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Euro-Kremlinology

December 10th, 2011

Understanding developments in the European crisis has become rather like Kremlinology, trying to figure out the meaning of subtle changes in wording, and rearrangements of the Politburo on the podium for May Day parades. In particular, Mario Draghi of the ECB goes back and forth, sometimes suggesting that the ECB will do what nearly everyone else can see is minimally necessary to the survival of the euro (namely, print lots of them, and use some to buy EU government debt, as was done by the Fed and the Bank of England). At other times, though, it’s as if Jean-Claude Trichet is doing a ventriloquist act.

In one respect, todays EU agreement was anything but subtle. The fact that the Eurozone countries and those aspiring to join them were prepared to go ahead without the UK (and a few others) suggests that they have something serious in mind. But what – the announcement is pretty much a restatement of the Growth and Stability pact, and under present circumstances, the deficit targets can only be seen as aspirational.

Applying one of the approaches that used to be standard in Kremlinology (not necessarily a reliable one, then or now) I’m going to assume that the EU leaders are acting with some sort of coherent goal in mind and work from there. In particular, I’m going to assume that everyone who matters now recognizes the need for a big monetary expansion and the use of newly created money to resolve, or at least stabilize, the debt crisis.

There are a bunch of obstacles to this:
(i) The desire of the ECB to save face, to avoid admitting its large share of responsibility for the crisis and, if it can, to hold on to its central position and to the inflation targeting system<
(ii) The belief of the German public (and some others) that they are being made to bail out a bunch of feckless Southerners, rather than (the reality) saving French and German banks from the consequences of their bad decisions, and preserving the European economy on which the Germans depend as much as anyone else from the disastrous regulatory failures of the Euro-elite, including the ECB, European Commission, financial regulators and so on
(iii) the problems with EU treaty amendments requiring unanimous consent

Obviously, problem (iii) is no longer an issue. From now on, eurozone economic policy will be made within the eurozone, through a still informal negotiating procedure. How this evolves remains to be seen, but there won’t be any effective national veto. And with the UK out of the picture, it’s unlikely there will be much room for carveouts or exemptions. Problem (ii) will take some time to fix, but Merkel can certainly sell the deal as a victory for Germany. Finally, it hardly seems possible that the EU leaders would have gone through this whole process unless they expected the ECB to play ball. And, the balance of power between the ECB and the national governments has changed pretty sharply. The old rules have been suspended, and there’s no reason to suppose that ECB independence would survive an intransigent refusal to move. The deal offers Draghi the chance to make a virtue of necessity.

Of course, given the history, it’s equally reasonable to suppose that the agreement has just kicked the can down the road, and that everyone will keep on doing as little as possible while austerity turns recession into depression.

And even if things work out well in the short term, there are big problems down the track in the failure to make room for a Keynesian fiscal policy. Even more serious is the democratic legitimacy crisis. Until now, it’s been more of a theoretical issue – people enjoyed grousing about various bits of the EU, but no one really cared. Now the big decisions that used to be made by national governments will be subject to a largely unaccountable central veto.<

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  1. Adam (ak)
    December 10th, 2011 at 08:49 | #1

    I seriously doubt that the European leaders have the intellectual capacity to understand what’s going on. Even if some do understand, they won’t tell because this is the rule of the game. To me the analogy with the Soviet leadership (especially from the late 1970ies / early 1980ies) is a perfectly valid one. There is a lot of politics going on and some players (especially the Germans) may think that they are successfully implementing a very sophisticated plan to mould the whole Western part of the continent into an Austerity Union – to “eat a cake” (effectively lead Europe) and “have a cake” (do not have fiscal transfers unlike after the reunification with GDR). Looking at the 19th century analogy one may claim that the process of the reunification of Germany on the Prussian terms is repeated on a larger scale. Yet the end result of this process may increasingly resemble the “other” German centre of power defeated in 1866, the Austro-Hungarian Empire, the archetypal bureaucratic state (analysed by both Franz Kafka and Ludwig von Mises).

    Nothing good will come out of that I am afraid even if some limited fiscal stimulus is eventually implemented. Europe has a very long tradition of resorting to violence when problems cannot be solved by diktat.

    NB the following article may be of interest:
    http://www2.euromemorandum.eu/uploads/ws5_podkaminer_laski_paradigm_change.pdf

  2. paul walter
    December 12th, 2011 at 00:12 | #2

    Basically the same sort of lunacy and greed that has typified American politics since the original meltdown. Substitute the Germans, Swiss and City of London for
    Wall St, politicians like Cameron and Berlusconi for the Republican clowns operating in the US and it’s yet more grief for millions of quite innocent ordinary people. Adam(ak) mentions Kafka and that about sums up politics in the world just now.
    On Russia the papers are reporting that large Occupy-style events are starting to take place in Russia, which is good if they can acheive some thing for themselves.
    On a lighter note, must say I miss sitting at dinner like when I was a kid, watching the huge phallic missile launchers, T-64 tanks and stomping red army troops in those days, while Kosygin, Grom, Brezhnev and the rest stood stoney-faced watching, wearing top coats and furry hats and surrounded by generals wearing medals of combined weight greater than that of the entire inventory at Sims Metal.
    We know now, an exotic display of decadent power and vainglory, as the old guys ossified before our very eyes.

  3. Chris Warren
    December 12th, 2011 at 05:23 | #3

    But what if this option is not available …

    In particular, I’m going to assume that everyone who matters now recognizes the need for a big monetary expansion and the use of newly created money to resolve, or at least stabilize, the debt crisis.

    The current debt problem is the result of many decades of under-pinning profits by money expansions to in effect flesh-out effective demand at capitalist prices.

    Money expansion only makes sense if next years product is greater than the current year, or can be given an expansion.

    Money expansion just so capitalists can sell products, in the misbelief that this maintains employment and wages, is a so-called ‘fools paradise’.

    Money expansion to resolve the crisis due to previous money expansion leads to catastrophe.

    Money is not the problem, nor is it a solution. It is the result of games played by capitalists after they have accumulated value from workers and when their equations do not balance for the next cycle.

    Unfortunately the only solution is to expand public provision of many goods and services with prices set at transparent economic levels and presumably set the value of money in terms of the basic wage. Of course this would mean the end of capitalist profiteering. Its either that or the end of civilised society.

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