As the Guardian noted in its editorial yesterday:
[The current economic] context demands a bold economic strategy fit for the times, with a major role for public investment. Instead, the EU is set to return in 2024 to the tight national spending guidelines that were suspended in 2020 when the pandemic took hold. Talks will resume soon on reintroducing a modified version of fiscal rules that limit EU member states' debt to 60% of GDP and their annual budget deficits to 3%.
This, to be polite, is a policy created in the economic madhouses of Berlin.
There are some countries which there have a special responsibility for the curse of the fiscal rule, as a result of which so many are now suffering.
One is the USA, where so much of the economics that is supposedly used to justify these rules was created, without any evidence base.
The second is the UK, where George Osborne did so much to promote the cult of austerity building, based on the dubious legacy of Ed Balls, who disastrously engineered the independence of the Bank of England.
The third such country is Germany.
It really is time that Germany grew up economically.
I know it lost the First World War, and suffered the disastrous consequences of the Treaty of Versailles.
I also know that Germany suffered the inflation of the Weimar Republic era.
And I know that Germany suffered the terror of the Nazis in so very many ways.
That means that I also recognise that in some ways Germany still carries the guilt of that era.
But, crucially, unless Germany stops playing the perpetual economic victim and begins to accept the role of economic leadership that it must have in Europe, and the responsibility that goes with it, then far from extinguishing that guilt it will compound it through the promotion of inappropriate economic policies that necessarily lay the foundations for the return of fascism not only in that country (where the far right is already dangerously popular) but also elsewhere.
As long as democratically elected politicians tell the people of Europe, the UK and the USA that there is nothing that they can do to protect them from the ravages of financial capitalism then they assist those unscrupulous politicians who will claim otherwise through the promotion of the politics of discrimination and hate. Nothing is more certain to facilitate the dangerous cult of democratic political incapacity than the creation of wholly unnecessary fiscal rules.
The threat to the financial stability of the EU right now comes from interest rates that are far too high because of the bizarre belief of those economists who also promote fiscal rules that raising them would have an impact on inflation.
In reality, nothing in the EU money creation programmes that have delivered stability since 2008 now threatens its economic future or the freedom of anyone within that Union. There is just one thing that does that, and that is the promotion of the idea that the EU government debt must be repaid, their deficits must be reduced, and new investment should be crushed meaning that people must be denied opportunity on the basis of the worship of the false god of the fiscal balancing of a government's books. Quite literally, nothing creates more opportunity for the advance of fascism than this cult does.
So, what should the EU be doing? Like the UK, it should be turning the financial wealth of its populations into the capital that is required to transform the economies of Europe into the economically durable and environmentally sustainable places that we need to live in. Using the power of legislation, regulation and taxation that financial wealth could be redirected to form the capital that could underpin this transformation. But, beholden to the financial services sector, as the leading governments of Europe are, those governments are far too frightened to do this and instead let the financial services sector command capital that capital for speculative activity, denying in the process any creative role for its use.
Our futures are at risk unless this curse of the fiscal rule is ended.
The question is, how can that be done?
That will be a recurring theme of discussion here next year. You have been warned.
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‘Couldn’t agree more.
Knowing what the ex-German Chancellor did to her own railway system – she financially cannibalised it for funding other things in order to please the the ordo-liberals at the ECB and not demand more money – the ECB are being let off the hook by member states.
My conclusion is that too many modern politicians are simply layman who have no idea what they are doing despite appointing themselves as managers of our economy. They’d rather bankrupt operations in the economy than do the harder thing and fight the ECB for a resource – money – that is artificially being made scarce.
Despite being a pro-EU, I have never taken to the ECB which I always thought was a step too far.
A country’s currency is a true expression of its sovereignty. If I wanted to see a real debate in the EU it would be about member states turning their back on the ECB. I’d love to see that form of ‘taking back control’.
The trouble is though that austerity all too often starts at home – in the national governments of EU members.
Thank you Richard,having read Clare Mattei’s book describing the rise of fascism based on the austerity created after the first world war, this scares me more than ‘Cliff at Christmas’!!
Rightly so, and I am no fan of Cliff.
Excellent and wide ranging summary of the root causes of the parlous state of our society and how we got here.
The problem is, as you say, what can be done?
In far too many of my conversations in online forums and in the pub the answer is a shrug and an ‘they’re all the same’ shrug.
Half a life time after Thatcher told us that there is no alternative to the economics of decline and austerity, TINA, is still with us.
Even the Greens support the economic illiteracy that it is tax that funds government spending, although they at least have a sort of Keynesian sympathy running through their economic policies. The problem is that despite their obvious advantages over the two main uk parties, they remain unpopular.
The problem seems to be that household economic model is deeply engrained in many minds and maintained and deliberately exploited by the lies and half truths of mainstream politicians.
All that can be done is keep talking truth.
Your blog is a magnificent educational tool to which I am indebted. Keep up the good work
Thanks you
It is the contribution I can make
It would be nice if someone could sit down with Gina “True and Fair” Miller and explain money creation to her since she does seem to be trying to assemble some sort of genuine political alternative. I gather that, thus far, she has no idea she needs to know this in order to be able to offer the alternative she seeks.
She follows me on Twitter
She knows how to ask.
“A country’s currency is a true expression of its sovereignty”.
I would go further. “A country’s currency is the true expression of its sovereignty”.
Everything else is sentiment.
Agreed
I’m happy with the fact that others more learned would take my ‘thesis’ further – maybe in this joined up world, a country’s currency is its ONLY sovereignty?
The huge irony of all this is that as Christine Desan pointed out and the 2007/2008 GFC reinforced market capitalism couldn’t exist without sovereign government creation of money from thin air. The history of private bank failures and subsequent runs should be required learning. All told the whole world is living a lie in regard to market fundamentalist ideology!
I had wondered where this ‘3% rule’ came from, assuming it originated in a published academic paper. Searching the Web I could not find such a paper, and was surprised to find this:
‘ …Le Parisien interviewed Guy Abeille, a senior official at the French Finance Ministry who is thought to have ‘invented’ the 3% deficit-to-GDP limit later enshrined in the EU treaties and the cornerstone of the famed Stability and Growth Pact.
And Monsieur Abeille made some rather extraordinary revelations:
“We came up with this number in less than an hour. It was born on the corner of a table, without any theoretical reflection”. ‘
See https://openeuropeblog.blogspot.com/2014/01/from-archives-story-of-3-deficit-limit.html
That is correct
I spent a lot of time in Brussels in the mid 90s talking to the designers of Monetary Union – in particular the Secretary to the Monetary Committee. It was arbitrary but (if I recall correctly… and it is a while ago) using assumptions for inflation, real growth, real interest rates and a 60% debt/gdp ratio a 3% deficit would keep debt/gdp ratio stable.
I forget the numbers for those assumptions but 2%, 1% and 2% respectively ring a bell.
Nope. I think Abeille has this one!
Mr MacInnes,
Thanks for that. I particularly like Abeille’s reminiscence that the decision was reinforced by the sense of 3% having satisfying resonance …. with the Trinity.
The Eurozone is in a bind. No individual nation has monetary sovereignty and there is insufficient political will to operate at a group level where monetary sovereignty does reside. They are moving towards better cooperation – but too slowly.
I would just note in passing that even the monetary headbangers that drafted the Maastricht Treaty accepted a deficit of 3% in normal times… so where the “balanced budget” idea (touted currently) comes from I really don’t know. It shows a complete lack of understanding of money.
The only country that actually operates a balanced budget (rather than just takes about and makes claims) … is Scotland; because it has no choice whatsoever.
And look at the result.
“Central Bank Independence Revisited: After the financial crisis, what should
a model central bank look like?” April 2018. Ed Balls, James Howat, Anna Stansbury:-
https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/working.papers/x87_final.pdf
Balls and Osborne are now joined at the hip
Starmer proposing scaling back Green Investment just in time for Christmas!
https://www.theguardian.com/politics/2023/dec/22/keir-starmer-considers-scaling-back-labour-28bn-pounds-green-plans
Dark Ages here we come!
Kissing our arses goodbye to balance the books
This is what I’ve been saying!