The Financial Times has reported that EU officials are urging governments to prevent member states from offering support to households and businesses in response to the latest energy shock stemming from the US/ Israeli assault on Iran. The concern, it is said, is that excessive intervention might trigger a “fiscal crisis”.
That claim needs to be challenged. It is wrong in theory, dangerous in practice, and revealing in intent.
First, the idea that governments face a binding fiscal constraint in a crisis is simply untrue. Modern Monetary Theory (MMT) explains what should by now be obvious: governments that issue their own currency cannot run out of money. Their real constraint is inflation, not an arbitrary financial limit. The EU's persistent claim that there is “limited fiscal room for manoeuvre” is not an economic fact. It is a political choice.
Second, history tells us exactly how governments behave when they understand this reality. During the Second World War, governments across Europe, including the UK, did not ask whether they had “fiscal space” before mobilising resources. They spent what was necessary to survive. As John Maynard Keynes made clear at the time, the question was not “can we afford it?” but “do we have the real resources required, and how do we organise them?” Finance followed function.
Third, what is being proposed by the European Commission is, in effect, the opposite of that logic. They are saying that even in the face of a major geopolitical shock, with energy prices rising by around 60 per cent and real risks to living standards and industrial production, governments should hold back. Support must be “temporary, targeted and tailored”. It must fit within pre-existing fiscal rules. In other words, people must adjust to the crisis; the state must not fully respond to it. The policy choice is to disable government and pass on shock, which is government deliberately abandoning its role in society.
Fourth, this argument is not neutral. It has real distributional consequences. If governments limit their intervention, then households will bear the cost through higher bills and reduced consumption, and the poorest will, inevitably, pay the most proportionately. Workers will also bear it through wage restraint or job losses. Meanwhile, energy companies, already benefiting from price spikes, will continue to extract extraordinary profits. The reluctance to act decisively is, in practice, a choice to preserve existing hierarchies of corporate power intact when they are very clearly part of the structural problem that has created this situation.
Fifth, the language used, including the demand for “co-ordination and caution”, the consideration of “fiscal implications”, and the “limited room for manoeuvre”, is all designed to sound responsible when, in reality, it is a mechanism of control used to narrow the range of acceptable policy choices. It excludes the possibility that governments might act at scale to protect their populations, reshape energy markets, or challenge profiteering, which is their job now. The language is, then, neoliberal to its core.
Sixth, the irony is that even within the article, there are glimpses of a different logic. There is a discussion of windfall taxes on energy companies. There is an acknowledgement that, in crisis, governments sometimes have to subsidise activities they would otherwise avoid. There is recognition that failure to act means “people will freeze or production will close down”. These are admissions that the state has both the capacity and the responsibility to intervene. But they are immediately constrained by the insistence that such action must be limited.
So what are the consequences of this approach?
To begin with, it risks repeating past mistakes. The interventionist approaches required will deliver what fiscal policy should do by controlling inflation and delivering policies aimed at full employment. The alternative is chosen austerity, and that has always led to social, political, and economic crises. The plan is to repeat that mistake while letting inflation rip. An MMT approach of the type I advocate would eliminate that risk.
In addition, the EU plan will almost certainly exacerbate inequality. Those with the least capacity to absorb higher energy costs will be hit hardest. Businesses operating on thin margins will fail. Meanwhile, those able to pass on costs or benefit from price volatility will do very well.
Most importantly, there is a moral failure embedded in this position. Governments exist to protect their populations. If they choose not to use the tools at their disposal in a moment of crisis, then they are failing in that most basic duty.
So what should be done instead?
To be clear, the answer is not indiscriminate spending. The risk of inflation is real, and policy must take it into account. But that does not justify inaction; it requires intelligent intervention.
First, governments should guarantee that households can afford essential energy. That is a basic condition of a civilised society.
Second, they should act to stabilise prices, including through direct intervention in energy markets where necessary. The idea that these markets must remain untouched, even in crisis, is ideological, not economic.
Third, windfall taxes on excess profits and on wealth or income and gains derived from it should not be an afterthought but a central part of the policy response, as Keynes made clear in the 1940s. If companies benefit from geopolitical shocks, those gains should be redistributed, and if additional tax is required to control inflation, the wealthy must pay.
Fourth, investment in the energy transition must be accelerated, not delayed. If reliance on volatile fossil fuel markets is the source of repeated crises, then reducing that dependence is the only sustainable solution.
Finally, and most fundamentally, we need to abandon the fiction of fiscal constraint. Governments are not households. They do not need to “find the money” before they can act. They need to decide what is necessary and then ensure that the real resources are mobilised to deliver it.
The real question is not whether governments can afford to act. It is whether they are willing to use their power in the interests of the many rather than the few. At present, the European Commission appears to have made its choice. It is the wrong one.
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The crisis is laying bare the inadequacy of the EU & its institutions. The European Commission is neo-liberal to its very core (& deeply pro-Israel). The functionaires (eurocrats) are “nice people, with nice families” (I’m quoting a former eurocrat) who totally lack empathy with those outside of the Commission. This was shown by the action/lack thereof in the last energy crisis (2021 – 2022). Some of the director-level people believe that the EU will fail due to this & other reasons. I agree with them. Unless there is root & branch reform, the EU will fail because it was designed to respond to “steady-as-she-goes” situations. Even there (the growth of renewables) policy is dictated to by neo-libtard quasi-religious beliefs. The European Union, Alice-in-Wonderland writ large. As for the ECB, a neo-libtard construct almost designed to enable the EU to fail (I knew one of the morons advising Delor on EMU – impossible to get him to change his mind on anything). Industrial strategy? ha! MMT? zero interest. Ask them why the ECB could not provide money to the EIB (European Investment Bank) in exchange for bonds (thus allowing lots of projects to be funded) …no response. The EU as is deserves to fail & has lost ALL connecttion with or consideration of or relevance to the well being of ordinary people. EU? I regard it with total contempt.
This is why a semi-detached relationship now makes some sense.
I agree that EU states should support households and businesses in response to the latest energy shock stemming from the US/Israeli attacks on Iran.
The UK should do so too.
Unfortunately Eurozone states do not have the fiscal sovereignty that allows them to do so. They cannot create the currency they use, which is a capability reserved for the European central bank. Consequently, it seems to me that, the opportunity for EU governments to support their economies in times of crisis is severely reduced.
Eurozone countries have to fund themselves by issuing bonds. In doing this they do indeed have “limited fiscal room for manoeuvre”. Now they can, as they have previously, simply issue bonds and dare the EU central bank not to buy those bonds. In doing this they do have a greatly weakened form of fiscal sovereignty. If I was running an EU economy this is what I would try to do. But it is risky, especially if you are a smaller state, because the EU may choose not to support you and instead devastate your economy, as was done to the Greeks.
This is, of course, a political choice. They could repatriate the fiscal soverignty they gave away. But that might involve leaving the Eurozone or, in extremis, being rejected from the EU. Sadly most politicians don’t have the courage to take such decisions even if they understood it was possible.
For all the ills of Brexit the UK is not so constrained. It could, and should, support its households and businesses in the face of this economic shock.
They do create the currency they use. Who else does? The ECB does not. The member state central banks do. Your claims are not true, or rather simplify matters far too much. They have fully functioning policy but 8moosed fiscal rules and monetary policy.
This is staggering……………..it’s not good news, another nail in the coffin for Euro togetherness. This simply goes against why the EU was created – as a peace mechanism stopping death across Europe created by fascism, itself grown in chaos .
The Commission needs to wind its neck in – is it the Neo-libs in the ECB again?
The EU – I mean, talk about cutting its own throat.
Does the EU have a death wish?
I am sure Farage could/will make use of this but opposition to the EU outside the UK is mostly ‘left’ not ‘right’ wing and its a godsend to them.
Aside from any moral or ethical issues at the time when Europe and its institutions need to be acting together and supporting their nations and citizens this is idiocy & lack of moral compass of the highest order.
It’s almost like the EU is actively trying to bring about European fascism.
While I have always supported the EU project for most of my life, these institutions need serious reform.
French fishermen are literally staying in port as they can’t afford to fish. Soon farmers will be unable to plant and harvest their crops. Its very clear what needs to happen. There’s a lack of know how and courage here and a fear of the “markets”.
Might this “political” decisiont be a deceit with an “economic” facade, seeking plausibility?
Might this be a compound lie to maintain a parasitic set up of exploiting regular citizens, and their childen, with the intention of maintaining predatory Neoliberalism for the benefit of the greedy few?
Might it be the the European countries are experiencing a perilous paradox whereby elected governments etc. work against the well-being of their people rather than pursuing their positive interests?
P. S. While a compound lie is often used to avoid immediate trouble, compounding lies often lead to more severe, long-term consequences.” [From AI Overview]
Your MMT claim falls at the first hurdle, as it requires individual member states to be able to issue their own currency. Which they can’t.
Collectively MMT works in the EU. It is impossible otherwise
If each Country can print as many € as they want and other countries will be forced to suffer the inflation / higher taxes to avoid inflation, how do you think that will work in practice? It makes no sense.
Why not read what I have written rather than writing nonsense?
Jason,
I am also interested in understanding how the eurozone works so I’ve tried to do as Richard suggests and read what he has written on the subject. But having spent some time today trawling both the local archive and the wider web with various search terms I cannot find anything that clarifies how a currency user country can implement MMT principles, quite the contrary in fact (see links below).
Perhaps his point is that the current article is about EU-wide policy making which would require a central bank decision to create the money for all the countries to use, or perhaps I am writing ‘nonsense’ as well?
https://www.taxresearch.org.uk/Blog/2015/06/28/let-me-say-it-loud-and-clear-the-uk-can-never-run-out-of-money/
https://www.taxresearch.org.uk/Blog/2011/06/27/reflections-on-greece-1-you-cant-put-money-before-a-market/
Gary Stevenson made a point on government intervention on energy / fuel prices etc in a recent video, which I thought was interesting, & I would be interested in hearing your views on. I’m probably oversimplifying what he said (or may have missed the mark entirely!) but I think what he was saying was that during covid, the government made all these massive interventions to support people & businesses, but in the end that money all ended up in the hands of the wealthy. People survived, but the wealthy became even more wealthy, & so inequality was increased as a result. And I think what he was saying in this recent video is that if governments intervene in this current scenario via price caps / subsidies etc, then yes, that shelters ordinary people from these shocks in the short term, but then those subsidies end up going to the sellers of fuel / energy / food / commodities & the owners of those companies (i.e. the wealthy) become even more wealthy & hence inequality is increased even further. Now, I can see that what you are suggesting is more nuanced in that you’re saying not only stabilise prices for the consumer, but also claw back excess profits via windfall taxes etc. So obviously that could negate what he is suggesting will happen. But historically I don’t think the UK government has much of a track record in imposing windfall taxes to curb profiteering by energy companies etc (?). So your opinion that I’d be most interested in is – is his suggestion true – that subsidies / price caps always have the ultimate effect of increasing inequality – unless they are accompanied by corrective actions such as windfall taxes etc to recoup the money the government injects into the system?
I watched this video and was frustrated by how simplistic it was. His analaysis lacks real depth. That said, you have understood his point, and there is some truth in it — but it is not the whole story.
Untargeted subsidies and price caps can end up boosting profits if they simply maintain demand while allowing suppliers to keep prices high. In that case, some of the benefit does leak through to shareholders and can increase inequality. But that is not inevitable. It depends on policy design. If governments:
• cap prices and regulate margins
• impose windfall taxes on excess profits
• or intervene more directly in pricing and supply
then the gains do not simply flow to producers.
So the real issue is not whether intervention happens, but how it is structured. Poorly designed intervention can increase inequality. Well-designed intervention can protect households and limit profiteering at the same time.
The problem in the UK has often been political will, not lack of policy options.
And re QE: the gains to the wealthy from this were also due to failed design, not inevitability.
Gary needs to take care. He could like he supports austerity right now, and that is worse. It would help is he understood money, but it is clear he does not.