Bloomberg - Everything You Want To Know About Modern Money Theory

via MNE

The German Undervaluation Regime under Bretton Woods

How Germany Became the Nightmare of the World Economy

by Martin Höpner (Max Planck Institute for the Study of Societies)

Highly recommended longer PDF. Here is the teaser:

Abstract

Germany is an undervaluation regime, a regime that steers economic behavior towards deterioration of the real exchange rate and thereby towards export surpluses. This regime has brought the eurozone to the brink of collapse. But it is much older than the euro. It was established during the Bretton Woods years and has survived all subsequent European currency orders. The regime operates in two steps: competitive disinflation against trading partners; and resistance against correcting revaluations. The Bretton Woods order provided perfect conditions for the establishment and perpetuation of the regime: it was flexible enough for sufficient macroeconomic policy autonomy to bring about differential inflation rates, and sticky enough to delay and minimize revaluations.

Conclusion

Germany’s competitive undervaluation has brought the eurozone to the brink of collapse (Flassbeck and Lapavitsas 2015). This undervaluation did and does not just rely on “wrong” policy choices. It must be understood as a path prescribed by a set of institutions, organizations, and ideologies – in short, a regime – that is much older than the euro. It was established in the 1950s, long before Germany became an export-driven growth model in the sense of Baccaro and Pontusson (2016; 2018; 2019), and has survived all subsequent European currency orders. The regime relies on the minimization of inflation drivers and on the stickiness of the currency regime. The stickier the currency regime, the more likely it is that competitive disinflation succeeds. The euro is the first European currency regime that rules out de- and revaluations entirely. The radicalization of the German undervaluation regime under the euro should therefore not come as a surprise.

Admittedly, the fact that the German undervaluation regime already existed in the 1950s is not proof that Bretton Woods was its starting point. It may have been established much earlier and revived after World War II. Let us therefore briefly sound out

the earlier phases of German capitalism. To put the main finding upfront, trade balance data for Imperial Germany, for the Weimar Republic, and for Nazi Germany indicate that Germany was not a surplus country before World War II (see the data shown in Lampe and Wolf 2015, 282; Metz 2015, 197; Wolf 2015, 296; Tooze 2008, 688). We have good reasons to believe that the regime was actually established under Bretton Woods.

Imperial Germany’s trade balance was consistently in the negative. The Weimar years are particularly interesting. Under the gold standard, after the great inflation in 1923, Germany continuously lost competitive strength and accumulated trade deficits (James 2012). Weimar Germany was definitely not an undervaluation regime – although it would have needed to become one to be able to pay the World War I reparations (Holtfrerich 2016, 358). The first years in which Weimar Germany’s current account deficits changed into surpluses were the years of Reich Chancellor Brüning (in office: 1930–1932) and the surpluses were a result of the huge contraction of the economy rather than of undervaluation. These incidents resemble not Germany’s undervaluation regime but, to the contrary, the situation which the Southern European economies face today (Ritschl 2012). The data for the Third Reich are difficult to read. The main characteristic of Nazi economic policy was surely not to boost exports but to implement a strict dominance of domestic over foreign economic policy goals, and to use available resources for war preparation and, later, war. In general, the Nazi’s economic vision was economic autarky rather than reviving the external trade that had broken down during the 1929 crisis (James 1998, 71; Kopper 2016, 94).

Today, the world economy, and the eurozone in particular, experience Germany’s export surplus orientation as a nightmare. We have seen that this orientation has a history of almost seventy years and that it is deeply rooted in Germany’s political–economic institutions, organizations, and economic ideologies. Should this rather theoretic insight change our thinking about the euro crisis? Does it qualify, justify or excuse the damage done? Does it challenge the fundamental truth that currency unions can, always and everywhere, work smoothly only if they are at the same time inflation unions? Or, more practically, does it speak against a progressive political program that aims at breaking with Germany’s export surplus regime and at re-directing its orientations more towards the domestic economy?

Not at all; the political and practical implication is a different one. The insight into the historicity of the German undervaluation regime should shift our attention from the dysfunctional policies within the eurozone to the euro itself. Undervaluation regimes are beasts which must not be used to found currency unions unless hard, transformative instruments capable of breaking the regimes’ self-logics are available. As things stand, such instruments do not even exist in theory.54 This is the problem of the euro- zone, not the absence of a eurozone parliament, of a European finance minister, or of sufficient risk pools among investors or banks. All this does not imply that regimes can- not be transformed. But it opens our eyes to the fact that the common currency may be easier to break than the dysfunctional heterogeneity within it.

Do read the whole Pdf.

Great Recession in Europe and the U.S. Great Depression - oh, Greece again

Post from the excellent True Economics

In a one-chart summary, why the Euro has been a painfully failing experiment in monetary policy:

The US Great Depression versus the Greek Recession

Greek Great Recession is now in year 11, and counting. By the end of 2019, the IMF estimates that the Greek economy will be 22.1 percent below the 2007 levels, and by 2024 (the furthest IMF forecast we have), it is expected to be 16.2 percent below the 2007 levels. ...

Greece is hardly the only economy in this situation. Italy is patently in the same boat, and as shown in the chart below, nine out of the EA19 states have experienced longer duration of recovery from the Great Recession than the U.S. from the Great Depression.

Euro area countries recession duration

Full post here.

Here is more on Greece by Bill Mitchell:

As you were Greece – remain in permanent depression – commitments are commitments!

COMPLETING THE EURO: THE EURO TREASURY AND THE JOB GUARANTEE

Bill Mitchell wrote:

On March 13, 2018, the OECD released its latest Economic Outlook with accompanying “Interim projections” as at March 2018) suggesting that the current growth phase will continue through to next year as consumer and business confidence improves and translates in higher investment rates. The OECD, however, forecasts that growth in the Eurozone will decline over the next two years. The major Eurozone nations (France, Germany and Italy) are not witnessing the growing investment expenditure. The Eurozone might be seeing a little sunshine creeping out from the very dark clouds. But it is far from recovered and the future is ominously black. Key cyclical indicators remain at depressed levels, which means that when the next cycle hits, the Eurozone will be in a much worse position than before. And the reason: the fundamentally flawed design of the monetary system with its accompanying austerity bias. The reform required is root-and-branch rather than a prune here and there.

Before I analyse the Eurozone, I thought this graph from the OECD briefing document – Getting stronger, but tensions are rising – was stark.

It shows movements in Household real disposable income across the OECD block from 1985 (= 100) to 2015.

The data shows that the lowest 10 per cent income-earning households are worse off than they were prior to the crisis and only around 18 per cent better off since 1985.

By comparison the Top 10 per cent are 60 per cent better off since 1985 and have more than recovered the losses in real disposable income that the GFC wrought.

Not only is the recovery slower at the bottom end but the fall during the crisis was much larger.

How can the Eurozone get back on a sustained growth path and, more importantly, how can unemployment be solved?

Esteban Cruz-Hidalgo, Dirk H. Ehnts and Pavlina R. Tcherneva write on the Econoblog

The problems with the design of the Eurozone came into focus when, late in 2009, several member nations – notably Greece – failed to refinance their government debt. The crisis that followed was not entirely a surprise. When the Euro was launched in 1999, many economists warned that the single currency was unworkable. Even Eurozone optimists argued that the Euro project would eventually need to be completed. More than 10 years after the crisis, unemployment rates remain elevated and continue to threaten the social, political and economic stability of the Eurozone. The institutional constraints of the single currency however preclude bold action to address these challenges. In this paper, we suggest that tackling the twin problems of the Eurozone – its institutional flaws and mass unemployment – could be addressed by creating a Euro Treasury that would finance a Job Guarantee program, which would eliminate mass unemployment, enhance price stability, and foster social and economic integration across Europe.

How would it be funded?

... we propose the creation of a European Treasury as a method of correcting the institutional flaw in the unprecedented historical design of the Euro, which gave birth to a stateless currency. The Job Guarantee is a particular method of providing the currency that is distinct from traditional aggregate demand management methods. Even if Maastricht criteria were relaxed and a European Treasury established, long run full employment is not guaranteed through conventional aggregate demand management measures. Indeed, we have observed periods of robust growth that still experience joblessness. The Job Guarantee is a targeted demand approach to solving the problem of unemployment at all stages of the business cycle by an innovative policy design of direct bottom-up employment, which can also address other public purpose objectives such as Green investment. It is also superior to conventional pump priming measures because it acts as a robust Euro-wide anti-cyclical fiscal policy — one that neither creates too much, nor too little spending to produce and maintain tight full employment over the long run.

Since the Job Guarantee builds on the idea that money is a creature of the State and that the State is normally the monopoly issuer of the currency, to us it seems a logical step to first introduce a Euro Treasury and then proceed with the implementation of a macroeconomic policy for achieving full employment and price stability in the form of a Job Guarantee. In short, what we propose is for the Euro Treasury to establish a new fiscal institution that would issues sovereign securities. For simplicity, we call these eurobonds. The eurobonds would be eligible as collateral to borrow from European Central Bank (ECB) to the full extent possible. As the ECB is only prohibited to finance national governments directly, it could put its full support behind the eurobonds, meaning that it could promise to buy up as many eurobonds as necessary. Acting as a buyer of last resort it would guarantee that investors would always be able to sell eurobonds at a fair price without creating a large fall in the price of eurobonds. Thus, the ECB would ensure sufficient liquidity in the market for eurobonds. De facto, the Euro Treasury would spend first and tax later, thus removing the need to finance the European Union's budget by transferring money from the budgets of the Eurozone's member countries. 2

2 This is akin to Lavoie's notion of post-Chartalims (Lavoie 2013). Our point is logical, not descriptive. The fact that to save the self-imposed restriction the support of the ECB can be seen as an introduction of "latent" high-powered money within the banking sector. The money that will be used to buy these bonds from the banks comes from the ECB via open market purchases backed from the beginning. In this sense, the bonds would be involved in public spending. The Treasury spends first. If these bonds were not backed by the Central Bank, there would not be any increase in the money supply, producing only a change in the composition of the financial assets of the private sector (see Tymoigne 2016:1324-1325). Therefore the bonds would not be risk free, which would affect their price.

They suggest in their Pdf

A BOTTOM-UP APPROACH TO TRANSFORM EUROPE

The Euro turned twenty in 2019. It was to be expected that it would not work smoothly from the start, since establishing monetary systems usually takes decades or even centuries. Monetary regimes must then be adjusted constantly in order to cope with change. We propose that the Eurozone institutions be amended by a Job Guarantee in order to address the unemployment problem and a Euro Treasury in order to make sure that government spending is forthcoming on a permanent basis (without the interference of financial markets) and especially in times of economic crises. This would set the Eurozone on a path to full employment and price stability that is superior to current arrangements; with the replacement of the NAIRU with the NAIBER and, de facto, to promote convergence at the bottom substituting the disperse minimum wage with a Job Guarantee on equal terms for all European citizens.

The creation of monetary sovereignty in the Eurozone as a Federal level is the result of a fiscal authority supported by the ECB. Such institutional innovation is compatible with the current mandate of the ECB, and eliminates the risk that the treasury bonds could have to establish the link with the currency issuer. Not being a mere customer of the currency, as member countries are, would allow the Euro Treasury to spend and introduce money into the economy without the need to finance the European Union budget by transferring money from member countries' budget of the Eurozone.

The dysfunctionality that implied that the fiscal and monetary arms of the Eurozone were separated is corrected as well, allowing a functional Treasury liable for filling the lack of spending that creates a level of mass unemployment unevenly distributed among the countries of the Eurozone. The Job Guarantee creates jobs directly, it does not go through any strategy of flooding the top ones with easy credit and expecting the drip to come down. It can be conceptualized as a bottom-up approach, different from the traditional Keynesian trickle-down economics. The Job Guarantee financed by the Euro Treasury for managing full employment and stability allowing, besides, the design of policies that focus on the economic and human impact of the policy instead of a specific budget result. Instead of the inefficiency of pushing the workforce to unemployment and discouragement, with the enormous economic and social costs that this "epidemic" of unemployment entails, we could mobilize the citizens through Job Guarantee programs to take care of the environment and the people, and everything we can imagine doing to improve our societies and that we do not do for a bad design of the monetary system. Increasing spending without raising taxes it is possible, but above all absolutely essential.

Full Pdf here

Claus Offe: Time is running out for EMU reform, as divide between winners and losers grows

MF: As the largest Member State and as the economic powerhouse of Europe, one would expect Germany to somehow serve as a benign hegemon, capable of reconciling her own national interests with the interests of others and especially with the  long term economic and political sustainability of the EU

CO: During the long crisis Germany has in fact largely abdicated its responsibility in and for Europe. The German government’s obsession with rules, austerity and conditionality has been the main driving force behind the growing divergence of EMU economies and the devastating social shocks which has hit Southern member states.  Germany has tried to push through her own economic and social model, based on flawed assumptions that we might call a "flower pot theory”. Such theory is the favorite mode of thinking of winners. Their message: the rules that have worked so advantageous in "our" case are the same that would work to the benefit of "you" as well – if only you could overcome yourself to follow "our" rules which you are most welcome, in fact required, to adopt and follow. Flowers in separate flower pots develop similarly if you use the same seeds, the same fertilizers etc. What is wrong with this comfortable mode of thinking is that it ignores and denies systemic interdependence. However, there is a powerful intellectual antidote. It is captured in a sentence by authors  Mathijs and Blyth, often quoted in the scholarly literature on the EU. It reads: "The Eurozone as a whole cannot become more like Germany. Germany could only be like Germany because the other countries were not." Germany is like Germany, we might add, because of its reaping of unreciprocated advantages from the system of EU member states and their interdependencies – the opposite of separate flower pots.

More here

Reading Lounge

1. How to Leave the Euro: A Practical Roadmap for Italy - more important than ever

2. Dunning-Kruger and one more

3. Briefing Paper on TARGET2 Balances

4. Can we enable a robot to do the same, learning to manipulate a new object by simply watching a human manipulating the object just as in the video?

5. Losing public attention raises the severity of terrorism. - Give them air time they deserve

6. J'aime Paris in Mai - not back then

7. Italy should prioritise an exit of the Eurozone madness

Reading Lounge - Italy

1. The assault on democracy in Italy

2. Italy’s Organic Crisis

3. Eurocracy

4. Here's some real good porn and spot on: One Word: Contagion

5. Someone's peace of mind has been severely disturbed. Not directly by Italy.

Reading Lounge

1. How Hungary Ran George Soros Out of Town

2. Jane Austen and social judgement - older but good

3. We Need to Talk About Zeki Müren: Meet Turkey’s Liberace

4. Pollution in the Roman Empire

5. Uber and other gig platforms account for far less of the economy than many estimates suggest

Reading Lounge

1. What did Hannah Arendt really mean by the banality of evil?

2. The Man Who Brought Down Lance Armstrong

3. Bank of Japan’s QE strategy is failing

4. Sex wearable is coming to track your performance and judge you

It's basically a Fitbit for your man bits that tracks thrust speed and velocity. But don't be too hard on yourself.

No idea, if live tweeting is included.

5. THE MORE OF EVERYTHING PROBLEM

Is this the best way to stimulate startup activity in the EU?

Reading Lounge

1. El­iz­a­beth Reed - one of the best live albums

2. Wes Anderson-Inspired Restaurant - super cool

3. ‘My Dearest Fidel’

"You may be the prime minister, but I’m a very important journalist. How dare you keep me waiting,”

4. The hidden world of the hikikomori

At the time when Elan photographed 34 year-old Ikuo Nakamura, he had been in his room for seven years.

5. The pink choice - homosexuals in Vietnam

6. Forget European reform – the Germans have anyway

Reading Lounge

1. “I hope for Goldman Sachs’ bankruptcy”: Nassim Nicholas Taleb on Skin in the Game

2. Must read! Monetary policy and fiscal discipline: How the ECB planted the seeds of the euro area crisis

3. Discernment of mortality risk associated with childbirth in archaeologically derived forager skeletons

4. Economic Leadership and Growth

Economies governed by former economics students grow faster than economies governed by leaders with other education backgrounds; a result which is most evident for presidents. 

Evidence in Europe missing. Pdf here.

5. From 2005 but still entertaining: Gender differences are a laughing matter, study reveals

"These included the left prefrontal cortex, suggesting a greater emphasis on language and executive processing in women, and the nucleus accumbens, or NAcc, which is part of the mesolimbic reward center."

6. Google Japan Now Has Street View From a Dog's Perspective

Bill Mitchell in Helsinki

Around 17:30: 'There had been a huge demonstration in Andalusia demanding full employment, jobs. I asked who had organized it? It was the extreme right, not the social democrats.'

via his blog

Yes! A huge export surplus of Germany mirrored by a massive 70.8 per cent of its unemployed ‘at risk of poverty’

Good golly, and the Germans just voted for the same government that made this possible. Relax, "this time it's different".

Bill Mitchell has a post based on Eurostat data.

Last week, Eurostat released it updated data covering people who are at risk of monetary poverty. In the press release/news page (February 26, 2018) – Almost half the unemployed at risk of monetary poverty in the EU – we learn that 48.7 per cent of unemployed persons in the EU “were at risk of poverty” in 2016, even “after social transfers” were taken into account. The situation has deteriorated significantly since 2005 as a result of the impacts of the GFC and the policy response taken by the European Commission and the Member States (under the EC’s thumb). While the usual suspects perform badly on these indicators (Spain, Greece, Italy), a stark result is that 70.8 per cent of German unemployed persons are at risk of poverty. This proportion has jumped from 40.9 per cent in 2005 (a 29.9 percentage point shift). So, even in the strongest Eurozone economy, the policy frameworks are delivering terrible outcomes. Increasing divergence and inequality and rising social exclusion are the most striking characteristics of the 13 years of European Union history since 2005. It doesn’t look like a policy bloc that any sensible nation should aspire to be part off (or remain within).

The performance of Germany is particularly interesting given it is held out as the ‘engine-room’ of the Eurozone. Overall, it has endured the second largest deterioration over the period (5.9 percentage points). Spain had the largest deterioration (6.6 percentage points).

Eurostat

Full post at Bill Mitchell with more graphs.

Narrative-building in newspapers during the 2008 financial crises in the eurozone

Bruegel has a study on this subject.

Tales from a crisis: diverging narratives of the euro area

Henrik Müller, Giuseppe Porcaro and Gerret von Nordheim

Who gets the blame for the crisis? How did narratives of the crisis develop since 2007? The authors of this paper tried to identify the key crisis-related topics in articles from four opinion-forming newspapers in the largest euro-area countries.

This paper focusses on an issue that is largely ignored by economic analyses: Europe’s fragmented public sphere, a feature that distinguishes the euro area from other major currency areas. At the national level, public opinion is formed through mass media, which provides a platforms for public discourse (McCombs et al, 2017), but the European Union and the euro area lack a common public sphere (De Beus, 2010). In the context of the euroarea crisis, it has been argued that the lack of common European communication channels constitutes a missing link that holds back national discourses from converging on common framings when it comes to economic policy priorities (Müller, 2016). Our analysis identifies historical trends in narrative building linked to the crisis in order to inform the current debate on euro-area governance reform.

We analysed a set of newspaper articles published between 2007 and 2016 in the four biggest euro-area countries – Germany, France, Italy and Spain. We were able to observe the evolution of newspaper coverage of economic policy topics over time and to compare similarities and differences between countries. Our specific objective is to dig deeper into the question of whether there is scapegoating underway in terms of responsibility for the crisis. More broadly, our analysis can help in understanding the difficulties euro-area policymakers face when it comes to formulating solutions that are both appropriate and commonly acceptable.

Executive summary

Economic analyses largely ignore Europe’s fragmented public sphere, a feature that distinguishes the euro area from other major currency areas.

This Policy Contribution identifies how narratives of the crisis developed since 2007, by identifying the key crisis-related topics in articles from four opinion-forming newspapers in the largest euro-area countries (Germany’s Süddeutsche Zeitung, France’s Le Monde, Italy’s La Stampa and Spain’s El País). In particular, the analysis considers where blame for the crisis has been laid with the aim of informing the current debate on euro-area governance reform. Such an exercise can help to understand the difficulties euro-area policymakers face when it comes to formulating solutions that are both appropriate and commonly acceptable.

The analysis showed that Süddeutsche Zeitung blames everyone but Germany, the chief suspects being Greece and the European Central Bank; the paper stresses the need to return to a perceived status quo of stability and fairness. Le Monde blames everyone including the French political class, but largely refrains from criticism of European institutions such as the European Commission and the European Central Bank. La Stampa sees Italy as the victim of unfortunate circumstances, including the European Union austerity measures promoted by Germany, and Italy’s own politicians. El País primarily blames Spain for misconduct during the boom years preceding the crisis.

This picture of differing narratives shows that each euro-area country faces different pressures from its respective public when discussing how to press ahead with effective euro-area governance reform. The global financial crisis and the subsequent recession had quite different effects in different euro-area countries. Therefore, it is unsurprising that the narratives differ in the four papers. National problems and solutions took centre stage in national discourses leaving systemic euro-area issues largely unmentioned.

Pdf here

Stuff to read

1. Often, I hear economists saying that they never realized that adjustment in the Eurozone would come via lower wages.

2. Great Quincy Jones interview

3. Hail, King Kazu. Pro soccer at 50

4. A quadraphonic reel to reel tape of Bitches Brew, the groundbreaking Miles Davis jazz-rock fusion album of 1970.

5. Dim lights are producing dimwits.

Germany’s dystopian plans for Europe: from fantasy to reality?

Excellent post by T. Fazi on the current situation of that ambitious under-permanent-construction-reconstruction-Macron/Hegel-refounding-Merkel-on-life-support-project EU.

While its neighbor Austria puts the finishing touches on a new government after a 30-year-old won the elections, Germany sits in a swamp with a 63-year-old Diesel off-road waiting to be winched out by a bearded immigrant from Brussels who is more less on his political death bed with the vultures circling. New elections totally out of the picture at the moment, because the AfD would gain even more votes than in September. IOW, it's fun time. By German standards, that is.

Nugh said, here is Thomas Fazi crossposted from Open Democracy with thanks.

Germany’s dystopian plans for Europe: from fantasy to reality?

For Germany, the idea of Europeanism has provided the country’s elites with the perfect alibi to conceal their hegemonic project behind the ideological veil of 'European integration'. 

After Emmanuel Macron’s election in France, many (including myself) claimed that this signalled a revival of the Franco-German alliance and a renewed impetus for Europe’s process of top-down economic and political integration – a fact that was claimed by most commentators and politicians, beholden as they are to the Europeanist narrative, to be an unambiguously positive development.

Among the allegedly ‘overdue’ reforms that were said to be on the table was the creation of a pseudo-‘fiscal union’ backed by a (meagre) ‘euro budget’, along with the creation of a ‘European finance minister’, the centre-points of Macron’s plans to ‘re-found the EU’ – a proposal that raises a number of very worrying issues from both political and economic standpoints, which I have discussed at length elsewhere.

The integrationists’ (unwarranted) optimism, however, was short-lived. The result of the German elections, which saw the surge of two rabidly anti-integrationist parties, the right-wing FDP and extreme right AfD; the recent collapse of coalition talks between Merkel’s CDU, the FDP and the Greens, which most likely means an interim government for weeks if not months, possibly leading to new elections (which polls show would bring roughly the same result as the September election); and the growing restlessness in Germany towards the 13-year-long rule of Macron’s partner in reform Angela Merkel, means that any plans that Merkel and Macron may have sketched out behind the scenes to further integrate policies at the European level are now, almost certainly, dead in the water. Thus, even the sorry excuse for a fiscal union proposed by Macron is now off the table, according to most commentators.

At this point, the German government’s most likely course in terms of European policy – the one that has the best chance of garnering cross-party support, regardless of the outcome of the coalition talks (or of new elections) – is the ‘minimalist’ approach set in stone by the country's infamous and now-former finance minister, Wolfgang Schäuble, in a ‘non-paper’ published shortly before his resignation.

The main pillar of Schäuble’s proposal – a long-time obsession of his – consists in giving the European Stability Mechanism (ESM), which would go on to become a ‘European Monetary Fund’, the power to monitor (and, ideally, enforce) compliance with the Fiscal Compact. This echoes Schäuble’s previous calls for the creation of a European budget commissioner with the power to reject national budgets – a supranational fiscal enforcer.

The aim is all too clear: to further erode what little sovereignty and autonomy member states have left, particularly in the area of fiscal policy, and to facilitate the imposition of neoliberal ‘structural reforms’ – flexibilisation of labour markets, reduction of collective bargaining rights, etc. – on reluctant countries.

To this end, the German authorities even want to make the receipt of EU cohesion funds conditional on the implementation of such reforms, tightening the existing arrangements even further. Moreover, as noted by Simon Wren-Lewis, the political conflict of interest of having an institution lending within the eurozone would end up imposing severe austerity bias on the recovering country.

Until recently, these proposals failed to materialise due, among other reasons, to France’s opposition to any further overt reductions of national sovereignty in the area of budgetary policy; Macron, however, staunchly rejects France’s traditional souverainiste stance, embracing instead what he calls ‘European sovereignty’, and thus represents the perfect ally for Germany’s plans.

Another proposal that goes in the same direction is the German Council for Economic Experts’ plan to curtail banks’ sovereign bond holdings. Ostensibly aimed at ‘severing the link between banks and government’ and ‘ensuring long-term debt sustainability’, it calls for: (i) removing the exemption from risk-weighting for sovereign exposures, which essentially means that government bonds would no longer be considered a risk-free asset for banks (as they are now under Basel rules), but would be ‘weighted’ according to the ‘sovereign default risk’ of the country in question (as determined by credit rating agencies); (ii) putting a cap on the overall risk-weighted sovereign exposure of banks; and (iii) introducing an automatic ‘sovereign insolvency mechanism’ that would essentially extend to sovereigns the bail-in rule introduced for banks by the banking union, meaning that if a country requires financial assistance from the ESM, for whichever reason, it will have to lengthen its sovereign bond maturities (reducing the market value of those bonds and causing severe losses for all bondholders) and, if necessary, impose a nominal ‘haircut’ on private creditors.

As noted by the German economist Peter Bofinger, the only member of the German Council of Economic Experts to vote against the sovereign bail-in plan, this would almost certainly ignite a 2012-style self-fulfilling sovereign debt crisis, as periphery countries’ bond yields would quickly rise to unsustainable levels, making it increasingly hard for governments to roll over maturing debt at reasonable prices and eventually forcing them to turn to the ESM for help, which would entail even heavier losses for their banks and an even heavier dose of austerity.

It would essentially amount to a return to the pre-2012 status quo, with governments once again subject to the supposed ‘discipline’ of the markets, particularly in the context of a likely tapering of the ECB’s quantitative easing (QE) program. The aim of this proposal is the same as that of Schäuble’s ‘European Monetary Fund’: to force member states to implement permanent austerity.

Of course, national sovereignty in a number of areas – most notably fiscal policy – has already been severely eroded by the complex system of new laws, rules and agreements introduced in recent years, including but not limited to the six-pack, two-pack, Fiscal Compact, European Semester and Macroeconomic Imbalances Procedure (MIP).

As a result of this new post-Maastricht system of European economic governance, the European Union has effectively become a sovereign power with the authority to impose budgetary rules and structural reforms on member states outside democratic procedures and without democratic control.

The EU’s embedded quasi-constitutionalism and inherent (structural) democratic deficit has thus evolved into an even more anti-democratic form of ‘authoritarian constitutionalism’ that is breaking away with elements of formal democracy as well, leading some observers to suggest that the EU ‘may easily become the postdemocratic prototype and even a pre-dictatorial governance structure against national sovereignty and democracies’.

To give an example, with the launch of the European Semester, the EU’s key tool for economic policy guidance and surveillance, an area that has historically been a bastion of national sovereignty – old-age pensions – has now fallen under the purview of supranational monitoring as well. Countries are now expected to (and face sanctions if they don’t): (i) increase the retirement age and link it with life expectancy; (ii) reduce early retirement schemes, improve the employability of older workers and promote lifelong learning; (iii) support complementary private savings to enhance retirement incomes; and (iv) avoid adopting pension-related measures that undermine the long term sustainability and adequacy of public finances.

This has led to the introduction in various countries of several types of automatic stabilizing mechanisms (ASMs) in pension systems, which change the policy default so that benefits or contributions adjust automatically to adverse demographic and economic conditions without direct intervention by politicians. Similar ‘automatic correction mechanisms’ in relation to fiscal policy can be found in the Fiscal Compact.

The aim of all these ‘automatic mechanisms’ is clearly to put the economy on ‘autopilot’, thus removing any element of democratic discussion and/or decision-making at either the European or national level. These changes have already transformed European states into ‘semi-sovereign’ entities, at best. In this sense, the proposals currently under discussion would mark the definitive transformation of European states from semi-sovereign to de facto (and increasingly de jure) non-sovereign entities.

Regardless of the lip service paid by national and European officials to the need for further reductions of national sovereignty to go hand in hand with a greater ‘democratisation’ of the euro area, the reforms currently on the table can, in fact, be considered the final stage in the thirty-year-long war on democracy and national sovereignty waged by the European elites, aimed at constraining the ability of popular-democratic powers to influence economic policy, thus enabling the imposition of neoliberal policies that would not have otherwise been politically feasible.

In this sense, the European economic and monetary integration process should be viewed, to a large degree, as a class-based and inherently neoliberal project pursued by all national capitals as well as transnational (financial) capital. However, to grasp the processes of restructuring under way in Europe, we need to go beyond the simplistic capital/labour dichotomy that underlies many critical analyses of the EU and eurozone, which view EU/EMU policies as the expression of a unitary and coherent transnational (post-national) European capitalist class.

The process underway can only be understood through the lens of the geopolitical-economic tensions and conflicts between leading capitalist states and regional blocs, and the conflicting interests between the different financial/industrial capital fractions located in those states, which have always characterised the European economy. In particular, it means looking at Germany’s historic struggle for economic hegemony over the European continent.

It is no secret that Germany is today the leading economic and political power in Europe, just as it is no secret that nothing gets done in Europe without Germany’s seal of approval. In fact, it is commonplace to come across references to Germany’s ‘new empire’. A controversial Der Spiegel editorial from a few years back event went as far as arguing that it is not out place to talk of the rise of a ‘Fourth Reich’:

That may sound absurd given that today’s Germany is a successful democracy without a trace of national-socialism – and that no one would actually associate Merkel with Nazism. But further reflection on the word ‘Reich’, or empire, may not be entirely out of place. The term refers to a dominion, with a central power exerting control over many different peoples. According to this definition, would it be wrong to speak of a German Reich in the economic realm?

More recently, an article in Politico Europe – co-owned by the German media magnate Axel Springer AG – candidly explained why ‘Greece is de facto a German colony’. It noted how, despite Tsipras’ pleas for debt relief, the Greek leader ‘has little choice but to heed the wishes of his “colonial” masters’, i.e., the Germans.

This is because public debt in the eurozone is used as a political tool – a disciplining tool – to get governments to implement socially harmful policies (and to get citizens to accept these policies by portraying them as inevitable), which explains why Germany continues to refuse to seriously consider any form of debt relief for Greece, despite the various commitments and promises to that end made in recent years: debt is the chain that keeps Greece (and other member states) from straying ‘off course’.

Even though the power exercised by Europe’s ‘colonial masters’ is now openly acknowledged by the mainstream press, it is however commonplace to ascribe Germany’s dominant position as an accident of history: according to this narrative, we are in the presence of an ‘accidental empire’, one that is not the result of a general plan but that emerged almost by chance – even against Germany’s wishes – as a result of the euro’s design faults, which have allowed Germany and its satellites to pursue a neo-mercantilist strategy and thus accumulate huge current account surpluses.

Now, it is certainly true that the euro’s design – strongly influenced by Germany – inevitably benefits export-led economies such as Germany over more internal demand-oriented economies, such as those of southern Europe. However, there is ample evidence to support the argument that Germany, far from having accidently stumbled upon European dominance, has been actively and consciously pursuing an expansionary and imperialist strategy in – and through – the European Union for decades.

Even if we limit our analysis to Germany’s post-crisis policies (though there is much that could be said about Germany’s post-reunification policies and subsequent offshoring of production to Eastern Europe in the 1990s), it would be very naïve to view Germany’s inflexibility – on austerity, for example – as a simple case of ideological stubbornness, considering the extent to which the policies in question have benefited Germany (and to a lesser extent France).

Germany (and France) have been the main beneficiaries of the sovereign bailouts of periphery countries, which essentially amounted to a covert bailout of German (and French) banks, as most of the funds were channelled back to the creditor countries’ banks, which were heavily exposed to the banks (and to a lesser degree the governments) of periphery countries. German policy, Helen Thompson wrote, overwhelmingly ‘served the interests of the German banks’.

This is a telling example of how Germany’s policies (and the EU’s policies more in general), while nominally ordoliberal – i.e., based upon minimal government intervention and a strict rules-based regime – are in reality based on extensive state intervention on behalf of German capital, at both the domestic and European level.

As Andy Storey notes, not only did the German government, throughout the crisis, show a blatant disregard for ordoliberalism’s non-interference of public institutions in the workings of the market, by engaging in a massive Keynesian-style programme in the aftermath of the financial crisis and pushing through bailout programmes that largely absolved German banks from their responsibility for reckless lending to Greece and other countries; German authorities have also been more than happy to go along with – or to encourage – the European institutions’ ‘exercise of unrestrained executive power and the more or less complete abandonment of strict, rules-based frameworks’ – Storey is here referring in particular to the ECB’s use of its currency-issuing monopoly to force member states to follows its precepts – ‘to maintain the profitability of German banks, German hegemony within the Eurozone, or even the survival of the Eurozone itself’.

Germany (and France) are also the main beneficiaries of the ongoing process of ‘mezzogiornification’ of periphery countries – often compounded by troika-forced privatisations –, which in recent years has allowed German and French firms to take over a huge number of businesses (or stakes therewithin) in periphery countries, often at bargain prices. A well-publicised case is that of the 14 Greek regional airports taken over by the German airport operator Fraport.

France’s corporate offensive in Italy is another good example: in the last five years, French companies have engaged in 177 Italian takeovers, for a total value of $41.8 billion, six times Italy’s purchases in France over the same period. This is leading to an increased ‘centralisation’ of European capital, characterised by a gradual concentration of capital and production in Germany and other core countries – in the logistical and distribution sectors, for example – and more in general to an increasingly imbalanced relationship between the stronger and weaker countries of the union.

These transformations cannot simply be described as processes without a subject: while there are undoubtedly structural reasons involved – countries with better developed economies of scale, such as Germany and France, were bound to benefit more than others from the reduction in tariffs and barriers associated with the introduction of the single currency – we also have to acknowledge that there are loci of economic-politic power that are actively driving and shaping these imperialist processes, which must be viewed through the lens of the unresolved inter-capitalist struggle between core-based and periphery-based capital.

From this perspective, the dichotomy that is often raised in European public discourse between nationalism and Europeanism is deeply flawed. The two, in fact, often go hand in hand. In Germany’s case, for example, Europeanism has provided the country’s elites with the perfect alibi to conceal their hegemonic project behind the ideological veil of ‘European integration’. Ironically, the European Union – allegedly created as an antidote to the vicious nationalisms of the twentieth century – has been the tool through which Germany has been able to achieve the ‘new European order’ that Nazi ideologues had theorised in the 1930s and early 1940s.

In short, the European Union should indeed be viewed a transnational capitalist project, but one that is subordinated to a clear state-centred hierarchy of power, with Germany in the dominant position. In this sense, the national elites in periphery countries that have supported Germany’s hegemonic project (and continue to do so, first and foremost through their support to European integration) can thus be likened to the comprador bourgeoisie of the old colonial system – sections of a country’s elite and middle class allied with foreign interests in exchange for a subordinated role within the dominant hierarchy of power.

From this point of view, the likely revival of the Franco-German bloc is a very worrying development, since it heralds a consolidation of the German-led European imperialist bloc – and a further ‘Germanification’ of the continent. This development cannot be understood independently of the momentous shifts that are taking place in global political economy – namely the organic crisis of neoliberal globalisation, which is leading to increased tensions between the various fractions of international capital, most notably between the US and Germany.

Trump’s repeated criticisms of Germany’s beggar-thy-neighbour mercantilist policies should be understood in this light. The same goes for Angela Merkel’s recent call – much celebrated by the mainstream press – for a stronger Europe to counter Trump’s unilateralism. Merkel’s aim is not, of course, that of making ‘Europe’ stronger, but rather of strengthening Germany’s dominant position vis-à-vis the other world powers (the US but also China) through the consolidation of Germany’s control of the European continental economy, in the context of an intensification of global inter-capitalist competition.

This has now become an imperative for Germany, especially since Trump has dared to openly challenge the self-justifying ideology which sustains Germany’s mercantilism – a particular form of economic nationalism that Hans Kundnani has dubbed‘Exportnationalismus’, founded upon the belief that Germany’s massive trade surplus is uniquely the result of Germany’s manufacturing excellence (Modell Deutschland) rather than, in fact, the result of unfair trade practices.

This is why, if Germany wants to maintain its hegemonic position on the continent, it must break with the US and tighten the bolts of the European workhouse. To this end, it needs to seize control of the most coveted institution of them all – the ECB –, which hitherto has never been under direct German control (though the Bundesbank exercises considerable influence over it, as is well known). Indeed, many commentators openly acknowledge that Merkel now has her eyes on the ECB’s presidency. This would effectively put Germany directly at the helm of European economic policy.

Even more worryingly, Germany is not simply aiming at expanding its economic control over the European continent; it is also taking steps for greater European military ‘cooperation’ – under the German aegis, of course. As a recent article in Foreign Policy revealed, ‘Germany is quietly building a European army under its command’.

This year Germany and two of its European allies, the Czech Republic and Romania, announced the integration of their armed forces, under the control of the Bundeswehr. In doing so, the will follow in the footsteps of two Dutch brigades, one of which has already joined the Bundeswehr’s Rapid Response Forces Division and another that has been integrated into the Bundeswehr’s 1st Armored Division.

In other words, Germany already effectively controls the armies of four countries. And the initiative, Foreign Policy notes, ‘is likely to grow’. This is not surprising: if Germany (‘the EU’) wants to become truly autonomous from the US, it needs to acquire military sovereignty, which it currently lacks.

Europe is thus at a crossroads: the choice that left-wing and popular forces, and periphery countries more generally, face is between (a) accepting Europe’s transition to a fully post-democratic, hyper-competitive, German-led continental system, in which member states (except for those at the helm of the project) will be deprived of all sovereignty and autonomy, in exchange for a formal democratic façade at the supranational level, and its workers subject to ever-growing levels of exploitation; or (b) regaining national sovereignty and autonomy at the national level, with all the short-term risks that such a strategy entails, as the only way to restore democracy, popular sovereignty and socioeconomic dignity. In short, the choice is between European post-democracy or post-European democracy.

There is no third way. Especially in view of the growing tensions between Germany, the US and China, periphery countries should ask themselves if they want to be simple pawns in this ‘New Great Game’ or if they want to take their destinies into their own hands.

via Open Democracy

Save the EU, Forget Catalonia

H/T Rigged Game

Here’s a darkly humorous take on the mushy “Help Catalonia, Save Europe” video from the eternally irreverent Catalonian political satire show Polonia, which, ironically, will probably be the first program to be axed as part of Madrid’s campaign to “neutralise” content at Catalonia’s publicly owned broadcaster TV3. As I’ve said before, everything that is happening in Spain right now is happening with the full consent and blessing of the European Commission and the governments of almost all European nations (exceptions: Belgium, Denmark and Slovenia).

All backed by the usual crooks:

Catalonia latest: Merkel, Macron and Juncker shamelessly back Spanish PM on Catalonia

The Libertarian Position on Catalonia

By Pater Tenebrarum at the Acting Man blog:

As libertarians we should always support secession, for a number of reasons:

    The smaller the territories governments rule over, the less power they have.

    The more territories and governments people can choose from, the less tyrannical government policies will be, as people will find it easier to vote with their feet.

    Competition among governments is a good thing for citizens. One reason why the EU has become such an evil organization since it expanded its remit from being a trade union to become a political entity trying to centralize power.

    The idea of secession will eventually lead to the total abolition of government. After all, if a territory can secede, why not a city? Why not a block within a city? And lastly, why should not individuals also be able to secede? Incidentally, this was an argument Rothbard made in support of secession. He basically said: "We are told anarchy is bad but governments and nation states exist in a state of anarchy vs. each other. Why is that not bad? And if that is not bad, how come getting rid of government altogether is considered bad?"

    I have empirical support for this idea as well. Where is economic freedom the greatest, and which countries are therefore the by far most prosperous? Well, how about Hong Kong, Switzerland, Singapore, Luxembourg, Liechtenstein, Monaco, Andorra, all of which are tiny political territories. Some of them are almost twice as rich (in output per capita) than the so-called "developed world". What unites them are "laissez-faire" governments, low taxes, almost no licensing requirements, low tariffs or no tariffs at all, and so on. Oh, and none of them "throw their weight around on the world stage" or threaten any of their neighbors militarily.

H/T Mish

More articles:

Catalonia - fake freedom.

And, of course, not remiss fucking Merkel and the view from Switzerland:

She did not do anything
Catalonia and Spain are approaching the abyss. EU politicians remain depressed. Merkel fails. (in German)

Sie hat doch gar nichts getan
Katalonien und Spanien nähern sich dem Abgrund. Die EU-Politiker schweigen depressiv. Merkel versagt.

Guess what, the German Constitutional Court agrees with me, Super Mario, and my 2% inflation goal.

Keep it up, Karlsruhe.

Don't even know, how the heck we get there. Not even Janet knows. Anyway, I keep buying shit, even corporates. Where does the money go? Dunno, may be here, or here.

Look, the EU would be screwed without my 'Whatever it takes' in July 2012 and my additional quantification "And believe me, it will be enough” just so I could get my point across.

Still, some dimwits say I am contravening the Maastricht Treaty, as if I would care. They even drag their asses to the Red Coated in Karlsruhe to get me stopped. Losers! Here it is from those funnily clad chaps:

2. a) ...

Mit der Unterbrechung der Anleihekäufe durch die Bundesbank würde die Zielsetzung des PSPP, durch eine weitere Lockerung der monetären und finanziellen Bedingungen eine Anhebung der Inflation auf knapp 2 % zu bewirken, aufgrund des hohen prozentualen Anteils der von der Bundesbank getätigten Ankäufe jedenfalls stark eingeschränkt oder womöglich sogar verhindert werden.

2. (a) ... With the interruption of the bond purchases by the Bundesbank, the objective of the PSPP to effect an inflation of just under 2% by an additional easing of the monetary and financial conditions would in any case be severely restricted or even prevented.

Didn't expect anything else from Gruppo Rosso.

When you're walkin' down the street

And the man tries to get your business

And the people that you meet

Want to open you up like Christmas

You gotta wrap your fuzzy with a big red bow

Ain't no sum bitch gonna treat me like a ho

I'm a classy honey kissy huggy lovey dovey ghetto princess

Cause you're filthy Oooh, and I'm gorgeous.

Juncker: "... the wind is back in Europe's sails" and the inability to afford one-week holiday away from home

Juncker: "... the wind is back in Europe's sails", as long as you keep sailing on your couch.

via Bill Mitchell