As the Guardian reports this morning:
Merkel is pushing for a new enforceable regime under which countries using the euro would ultimately need to sacrifice budgetary and fiscal powers to a European authority that would monitor and then either endorse or veto budgets. It would penalise those whose debt levels are deemed to be destabilising the currency.
Let's leave aside for the moment all the issues about loss of sovereignty to the EU (and I would have major reservations about this). Let's instead deal with utter economic stupiduty (I can't be blunter than that) of this plan.
What Merkel, and so many right wing economists and politicians, assume is that government is in complete control of its budgets. That is completely untrue.
A government can and should would work out what it wishes to do with regard to spending to fulfil its mandate. So it should set budgets for health, education, asocial security, defence and so on. And it has a duty to explain why it has budgeted those costs.
And of course a state has a duty to do two further things. The first is to cover current spending as far as is possible with current income and to also cover the current cost of servicing loans used to pay for capital spending out of that same current income. If it does that then its book balance in a true accounting and economic sense.
That's the theory. That's the world Merkel thinks can be delivered. And she's completely wrong to presume this can be done.
Whilst government spending is, bar the so called 'automatic multipliers' such as unemployment beenfits that are largely beyond government control since the level of unemployment is also at least in part also beyond its control, largely predictable. That's the easy side of the budgeting equation. What government gets in income is to quite some considerable degree - especially in times like the present - hard to estimate.
As I have pointed out, often, Labour did not suffer an overspending crisis in 2008. Far from it: spending stayed on track. What went wrong was that government income crashed. And that was not its fault. Banks crashed and economic activity with it. The deficit was not a matter of choice, it was imposed on Labour.
Of course there is an argument about whether there is a structural deficit or not: I contend there isn't. But that's not the issue here. The reality is that whatever deficit there is was almost entirely beyond the control of Labour in 2008 and to some extent is of course now for George Osborne - assuming at least that the government decides it has no role in stimulating the economy, as Osborne has done.
And so for Merkel to say that states in the Eurozone have to control their budgets is just an indication of economic stupidity on her part. If they could then I am quite sure most would, all too willingly. They aren't because they can't. And the reason they can't is because of fundamental accounting equations. For example, if the economy as a whole decides to save (I stress save, which means cash stockpiling, and is an act quite different form investing which involves expending cash) as it is now, with corporations in particular stockpiling cash in quite spectacular fashion, then government is going to run a deficit: it is an accounting truism. It is beyond government's control but do so. And if it does seek to cut its spending in that circumstance - as Osborne is doing - then the inevitable consequence is that income - the only other variable in the equation - must be cut. So, fr example, as Martin Wolf has pointed out recently, if you cut government spending right now and it is corporate saving that is funding it the inevitable consequence is that you must cut corporate profitability to achieve that result. It follows like night does day.
But this is what Merkel is saying. In a perverse throw back to the economics of the 1920s she is saying that come what may the governments of Europe must balance their books. The result is inevitable: the automatic balancing role that government deficits have played in the economy, picking up the slack in times of depression and recession, will instead be passed on to the private sector and individuals. That has to be the case. Business and individuals must run deficits if governments won't. That's not desirable, that's just what has to be.
But if banks won't fund those deficits and there aren't enough savings to pay for them (and the institutional structure of much saving such as pension funds does not facilitate this) then we'll simply see income crash instead. That has to follow because what we also know is that as we demand that banks rebuild their balance sheets they will not lend to cover it.
So Merkel's plan is a plan for deep, deep recession. That's what fiscal conservatism brings. It's not chance. It is, as I say, just what will have to happen if this plan proceeds.
This is the mad house of the commitment to the Gold Standard seen in the 1920s and which was so damaging wit large all over European economic policy.
This is a policy guaranteed in the interests of the 1% whose savings will be protected from inflation (the alternative cure to this crisis) to wreak havoc on the well being of the 1%.
This is a policy designed to destroy government.
It is a policy designed to destroy the welfare state.
It is a policy designed to destroy democracy.
And it will do all those things.
It is a policy designed to create social instability and turmoil.
And it will do that too.
This is the economics of the madhouse. And it is not just being proposed in the Eurozone. The same logic underpins 'In the black Labour', a new Labour pamphlet published this week. I am sure its authors are well intentioned. But they're still prescribing economic disaster and Labour must have nothing to do with it.
The choice is a stark and simple one: is government to manage the economy as a Courageous State should or run from its responsibility and let people sink as Merkel and the fiscal conservatives want?
Labour has a duty to put the Courageous alternative to people. Or candidly we've surrendered already.
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“This is a policy guaranteed in the interests of the 1% whose savings will be protected from inflation (the alternative cure to this crisis) to wreak havoc on the well being of the 1%.”
“of the 99%” I think you meant to write.
I said sometime ago that Merkel is past her sell-by date and her latest reaction suggests that this is so. Is she being guided by her advisors to pursue this course of action? There is a very interesting article in this week’s New Statesman – ‘Grappling with ghosts’ which discusses the historic basis for the German/ Greek animosity and unfortunately it is just this type of animosity/hostility which can lead to war.
If the Eurozone is moving towards fiscal union then undoubtedly the democartic deficit will have to be addressed.
The authors of the pamphlet are of course in the same disastrous mindest which has brought the developed world almost to its needs. We must move on and consider a new paradigm and there are ideas to be discussed from people such as you Richard, so the excuse that there is no alternative no longer holds.
I admire your loyalty to the idea that Labour can advocate a Courageous State, but I fear it is misplaced.
I agree. It may be
But I live in hope
But not blind hope
I live in hope but not blind hope too. The reality is that, at the moment, the only option for removing the Tory-LD government in 2015, is the LP. Unsurprisingly, the LP did not become more left wing when all the active left wingers left it during the reign of New Labour. Indeed, the ultimate aim of New Labour was the expulsion of the left, and a realignment with the LDs… an aim thwarted by Clegg and Cameron at the GE, to the chagrin of Mandelson and Adonis who actively undermined the re-election of the Brown government… facilitating the disastrous economic and social consequences of the Tory-Orange booker Coalition.
My own priority is to try to bring the LP to being the Red-Green people’s party that it should always have been. New Labour was a heist, a takeover by stealth which paralleled the hidden progressive privatisation of the NHS. A Real LP needs the Left to be active within it to argue and win against the tory-lite blairite rump, represented by Purple, Blue and now Black Labour. There is little point in having the ‘correct’ analysis if there is no possibilty of implementing it…
I agree
A Red Green alliance makes complete sense and is what this country needs
Purple and Black Labour make no economic sense at all
Blue Labour isn’t an economic policy
Red and Green is viable
“if you cut government spending right now and it is corporate saving that is funding it”
This isn’t very clear. How can corporate saving, that is money not being spent, fund government income and therefore expenditure?
Corporate profits are creating the corporate cash pile that with QE is funding the government deficit – it is being lent to the government in other words
Borrowing comes from somewhere
Whilst government spending is – bar the so called ‘automatic multipliers’ such as unemployment benefits that are largely beyond government control since the level of unemployment is also at least in part also beyond its control – largely predictable, that’s the easy side of the budgeting equation.
Even that side isn’t entirely simple. Large and unanticipated extra expenses can and do occur – be that the cost of military action in Libya, or the cost of clearing up after earthquakes and tsunamis in Japan.
Putting it in terms Merkel would understand – what would she have done in 1948 in the face of the Berlin blockade? Commit to the airlift – or let the Soviets roll over West Berlin while wringing hands about the cost of supporting democracy?
When you say Labour had no part in the banking crises which subsequently ‘crashed’ income, that seems rather too kind. It’s true perceived overspending by Labour is much exagerrated and that most of the spending was on education and health, both in dire straits due to years of underinvestment and in any case Osborne and Cameron pledged to match Labour’s spending plans in those two areas ‘pound for pound’…however Labours enchantment with high finance and the corporate class means they were anything but innocent parties in the financial crisis that developed. They were enthusiastic supporters of the City of London and all the attendant lack of regulation and liberalisation and ergo complicit. The fire may have started on Wall St but the City was like a tinder box waiting for the spark. My own feeling is that little has changed regards Labour either.
They still suirm uneasily on Newsnight when offered the opportunity to damn ‘private equity’. How can they damn it having been wedded to it for 13 years? When asked if they support Industrial action they lamely respond ‘of course not’ lest they conform the Cons’ description of them as the Unions lackeys. That we have suffered so much more due to inequality in income is also Labour’s legacy. Frankly they are culpable for the crisis and anything less than outright condemnationis a rewrite of history.
IMF research has shown that nations with high income inequality cannot sustain long term growth. Only nations that were reducing income inequalities, building a strong middle class, and bringing people out of poverty managed to sustain growth over many years (without constant setbacks and contractions).
Only by protecting the middle class, getting money to low & medium earners, will domestic demand be restored – which will in turn add some heat to the economy.
That’s the logic of The Courageous State
This insanity appears to be worldwide. I’m an American and the Republicans here are in Merkel’s camp. They are purposely repeating Herbert Hoover’s policies of the 1920’s in a heartless attempt at political domination. Clinton dragged the Democratic party over to the right so it is really a party of moderate Republicans. We have no alternatives except the Tea Party or the Occupy movement. Expect many of the scenes of the 1929 Depression to be repeated. Occupy has already started to pitch camps in the yards of people threatened with foreclosure and eviction. It’s working for now but isn’t a solution.
This depression is now pervasive in the West. The middle east hasn’t had a reasonable economy in decades if not centuries so I don’t pay it much attention despite the “Arab Spring”. Asia is a mixed bag of solvent, teetering, and insolvent states.
I’m afraid we are in for years of stagnation and social unrest.
But that doesn’t mean we shouldn’t fight. We must resist and educate. People must realize that a sound economy is built on labor not on speculation and financial sleight-of-hand. Abraham Lincoln said, “Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration. Capital has its rights, which are as worthy of protection as any other rights.” John Buchan said “Capital knows no homeland.” These truths must be made evident to all who are capable of understanding them.
Thank you so much for your continuing efforts and clarity of mind and writing.
It’s pretty depressing to read most people are now pessimistic (Observer, this morning)
But it seems I was given no option but do what I do: it’s at the very core of me
So, I’ll keep going – and thanks for your support. I do appreciate it.
The Courageous State is part of this process….
@Bob Poulsen, “Capital has its rights, which are as worthy of protection as any other rights”. What do you mean by capita?. As a factor of production it is passive and does not breath. I assume, though, that you mean the owners of capital. I would then ask you, “why do we need a separate class to own something that can only be used by the active factor of production labour”? Land and labour should be owned by those who use them. Cut out the middlemen. Let workers purchase their own capital from retained surpluses and simple borrowing. Nationalise rent and land would be allocated to best use because there would be no future income stream for idle owners of land.
I have to say I can see no reason for special rights for capital
People come first
Not property
At the end of the day creating a one state Europe, with Germans leading is all very well. But as we have seen in Greece and I am sure soon to follow in Italy the Democracy deficit is a cost to pay. The argument is like bullying, either you are in or you are out and we will make sure if you choose to ask your voters even never mind their opinion (Greece referendum idea was a no go, like it is high treason if you ask the Greek voters about their future )
So the assumption the Germans make is that what is good discipline for Germany will work for the rest in the club. This ignores the obvious, which is that Greece for example has a large income from Tourism and with the Euro still at 1.35 to Dollar it is a very strong currency. The parity rate was meant to be 1 Euro to the Dollar, so even after all this it is 35% above the plan.
Devaluation of the Euro would be sensible for Greece and Portugal but the Germans will not hear of it. They fear inflation. So whoever is stronger in Europe will determine what happens re currency rate.
Merkel is using the other members weakneses to keep the German borrowing cost down. In fact Germany has a lot to loose if the German zombie Banks go bust in writting of their Euro loans to Soverigns.
Dave in the mean time does not know how he will vote when the Treaty is rewritten. His right wing want him out and nothing will suit them better then leave a Europe which is breaking down anyhow. Dave is sending macho messages but does not really want to leave the top table of Europe (Roger Bootle’s phrase on his position).
One of the tragedies of humanity is that good people, or well intentioned people, try to do what they think is right even though it is hurtful and difficult. Ramsey McDonald in 1931 thought he had no alternative but to do what the experts told him. Many of the ‘experts’ are saying the same now-accept fiscal union or break up the eurozone: there is no alternative!
Many on the Telegraph yesterday, Eavns-Pritchard’s blog, were insisting that to allow the ECB to print money and be the lender of last resort would be ruinously inflationary. Some were insisting Merkel was right while deploying her solution. If they could acknowledge that banks do largely ‘print’ money then the long term solution is take away the power from the private banks and restore it to the state, then we could reschedule the debt and work to eventually become free of the ‘money masters. I suppose it is not only the vested financial interests but the economists who have been trained in the last 30 years and been promoted because they agree with the prevailing orthodoxy, who resist any idea of an alternative.
Well….another way of looking at it:
http://www.youtube.com/watch?v=BsMj59hyJOQ&feature=player_embedded
Dear Richard,
In your article you mention the alternative being to wreck havoc on the 1%.
What would need to be done to follow this alternative path?
Thanks for your time
Phil Bagge
Well said, labour wasted is sad. Must give it priority to put capital to work. If cash hoarding is the only way companies feel safe (despite loosing 5% a year to inflation) then the Government must step in to encourage labour, not cause deflation. Cost cutting means that the cost of unemployment both social and financial is dumped on society plus loss of income for others,
As Keynes said if we tackle unemployment then the deficit solves itself
Your keyboard seems to have it in for you ‘stupiduty,’ ‘asocial security’, ‘beenfits’.. (athough all three could be useful neologisms).
But:
‘This is a policy guaranteed in the interests of the 1% whose savings will be protected from inflation (the alternative cure to this crisis) to wreak havoc on the well being of the 1%’
Eh?
This is too good and true an article to not re-edit.
Sorry
Like a lot of my aerticles this was written in haste – this whilst waiting for a band practice to start
With the conductor waiting I pushed the publish button
Looks like I was hasty
I will edit later
Thanks
Richard
[…] prospect of immediate meltdown has receded slightly during the weekend, but the threat of the Merkel-driven Treaty of Austerity, designed to temporarily satisfy ultimately insatiable markets by impoverishing millions of […]
Richard, I don’t think Merkel’s plan has anything to do with providing an economic solution. Her plan is the dream of the eurocrats – to squash the sovereignty of European nations – to create the U.S.E. (United States of Europe), that many of the elite have been seeking. This economic crisis presents them with the perfect opportunity to present what they see as the “only solution” to Europes economic mess; when we all know there are other solutions. Many Greeks and Italians would rather see their nations leave the Euro. Is it going to happen? I doubt it.
I totally agree this ego driven singular approach is crazy since the economies are different and so they should be, if we all start producing expensive cars and expensive engineering machines then apart from being harmful to our environment, number of products needed is small so the rest would have to go without. This elitism and perfectionism is not good for everyone.
Italy’s “technocratic” government unveiled a package of painful austerity measures on Sunday night — so painful, indeed, that one of the ministers began to weep as she explained them to the press.
Announcing that all but the lowest pensions would be frozen next year, the welfare minister, Elsa Fornero, said: “We — and this really cost us dear, psychologically even — we’ve had to ask for sac…” But she was unable to say the word “sacrifices” and, brushing tears from her eyes, brought her presentation to an abrupt close.
The emergency budget, containing tax rises and spending cuts totalling a net €24bn (£21bn), is the latest of several passed this year aimed at restoring the credibility of the eurozone’s biggest debtor nation. The government, headed by a former European commissioner, Mario Monti, is hoping to rush the measures through parliament before the next EU summit begins on Thursday
From the Guardian today, this is what Merkel wants, unelected dictatorships all over Europe telling the country that they need to be punished untill they learn to behave.
The package approved by the cabinet in emergency session on Sunday did not contain a one-off wealth tax or even, as widely leaked, an increase in income tax for high earners. But it did restore a property tax on first homes and push back retirement ages for men and women — both measures that will hit the less well-off.
In addition, the pension freeze will cut the real incomes of all but the worst-off pensioners in 2012. The deputy finance minister, Vittorio Grilli, said the government now expects the economy to shrink next year by 0.4-0.5% and remain flat in 2013.
. In
Monti earlier briefed trade unionists and employers’ representatives. One quoted Monti as having said the choice was between sacrifices on the one hand and an “insolvent state” and a “euro destroyed by Italian infamy” on the other.
This is the unfairness of these measures for example in Italy, no wealth tax yet Italians have Euro 8Trillion in savings why should these savings not be used to help the economy. Instead Pensioners will be clobbered, hit the weakest first instead of the strongest because the strong give political donations. This is the way democracy is being torn up.
What commentary on Merkel often overlooks is that her part of the CDU/CSU is speaking to an electorate, which isn’t Greece or any other country as they are not German voters. And a significant part of that electorate is the substantial part of the German population who feel very hard done by because they believe war guilt has made Germany a soft touch for all sorts of demands from immigration policies to having to shell out to the Greeks. So of course they won’t “hand out money” without fiscal controls. In the final analysis Merkel doesn’t care what happens in the Eurozone as long as she and her party look good. She’s a politician, not an economist it’s all about rhetoric.
Until you find a country model for your economic ideas RM, I don’t think it is entrirely credible to criticise the leader of one of the most succesful economies in the world.
It’s like pointing out faults in Manchester City (and there are some) when they are top of the Premier League.
Why?
Merkel is fundamentally dangerous
Your logic is the president of the US is infallible
How absurd
Not sure the USA is currently a good example as a shining light. They have tried some (repeat some) of your ideas and they appear not to have worked. Noone is infallible I agree, not even you RM (!) But like em or loath em, Germany works. Is not a practical methodology to see what works, and then repeat it?
But we cannot all export…..
It is absolutely insane when growth is stagnant to keep cutting back on public spending. You cut off any chance of growth. Our government is learning this lesson. Its borrowing costs have actually increased as it has thrown more people out of work, meaning less tax is coming in. This has a knock on effect as businesses start to go under due to people spending less and tightening their belts. Of course, as the government has less coming in in tax reciepts, it has outgoings in the form of redundancy and benefit payments.
To balance the books, it either has to sell off public assets, make yet more self defeating cutbacks in spending or balance the books with more borrowing,
The system works on borrowing. The government can only spend if it borrows. If it cuts back on that expenditure while growth is on the floor, that money is simply lost to the economy and the only real way to balance the books is to either borrow and spend to create employment and so create demand or further borrowing.
Unless the country is in surplus, there is no way the government can’t NOT borrow.