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
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.
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
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