 17 then we have something akin to lebensraum. The big bullies deciding for everybody. Moreover it is not even the people of France and Germany, it is only their elites. Moreover an ECB policy that clearly favours Germany.

Criticizing the two things is NOT INCOMPATIBLE: corrupt/un-economic behaviour of PIGS AND current colonial/paternalist behaviour of Germany (and France). One can point to BOTH.

Furthermore, the most I can (practically) do is not engaging in local corrupt behaviour, and trust me, it is difficult: Just last year I undergone surgery and I had a few offers to "speed things up" and "assure that the best doctor would operate". Just refusing such offers is seen as offensive. But back to the point:

There will be a time where this nationalist approach to EU decisions will backfire miserably. This kind of behaviour is just cannon fodder to nationalism of the worse kind. The back-yard decisioning by just two is the seeds of a nationalist storm to come.

by cagatacos on Wed Aug 17th, 2011 at 09:01:15 PM EST
[ Parent ]
And I want to "blow" the EU in pieces, BTW (this is an exaggeration, but not by much - a measure decoupling is absolutely needed).

I think the alternative will be that we will literally blow ourselves to pieces with guns and tanks.

The euro was a political mistake.

by cagatacos on Wed Aug 17th, 2011 at 09:27:18 PM EST
[ Parent ]
If you think that dismantling the EU will lead to decoupling the European states, then you're living in a fantasy world.

The Euro was not a political mistake, it was an economic mistake.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Aug 18th, 2011 at 02:36:07 AM EST
[ Parent ]
I do not know what I can do more: the first thing I said was precisely that I was EXAGGERATING, I also used " for blow. I was just taking the rhetorical device (it was not me that used the word "blow") used before to make a reasoning:


And I want to "blow" the EU in pieces, BTW (this is an exaggeration, but not by much - a measure decoupling is absolutely needed).

A measure of decoupling is needed. I am against the Euro, not the EU.

But my main concern is the narrative that is being CREATED: The big boys decide, the others are supposed to follow. For how long do you think this will last until somebody rebels SERIOUSLY? And most probably in the North (say, Finland). Or maybe in the South. But this "Merkosy" narrative is a disaster in terms of precisely creating the nationalistic vision that is so poisonous.

Of course, there is also a very personal dislike for the anti-democratic way that this is going through...

by cagatacos on Thu Aug 18th, 2011 at 05:27:58 AM EST
[ Parent ]
Another issue is how one takes to these discussions. Around here, I think that there should be some space to have some honest discussion where this is going.

I happen to believe that this is going belly up. Do not confuse this with my desires or on how address the "general public".

My discourse to a "general audience" is completely different in tone (just read this). If you read the piece above, it should also make clear about my view on PIGGY responsibility. Do you still think that I "blame" Germany or France?

To make it clear: I am the last person in wanting to give this a nationalistic flavour. BUT, UNFORTUNATELY, it is precisely where I see things going. I hope to be wrong.

by cagatacos on Thu Aug 18th, 2011 at 05:49:54 AM EST
[ Parent ]
Indeed there is an issue in how one takes these discussions.

And since the reality-based and well-founded criticisms against German mercantilism that are being advanced in this thread are already sufficient to make otherwise reasonable German contributors defensive, I hardly think that there is any need to exaggerate for effect.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Aug 18th, 2011 at 08:10:38 PM EST
[ Parent ]
The Godwin photo is puerile but also beyond humorous provocation.

That Migeru could give that a 4 leaves me in wonder.

But the comment beneath the photo is so far removed from reality that the whole thing collapses in ridicule. Sarkozy and Merkel hold what is a 90% window-dressing operation to "reassure the markets" and you find it interesting to talk about Lebensraum and "European government"? What "European government"? A proposal - not yet accepted by the other eurozone countries, which actually do have their word to say - to hold a six-monthly eurozone version of the European Council?

Nonsensical scaremongering - but that photo is completely out of place and I'm troll-rating it.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Aug 18th, 2011 at 02:40:09 AM EST
[ Parent ]
The whole course of events regarding euro denominated debt is as maddening to me as is the bipartisan insanity gripping Washington D.C. and the USA over deficits and the "debt ceiling", so I can only imagine how it seems to a citizen of one of the PIIGS. And I, like cagatacos, have great difficulty in seeing how this turns out well. So I am willing to indulge a little hyperbole, even if Merkel is no Hitler and Sarkozi is no Petain. Lesser lights can guide all to a similarly disastrous situation via less clearly, and even unintentionally, genocidal means.

I am starting to really fear the consequences of total financial collapse, especially considering how little understanding of the situation exists amongst the broader population. At this point either the EU or the USA could provide the event that triggers the collapse. It could also be from the "developing" world.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Aug 18th, 2011 at 01:05:14 PM EST
[ Parent ]
ARGeezer:
a similarly disastrous situation

I don't think you really understand the photograph in its historical context, or you wouldn't have written that.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Aug 19th, 2011 at 05:36:54 AM EST
[ Parent ]
Granted it is different for the USA. We unilaterally decide for most of the hemisphere and have for more than a century. In the process we have gotten a lot of blood on our hands from Cuba to Sandino to Guatemala  back to Cuba, to Chile, back to Nicaragua and Guatemala, and mostly to do the bidding of financial and economic interests.  But I do have a sense of the consequences of French collaboration under the Vichy regime and that this has left scars and has not been well resolved by the French. But that, combined with the on point critique by cagatacos of the implications of the leaders of Germany and France bi-laterally making decisions for all of the Euro-zone because they can and without any real consultation with even the other governments, let alone considering the sentiment of the populations involved, considering the meat grinder into which they are being tossed, not even to get into the self-defeating policies advocated out of parochial, short term interests, leads me to think that the allusion is not so far fetched after all, even though I don't believe that the conscious intentions are there to any greatly similar extent.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Aug 19th, 2011 at 03:02:36 PM EST
[ Parent ]
ARGeezer:
Germany and France bi-laterally making decisions for all of the Euro-zone because they can

They put on a show that nobody has taken too seriously. Read the pdf Migeru links to, it's mostly fluff with the constant repetition of the verb "should". They announced no decisions except those concerning their own governments. None of their proposals for the eurozone will ever see the light of day without the agreement of the other member states.

In fact, (setting aside the question of whether their proposals are recommendable or not), the worst thing about this Franco-German summit is that it was such transparent kabuki that it has simply intensified the impression in the political and financial worlds that Europe is still floundering around avoiding taking decisions.

As for the supposed historical analogy with 1940, I won't be drawn on it in detail. That would be to fall into the trap set by the provocation, which is why I simply troll-rated it, and will stop there.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Aug 19th, 2011 at 03:32:56 PM EST
[ Parent ]
The "similarly disastrous situation" I had in mind was something akin to a periphery wide rerun of the Irish potato famine with EU policy justifying non assistance on grounds similar to those which Malthus justified non intervention by Great Britain in the Irish famine. This might lead to a sufficient political destabilization that effective intervention from within the EU is not really even possible.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Aug 19th, 2011 at 03:16:00 PM EST
[ Parent ]
Eurointelligence Daily Briefing: Yet another sanctions regime that lacks credibility
Merkel and Sarkozy are proposing a new sanctions based policy regime: no structural funds for deficit sinners; they are also proposing regular eurozone summits, corporate tax harmonisation and a financial transactions tax;they have written to van Rompuy to ask him to become the eurozone's chief coordinator; El Pais calculates that Spain would face the greatest risk of censure under the proposed sanctions regime; the paper also points out that it is virtually impossible to establish a debt brake in the Spanish constitution; reaction among member states to the Merkel and Sarkozy proposals is divided; Mark Rutte apologises for his communication blunders after the summit, but vows that he would oppose Eurobonds for as long as sanctions are not automatic; FT Deutschland welcomes the Merkel/Sarkozy agreement, and says it is much better than widely portrayed; Berthold Kohler argues that Merkel and Sarkozy had made a bold agreement with important long-term consequences, but the crisis required more immediate action; Werner Musler says the agreement is most irrelevant; Finland strikes its own its own bilateral collateral deal with Greece, as a condition for its participation in the new EFSF package; the Swiss National Bank's increase in liquidity failed to persuade the foreign exchange markets, as the Franc continued to appreciate; James Saft says doubts over the ECB's willingness to support Italy and Spain indefinitely add to volatility; Jeffrey Sachs, meanwhile, argues that western governments have badly mismanaged globalisation.
(Google link)

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Aug 18th, 2011 at 04:14:55 AM EST
EUObserver: 'New system of European governance' demands deeper austerity (09.06.11)

Note that the "new system of European Governance" referred to in June is the "European semester" agreed to at the end of 2010 in the Council.

It goes further than fresh call for austerity: it is a recipe for much deeper liberalisation of the European economy than has yet been seen.

...

The commission did however acknowledge the anger regular Europeans feel at the austerity and liberalisation that has already been imposed in response to the crisis, but argues there is no alternative and that these changes should have been made years ago.

...

Brussels has also called for taxation in general to be shifted away from labour, where the higher the income, the higher the rate paid, and onto consumption, where everyone pays the same rate, regardless of income levels. Many countries have also been ordered to introduce so-called debt brakes - legislative or constitutional changes to enforce budgetary discipline.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Aug 18th, 2011 at 04:46:39 AM EST
Brussels has also called for taxation in general to be shifted away from labour, where the higher the income, the higher the rate paid, and onto consumption, where everyone pays the same rate, regardless of income levels. Many countries have also been ordered to introduce so-called debt brakes - legislative or constitutional changes to enforce budgetary discipline.

They have no business to say anything how countries collect their taxes. And why should anybody take them seriously anyway? After all these are people who promoted "Ireland model" as model for whole Europe. Real geniuses.

by kjr63 on Thu Aug 18th, 2011 at 04:38:04 PM EST
[ Parent ]
Just what you want in a recession: a reduction in the amount of money available for micro-economic activity.

Skepticism is the first step on the road to truth. -- Denis Diderot
by ATinNM on Thu Aug 18th, 2011 at 08:01:45 PM EST
[ Parent ]
In addition, indirect taxes directly impact prices and therefore inflation and so the ECB would be compelled to tighten the money supply to counter inflationary pressures.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Aug 19th, 2011 at 02:44:17 AM EST
[ Parent ]
Or fewer euros chasing relatively more goods acerbates the recession increasing the risk of initiating a deflationary cycle.

Skepticism is the first step on the road to truth. -- Denis Diderot
by ATinNM on Fri Aug 19th, 2011 at 01:47:20 PM EST
[ Parent ]
In the presence of downward nominal price rigidity, the two are not mutually exclusive.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Aug 19th, 2011 at 01:53:44 PM EST
[ Parent ]
True.  

We've been seeing a divergence between micro-economic conditions and macro-economic indicators and measurements for some time.  Giving rise to the interesting possibility of a booming economy with most the actors in that economy bankrupt.

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Fri Aug 19th, 2011 at 02:15:05 PM EST
[ Parent ]
I should think that the definition of "booming" would become a rather pressing question in that event.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Aug 19th, 2011 at 02:20:19 PM EST
[ Parent ]
"Booming", as in the sense of businesses blowing up?

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Aug 19th, 2011 at 03:05:37 PM EST
[ Parent ]


Austerity can only be implemented in the shadow of a concentration camp.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Aug 19th, 2011 at 03:15:19 PM EST
[ Parent ]
Well, that is funny, but not as punny.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Aug 19th, 2011 at 03:18:02 PM EST
[ Parent ]
From Merkozy's letter to van Rompuy (via El Pais [PDF]):
Building on their commitments under the Euro Plus Pact, all Member States of the euro area will incorporate a balanced budget fiscal rule into their national legislation by summer 2012. As a rule, the balanced budget fiscal rule is made law as part of Member States' constitutions or by legislation of an equivalent level in order to ensure the rule's stability and superiority over annual budgets. The fiscal rule should implement the objectives of the Stability and Growth Pact and ensure that every Member State of the euro area achieves a balanced budget as soon as possible. Therefore, it would ensure a sustained reduction of the debt ratios in the case they exceed the reference value (60% of GDP). In line with the revised Stability and Growth Pact, by end-2011, all Member States of the euro area whose debt level exceeds the reference value must present an adjustment path for reducing their debt below the reference value and expose how to address the impact of ageing population on the long term debt sustainability.
(emphasis in original)

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Aug 18th, 2011 at 04:51:41 AM EST
Daniel Cohn-Bendit : "La parole de nos gouvernants est triple zéro" - LeMonde.fr Daniel Cohn-Bendit: "The word of our leaders is rated triple zero" - LeMonde.fr
Les marchés plongent à nouveau après le sommet franco-allemand du 16 août. Le président de la République et la chancelière allemande n'ont visiblement pas convaincu... Markets plunge again after the Franco-German summit on 16 August. The president of France and the German chancellor obviously were not convincing
Daniel Cohn-Bendit : C'est la démonstration que Nicolas Sarkozy et Angela Merkel ne sont pas, à eux seuls, l'Union européenne ni la zone euro. Ce n'est pas parce qu'ils ont mis en scène deux idées qu'on leur a soufflées que la zone euro est conquise! Je remarque que la partie consciente des marchés spécule sur le fait que la parole des politiques n'a pas de valeur. Les gouvernements européens avancent à reculons à chaque fois. Ils prétendent, notamment Mme Merkel, que jamais ils n'aideront la Grèce, puis ils volent à son secours. La parole des gouvernements, ce n'est pas triple A, mais triple zéro. C'est aussi ça que les marchés sanctionnent. Mme Merkel et M. Sarkozy veulent le beurre et l'argent du beurre: ils veulent plus d'Europe pour les protéger, mais refusent un saut qualitatif vers une fédéralisation européenne.
Daniel Cohn-Bendit: This shows that Nicolas Sarkozy and Angela Merkel are not, by themselves, the European Union or the euro area. The eurozone isn't conquered just because they (NS and AM) stage-managed a couple of proposals that they were prompted with! I note that the conscious part of the market speculates on the fact that political leaders' discourse has no value. European governments move forward with backward steps every time. They claim, especially Mrs Merkel, that they are never going to help Greece, and then they fly to its rescue. Governments' word is not rated triple A, but triple zero. This is also what the markets punish. Mrs Merkel and Sarkozy want to have their cake and eat it: they want more Europe to protect them, but refuse a qualitative leap towards a federalization of Europe.
Pensez-vous que les euro-obligations soient la solution ? Do you think that Eurobonds are the solution?
L'idée des euro-obligations est de communautariser une partie de la dette de certains pays affaiblis en les adossant à la force économique de l'Europe, pour contrer la spéculation. Les Etats comme la Grèce pourraient emprunter pour surmonter leur endettement à un taux inférieur de 50% à ceux du marché. Certains pays, comme l'Allemagne, emprunteraient un peu plus cher, mais c'est un acte de solidarité très fort et je suis pour. Nous avons aussi besoin d'euro-obligations pour relancer l'économie, notamment pour sa transformation écologique. Si, à l'inverse, on applique une politique d'austérité, les économies ne repartiront pas.The idea of ​​Eurobonds is to communitarise part of the debt of some weakened countries by backing them with the economic strength of Europe, to counter speculation. States such as Greece could borrow to overcome their indebtment at less than 50% of market rates. Some countries, like Germany, would have to borrow a bit more expensively, but it is a very strong act of solidarity and I am in favour. We also need Eurobonds to revive the economy, notably for its ecological transformation. If, conversely, we apply a policy of austerity, economies will stay stuck.
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Aug 19th, 2011 at 12:20:33 PM EST
Brilliant. I seem to share opinions with Red Danny. What's the world coming to? I'd better go do some hunting, horsebackriding, drink some Champagne, eat some oysters, listen to some opera and take a look at the stock portfolio. :p

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Fri Aug 19th, 2011 at 12:34:56 PM EST
[ Parent ]
Best would be to play polo while denigrating football.
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Aug 19th, 2011 at 12:48:50 PM EST
[ Parent ]
Don't forget a whale steak.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Aug 19th, 2011 at 06:25:15 PM EST
[ Parent ]
Hello I suggest you have a look at my full analysis on the joint Sarkozy-Merkel letter. The post can be found on my blog at <a href="http://protes-stavrou.blogspot.com/2011/08/full-analysis-of-joint-sarkozy-merkel.html#.TlFHg12g17s">http://protes-stavrou.blogspot.com/2011/08/full-analysis-of-joint-sarkozy-merkel.html#.TlFHg12g17s</a>

Here is how it concludes:

"Most of the rhetoric of the two leaders will be fundamentally revised by market pressures and events in the real world that are far detached from the world Mr.Sarkozy and Ms.Merkel currently visualize."

Thanks.

by protesilaos on Sun Aug 21st, 2011 at 02:02:29 PM EST
Interesting discussion, although I disagree with your take on tax harmonisation. I think it's a good idea, as long as the tax base is harmonised along with the rate and tax enforcement, so we do not punish countries like Ireland that has effective enforcement and a broad base but low rate. This would also have the advantage of closing many of the options for transfer pricing scams that currently serve to cheat the tax man of much revenue.

What makes it problematic is that it contains no pledge by the internal surplus countries to spend in unrestricted quantities in order to secure Eurozone-wide full employment. Given Eurozone-level underemployment, this underemployment will naturally gravitate towards the periphery, unless the periphery does underhanded things like currying favour with tax cheats.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Aug 21st, 2011 at 02:49:12 PM EST
[ Parent ]
@Jake .Your points are accurate. That way trade across the eurozone will be enhanced.

Well about the tax it still remains unclear what form it will finally take. However if it implies a horizontal harmonization of a single rate (with small variances perhaps), then I am afraid it will lead to a loss of competitiveness for some countries like Cyprus, who are far away from economic activity in the European continent and who now are able to attract capital exactly because of a different tax rate.

Of course there can be other means of attracting third country investment like double tax treaties but these are outside the EU/Eurozone...

At any rate I appreciate your response.
I cannot watch that video now, as I do not have enough time in front of me. I shall watch it later.

by protesilaos on Mon Aug 22nd, 2011 at 06:37:38 AM EST
[ Parent ]
I am afraid it will lead to a loss of competitiveness for some countries like Cyprus, who are far away from economic activity in the European continent and who now are able to attract capital exactly because of a different tax rate

One thing Cyprus is attracting is a lot of outsourced operations from the London financial sector, which has led to a nasty hot money bubble in Cyprus which, as a result, is now under market attack.

It would be much healthier for capital to come to peripheral regions through European Investment Bank financing of productive investment in real, non-financial, economic activities. Which is a key plank of any long-term-viable solution to the current Euro crisis as you hint at in your discussion of the Merkozy letter:

the crisis is systemic and is caused because of the structural flaws of the euro, the ill regulated banking system and the consistent under-investment in the periphery.


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Aug 22nd, 2011 at 06:46:43 AM EST
[ Parent ]
Oh yes absolutely. We need real growth not a series of bubbles.

Especially the point of mobilizing the EIB is one I also share. I have covered these issues in my writings on my blog http://protes-stavrou.blogspot.com/.

After all here is what I wrote some lines after the part you highlighted about the systemic structure of the crisis:

The point is not to cling to the same failing policies that allowed the crisis to threaten the Euro, but to introduce new truly decisive measures that will (a) fundamentally revise the architecture of the Euro, (b) that will mobilize the European Investment Bank within the framework of a redesign of the SGP, in order to produce real growth and true stability, not nominal growth figures and shaky economies.

As for Cyprus I have also written some articles on the recent economic situation:

http://protes-stavrou.blogspot.com/2011/08/fitch-cuts-cyprus-rating-close-to-junk.html#.TlI_ul2g17s

http://protes-stavrou.blogspot.com/2011/07/moodys-downgrades-cyprus-results-of.html

http://protes-stavrou.blogspot.com/2011/07/tiny-cyprus-can-now-become-huge-problem.html#.TlI_6V2g17s

Taxes can only be harmonized within the framework of a redesign of the overall architecture of the system, which is something that is not included in the plans of Sarkozy-Merkel.

by protesilaos on Mon Aug 22nd, 2011 at 07:48:10 AM EST
[ Parent ]
We need real growth not a series of bubbles.

What if the business cycle was inherently a bubble?

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon Aug 22nd, 2011 at 08:56:37 AM EST
[ Parent ]
then we need to change our mode of thinking if that is the case
by protesilaos on Mon Aug 22nd, 2011 at 10:02:18 AM EST
[ Parent ]
Well...
The play of business exigencies which lead to such a period of liquidation seems to run somewhat as follows: Many firms have large bills payable falling due at near dates, at the same time that they hold bills receivable also in large amounts. To meet the demand of their creditors they call upon their debtors, who may in their turn have bills receivable or may hold loans on collateral. The initial move in the sequence of liquidation may be the calling in of a call loan, or a call for additional collateral on a call loan. At some point, earlier or later, in the sequence of liabilities the demand falls upon the holder of a loan on collateral which is, in the apprehension of his creditor, insufficient to secure ready liquidation, either by a shifting of the loan or by a sale of the collateral. The collateral is commonly a block of securities representing capitalized wealth, and the apprehension of the creator may be formulated as a doubt of the conservative character of the effective capitalization on which it rests. In other words, there is an apprehension that the property represented by the collateral is over-capitalized, as tested by the current quotations, or by the apprehended future quotations, of the securities in question. The market capitalization of the collateral has taken place on the basis of high prices and brisk trade which prevail in such a period of business exaltation as always precedes an acute crisis. When such a call comes upon a given debtor, the call is passed along to the debtors farther along in the sequence of liabilities, and the sequence of liquidations thereby gets under way, with the effect, notorious through unbroken experience, that the collateral all along the line declines in the market. The crisis is thereby in action, and the further consequences follow as a wellknown matter of course. All this is familiar matter, known to business men and students by common notoriety.

The immediate occasion of such a crisis, then, is that there arises a practical discrepancy between the earlier effective capitalization on which the collateral has been accepted by the creditors, and the subsequent effective capitalization of the same collateral shown by quotations and sales of the securities on the market. But since the earlier capitalization commonly, in the normal case, comes out of a period of business prosperity, the point of inquiry is as to the ground and method of this effective capitalization of collateral during the period of prosperity that goes before a crisis, and this, in turn, involves the question of the nature and causes of a period of prosperity.

The manner in which the capitalization of collateral, and thereby the discrepancy between the putative and actual earning-capacity of capital, is increased by loan credit during an era of prosperity has been indicated in some detail in Chapter V above. But it may serve to enforce the view there taken, if it can be shown on similar lines that a period of prosperity will bring on a like discrepancy between putative and actual earning-capacity, and therefore between putative and eventual capitalization of collateral, even independently of the expansion effected by loan credit.

(The Theory of Business Enterprise by Thorstein Veblen, 1904)

I call this the credit-bubble theory of the business cycle.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon Aug 22nd, 2011 at 10:17:57 AM EST
[ Parent ]
What if the business cycle was inherently a bubble?

Then we abolish the business cycle. Nothing wrong with animal spirits that unrestricted countercyclical fiscal policy can't fix.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Aug 22nd, 2011 at 10:22:13 AM EST
[ Parent ]
It's not like anyone else ever thought about taming the business cycle, you know. :P

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Sep 8th, 2011 at 07:05:20 PM EST
[ Parent ]
Nobody's ever put the full power of a sovereign fiscal and monetary authority to work on the problem.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Sep 8th, 2011 at 09:40:56 PM EST
[ Parent ]
Actually, what I have heard discussed whenever details have been proposed is a harmonised tax base rather than a harmonised rate. This actually makes a lot of sense, because it closes off a number of possibilities for quote-unquote "regulatory arbitrage." It also means that we'll be talking about the same thing when we talk about tax rates.

The crucial point, however, is whether there is firm commitment to a Eurozone employer of last resort. With a Eurozone employer of last resort, there would be no need to engage in that sort of gimmickry. Absent a Eurozone employer of last resort, I can see no plausible story about how the periphery can avoid persistently having damaging levels of un- and underemployment. Playing tax haven may reduce the impact in the short term, but it is not a sustainable development path.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Aug 22nd, 2011 at 10:19:59 AM EST
[ Parent ]
The crucial point, however, is whether there is firm commitment to a Eurozone employer of last resort.

Investigate the meaning of Active Employment Policies in EU Commission parlance, and weep.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon Aug 22nd, 2011 at 10:40:42 AM EST
[ Parent ]
Thanks, and welcome to ET.

I'll post a reply on the substance of your post "after coffee"...

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon Aug 22nd, 2011 at 03:02:37 AM EST
[ Parent ]
You welcome. I am happy to be here, in this community. The exchange of ideas is always beneficial for making everyone better.
by protesilaos on Mon Aug 22nd, 2011 at 06:41:16 AM EST
[ Parent ]
As I wrote this morning at Credit Slips:

As a financial sovereign (the issuer of a sovereign currency), the EU might have been able to pull itself out of this mess had it the power and the will to act as a political sovereign. This crisis has proved the EU has neither the power nor the will. Politically, the EU is acting like a closely-held corporation. There has been a call for a capital infusion, the poorer members can't cover the call, and the richer members are agreeing to cover in return for something extra. Since "additional stock" (i.e. additional political power) is not an option, that means moving up the creditor chain beyond the equity holder class (i.e. getting collateral, since there can be no "classes of stock"). In such cases, the poorer players are ultimately forced off the field, until finally the last two or three divide the spoils.

Let the division begin.

by rifek on Mon Aug 29th, 2011 at 08:23:41 PM EST


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