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While the source of the crisis was the financial instability wrought by the massive buildup in private debt and the failure of governments to regulate the financial sector appropriately, the reason the damage has been amplified in the Eurozone relates to the intrinsic flawed design of the monetary union.


 The key to ending their Eurozone crisis is resolving those endemic flaws, which, as I’ve noted in the past, either require the creation of a truly federal fiscal capacity or a breakup of the monetary union. A related requirement is that the un-workable fiscal rules embodied in the Stability and Growth Pact be abandoned and member states be permitted to run appropriately scaled deficits to maintain domestic demand when a negative aggregate demand shock hits the European economy.


 It is a combination of the Eurozone nations using a foreign currency (the Euro) and the issuers of that currency (the ECB) not permitting the nations to run appropriate deficits that is at the core of the Eurozone problem.


 Making the nation’s more competitive will not overcome that endemic flaw.





Madness continues – macro conditionalities on regional transfers in Europe


As I have noted previously, there are only two ways for the Eurozone to proceed in providing for growth and stability:


1. What I would consider to be the preferred way, given the cultural and economic differences across member states, is for the Eurozone to be broken up in an orderly way and currency sovereignty restored at the member state level.......


2. In lieu of the preferred option, and given the seeming (irrational) resistance across the EA17 to abandoning the common currency, the only alternative viable path is for the Eurozone to create a true federation, where the member states become states of the Eurozone along the lines that California or New South Wales are states of the US and Australia, respectively



A Greek exit would not cause havoc


What Greece would get back would be its own central bank and its currency issuing capacity. It would then move from using a foreign currency and having to fund all its public spending via taxes and then borrowings (now bailouts) to a situation where it issued its own currency and became free of any financial constraints.



Its Euro-denominated debt would fall to zero.



Its capacity to spend would not be constrained by tax revenue and it would be in a position to pursue whatever growth strategies it thought suitable for its citizens and industry structure.


Monopoly’s Poster Children


G: If an alternative did come along, Prof. Hudson, what would be your sketch of their plan of an economic policy? Would you leave the euro? Would you create a new currency?
Prof. H: As long as the eurozone has no central bank, it’s not really integration. The only way you can have the United States of Europe is to have a common tax policy and a common monetary policy. You remember what the American Revolution was about: ‘No taxation without representation’. Right now that’s not the case in Europe. Unless there’s real political integration, which I don’t see, then all the Eurozone is now is not the peaceful socialist/social democratic idea that it was 50 years ago. It is an anti-labour, pro-financial class war. There is no way that you can remain in that kind of Europe. There doesn’t seem to be a discussion that there is another kind of Europe, the kind of Europe that was meant in the 1940s and ‘50s.

G: Can you tell us how specifically, the euro, the single currency, has restricted country’s ability to dig their way out of crisis.

Prof. H: Let’s compare how the US handled its bank bailout after 2008, and how Europe did.

In the US they didn’t raise taxes, and they didn’t borrow from foreigners. The Federal Reserve simply created four trillion dollars of credit electronically. That’s what a central bank is supposed to do. It’s supposed to create the money to monetize and finance government spending deficits.

The eurozone forbids this in two ways, and this is what the German court ruled in Karlsruhe last week. The European constitution prevents the European Central Bank from lending to governments. It won’t’ monetize debt that results from deficit spending – although it will create money to pay bondholders and speculators. It’s there to enrich the 1%, not the 99% – and even worse, it thinks that the main way to enrich the 1% is by impoverishing the 99%. That is why it is so dysfunctional and downright evil.

So, instead of creating the money that Europe’s central bank gives to the crooks – in the Anglo-American way – it actually make the taxpayers pay the crooks. This is completely unnecessary. You could just create money and give the crooks everything they want, without having to make things worse by taxing labor and industry to wreck the economy. But the eurozone aims deliberately to wreck the economy, in order to scale back wages. It thinks that whatever is taken from labor can be grabbed by the financial sector. There’s no concept of symbiosis, and that without a domestic market the debts ultimately will have to go bad.

The eurozone refuses to let a central bank finance government spending. Only commercial banks and bondholders can do this – and they charge interest. Crippling the central bank thus creates a huge transfer of interest to the commercial banks. Then, when the governments can’t pay, they go to Stage Two. That is where the governments have to pay by selling off the public domain: the land and natural resources, the forests, ports, electrical systems, natural monopolies basic infrastructure, roads and bridges. The economy is turned into a tollbooth economy. So you’re going back to feudalism. Ireland is back to the 14th century, quickly. 



1992 – The backfilling begins


Bill Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the Charles Darwin University, Northern Territory, Australia.

Note:  EMU is

European Monetary Union
An agreement by participating European Union member countries that includes protocols for the pooling of currency reserves and the introduction of a common currency.


The design of the EMU agreed on in Maastricht reflected a range of factors, none of which made any real macroeconomic sense. The French were obsessively motivated by its desire to end the threat of German militarism within Europe forever. The Germans, suffering an unspoken shame for their past militarism and associated deeds, had only their economic success including the ‘discipline’ of the Bundesbank as a source of national pride. They wanted to be part of the ‘European Plan’ to demonstrate a rejection of their past history but their obsessive fear of inflation meant that this had to be on their own terms, which meant that the new Europe had to accept the Bundesbank culture. Within the German ‘stability’ environment, it was seemingly overlooked that the nation relied on robust import growth from other European nations. The fact that not all nations can have balance of trade surpluses was ignored. They also wanted political integration via a strengthened European Parliament but that fell by the wayside as the Maastricht negotiations concentrated on the economic and monetary goals.


Overlaying this political play-off between France and German, which had dominated European affairs since the end of the Second World War, came an even more destructive force – the surge in Monetarist thought within macroeconomics, first within the academy, then into policy making and central banking domains. Unemployment became a policy tool to allegedly maintain price stability rather than a policy target as it had been up until the mid-1970s. National governments deliberately created persistently high levels of unemployment by suppressing spending as they sought price stability. The import of the new paradigm in economics for the design of the EMU was two-fold. First, there was a rejection of any need to develop a European-level fiscal function to work in tandem with the proposed European Central Bank. All sorts of sophistry was used to justify this decision, including a specious appeal to the principle of subsidiarity but the reality is that the politicians, infested with Monetarist thought, which eschewed the use of active fiscal policy, didn’t want much fiscal latitude to be built-in to the design of the EMU. Second, once it was clear that the fiscal and social policy functions would continue to be the responsibility of the national governments, the politicians had to ensure the straitjacket could be applied down to that level. The proposed imposition of tight fiscal rules – deficits no greater than 3 per cent of GDP and public debt no greater than 60 per cent of GDP – would they thought accomplish that goal. As we have learned earlier, these rules had no economic motivation. They were arbitrary but considered to be tight enough to satisfy the priority for price stability even though no research was published to robustly demonstrate how these fiscal rules would be necessary or sufficient to maintain a stable and low inflation environment.


The whole process had a surrealistic air about it at the time.

Once the Treaty was signed in March 1992, the European Commission and a phalanx of sympathetic economists set about ‘backfilling’ – producing research papers, which apparently provided intellectual and evidential authority to justify the decisions that had been made and to ‘prove’ how sound the Treaty parameters were. It was theatre, of the high farce variety.


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