Home > Economic policy > The failure of austerity in Europe

The failure of austerity in Europe

August 22nd, 2013

The Don Dunstan foundation (with which I have an affiliation) has released a report by Dexter Whitfield, Director of the European Services Strategy Unit, giving chapter and verse on the failure of austerity policies in Europe. It starts with the failure of austerity in terms of its own objectives (reducing debt), and then covers the various consequences, including

The only point I want to make, yet again, is that (with the partial exception of Greece) the debt crisis to which austerity has been the response was not the result of government profligacy. It was caused by the Global Financial Crisis which, in its European dimension, was generated by the policies of financial deregulation, fixed fiscal policy targets and inflation-targeted monetary policy adopted by the European Central Bank and the European Commission – the very institutions that are now imposing austerity.

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  1. wilful
    August 22nd, 2013 at 12:35 | #1

    We have a song for that:

    https://www.youtube.com/watch?v=Xd6E1JpwMj4

    (caution rude words)

  2. August 22nd, 2013 at 12:39 | #2

    Link not working John

    As an aside, I am currently reading “Austerity: The History of a Dangerous Idea” in which you are frequently quoted. Have you an opinion on the quality of this book?

  3. JamesH
    August 22nd, 2013 at 12:57 | #3

    “the various consequences, including…” – some words missing here.

  4. Ernestine Gross
    August 22nd, 2013 at 13:27 | #4

    The link to Dexter Whitfield’s work does not work.

    The origin of the GFC is to be found in Wall Street and the City of London. The governments of both countries still resist wide-ranging financial regulation (The UK did not join the stability pact because reportedly Cameron said it would hurt the City of London and he was surprised to not get support from Merkel because Germany has the reputation of ‘free trade’). The ECB on its own cannot negate this, nor can the EU because as at present the deregulation of financial markets is still something that is interpreted and supervised by individual member countries and preferences for financial risk differ among people. Work in progress to unify the rules of the game among the Euro zone countries are in progress.

    At present I don’t know the conceptual framework used by Dexter Whitfield. If it is macro-economic, then the austerity argument ignores the question: Austerity for whom? As such it is not interesting to all those who do not believe in printing fiat money and give it to those who generated various forms of private money, denominated in fiat money currency units, which is the cause of the GFC, or to directly convert the proverbial Wall Street Banker’s money into government debt. Or to continue to support tax havens and complex corporate structures. There is strong support for Merkel’s notion of austerity, first change the rules of the game and then you get a wealth transfer. It is working, slowly but steadily in the Euro zone countries. By contrast, not much of interest to people is happening in the US. On the contrary, more disasters in the Wall Street banks have happened since Lehman.

    A government policy without the support of its people – in principle – isn’t working. People are no fools, even if samples of their behaviour may contradict a theoretical criterion of rationality, thought up by a behavioural economist or psychologist for a laboratory experiment.

  5. Jim Rose
    August 22nd, 2013 at 14:22 | #5

    See http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4877&ref=mobile for “In Chronic Sovereign Debt Crises in the Eurozone, 2010–2012”.
    Arellano, Conesa, and Kehoe explain that the deep and prolonged recession in many Eurozone countries creates an incentive the gamble for redemption. This is betting that the recession will soon end. Sell more bonds to smooth government spending in the interim, and, if the economy recovers, reduce the enlarged debt.

    Under some circumstances, this policy is the best that a government can do for the citizens of its country, but it carries a risk! If the recession continues too long, the government will have to stop increasing its debt or default on its bonds.
    • Policies that result in high interest rates on government bonds and high costs of default provide incentives for a government to reduce its debt and avoid sovereign default.
    • Policies that result in low interest rates and low costs of default provide incentives for a government to gamble for redemption.

    The interventions taken to date by the EU and the IMF – lowering the cost of borrowing and reducing default penalties – encourage Eurozone governments to gamble for redemption.

    Greece and a few others bet that the recession will end soon. Sell more bonds to smooth government spending in the interim, and, if the economy recovers, reduce the enlarged debt. If the recession continues too long, the government will have to stop increasing debt or default on its bonds.

    Greece has been in default in more than 50% of the time since it became independent in 1822.

    the Greeks squeezing huge subsidies and 50% debt write-offs! The Irish played by the rules, guaranteed bank bond holders to which that had no obligation and got screwed.

  6. Ernestine Gross
    August 22nd, 2013 at 15:45 | #6

    @Jim Rose

    The paper you referenced refers to the opinion of US rating agencies in support of their argument. For those of us who have adaptive expectations, reliance on US rating agencies’ opinions signals “junk” status.

    Incidentally, it is Detroit not Athens which is currently in default.

    There are two US states which defaulted against the UK. Germany defaulted. Australia never did. Your statement about Greece is out of any historical context.

  7. QuentinR
    August 22nd, 2013 at 17:44 | #7
  8. Ikonoclast
    August 22nd, 2013 at 18:00 | #8

    It is always interesting to attempt to unpack Ernestine’s Delphic pronouncements. (The Delphic oracle was famously obscure.)

    “Austerity for whom? As such it is not interesting to all those who do not believe in printing fiat money and give it to those who generated various forms of private money, denominated in fiat money currency units, which is the cause of the GFC, or to directly convert the proverbial Wall Street Banker’s money into government debt. Or to continue to support tax havens and complex corporate structures. There is strong support for Merkel’s notion of austerity, first change the rules of the game and then you get a wealth transfer. It is working, slowly but steadily in the Euro zone countries. By contrast, not much of interest to people is happening in the US. On the contrary, more disasters in the Wall Street banks have happened since Lehman.”

    My translation:-

    Who is the Austerity to be applied to? This (banker’s) notion of Austerity is not appealing to those who do not want to print fiat money to bail out bankers who created the excess debt money (denominated in fiat money currency units) which was the cause of the GFC nor to directly convert the Wall Street Banker’s toxic assets into government debt nor to continue to support tax havens and complex corporate structures. There is strong support for Merkel’s notion of austerity, first change the rules of the game and then you get a wealth transfer. It is working, slowly but steadily in the Euro zone countries. By contrast, not much of interest to people is happening in the US. On the contrary, more disasters in the Wall Street banks have happened since Lehman.”

    I agree intitially but I then don’t know what Merkel’s notion of austerity is. I am not sure that you could say the Merkel strategy (if that is what is being applied) is working for Greece, Italy, Spain or Portugal yet (if ever).

  9. Ernestine Gross
    August 22nd, 2013 at 20:44 | #9

    @QuentinR

    Thank you. Among the references I discovered a blog post by Professor Stiglitz. It is: http://blog-imfdirect.imf.org/2013/05/03/the-lessons-of-the-north-atlantic-crisis-for-economic-theory-and-policy/

    IMHO, Professor Stiglitz goes much deeper than the Austerity theme in macro-economics (ie refuting the 19th century pre-Keynes mental model). Two points, which are dear to me on theoretical grounds are so elegantly presented by Professor Stiglitz: 1. The focus should be on credit and not on ‘money’ and the various forms of credit (something macro-models miss). 2. The distribution of wealth (which is ignored in macro-models, notwithstanding gini coefficients).

    Professor Stiglitz also refers to the old Miller-Modigliani theorem on the irrelevancy of the capital structure and uses this theorem to point to limitations of increasing the capital adequacy ratios. I suspect his argument is strenghtened, considering that the MM theorem does not extend to incomplete markets.

  10. Jim Rose
    August 22nd, 2013 at 21:06 | #10

    @Ernestine Gross not relying on rating agencies is rather discerning for adaptive expectations.

  11. Ernestine Gross
    August 22nd, 2013 at 21:42 | #11

    @Ikonoclast

    Much of the discussions about austerity and the Eurozone totally ignore the institutional setting of the EU. The Eurozone as well as the EU should be thought of as work in progress. In my simple mind, a discussion of the policy measures within the EU requires to simultaneously keeping in mind the economic and cultural development histories of the member countries, including the state and time when they joined (not all joined at the same time), and, furthermore, the evolution of an institutional framework with a common aim. Again, subject to the qualification of me having a simple mind, I say the number of dimensions relevant for discussing the policy measures taken within the EU far exceed the dimensions allowed for in the austerity debate.

    Merkel made a big mistake, in my opinion. She actually used the term austerity. I don’t know whether she was informed about the macro-economic debate in the Anglo-Saxon literature or not. But when you consider the actual policy measures taken since 1990 to achieve a convergence between the former East Germany and West Germany, then it is very obvious that it is not based on austerity as used in the macro-economic debate in question here. The fiscal policy was definitely expansionary (on the plausible expectation that a rebuilding of physical assets would have a positive multiplier effect), supported by a special levy (taxes) which amounted to a wealth transfers from the West to the East. The latter entailed a bit of austerity for the West. But this happened after the legal framework of the East was adjusted to that of the West. Even the Deutsche Bank, an unambiguous member of the proverbial Wall Street bankers, felt enough social pressure to offer a substantial debt cancellation for Greece. Clearly, the mindset is different from 19th century pre-Keynes economic thought as reincarnated under the name ‘austerity’.

    Merkel has no power to change anything within Greece or Ireland. Her power is restricted to what the German parliament and the German constitutional court allows and what is feasible in relation to EU rules. France and Germany, with the support of the Netherlands, Denmark, Finland are the main drivers for stronger financial market regulation.

    As I’ve said elsewhere, the interpretation of financial deregulation and supervision in EU member countries is still under the control of national governments, even though progress has been made within the EU to take another step toward convergence within the EU in terms of achieving a unified regulatory framework.

    Professor Stiglitz is a much better source of insights as to what are the big issues than what I can offer. I refer to the link in the previous post.

  12. Greg vP
    August 22nd, 2013 at 21:45 | #12

    Wall Street and the City do what they do, as Veblen pointed out lo these many years ago.

    But the origins of the GFC aren’t there. The weakening of worker bargaining power started with Carter in the US, and at the same time or soon after elsewhere. Banking deregulation started in the late ’70s, and the marketing of consumer unsecured lines of credit and defined-contribution pensions at the same time.

    The growing Gini coefficient and growing household insecurity, the zero-sum race for a place near a good school and all the debt necessarily followed.

    The Street’s and City’s attempts to make hyperprofits via the tried and true methods of buying politicians, mysticism, obscuring the risks, conspiracy, outright fraud: all secondary and tertiary effects of these processes set in motion a long time ago. The aftermath, the victim-blaming, scapegoating, and doubling down: also consequences.

    It’s sad to read that anyone at all thinks austerity is “working” in Europe — especially if by “working” is meant “putting the hoi polloi in their place, and beating them until they learn to stay there”.

    That meaning of “working” is worse than the other, the claim that Europe is recovering more quickly than it would have done without austerity. That’s merely false and incredibly harmful, not malevolent as well. The malevolent interpretation is the only one that can be applied when trained economists say “austerity is working”, though.

    A very brief summary of Whitfield’s points is here: http://www.european-services-strategy.org.uk/publications/books-and-articles-by-dexter-whitfield/unmasking-austerity-lessons-for-australia-by-d/

  13. Ernestine Gross
    August 22nd, 2013 at 21:48 | #13

    Jim Rose :@Ernestine Gross not relying on rating agencies is rather discerning for adaptive expectations.

    I think you missed my point.

  14. Ernestine Gross
    August 22nd, 2013 at 23:50 | #14

    “•Austerity was intended to rapidly reduce public debt by a combination of cutting public spending, reducing or freezing labour costs, tax increases and privatisation alongside reconfiguring public services and the welfare state. These measures would in turn allow the private sector to generate economic growth.”

    Source: Reference quoted by Greg vP.

    What exactly is “austerity”? And where did it happen? And when did it happen?

    According to the quote, the aim of ‘austerity’ is to rapidly reduce public debt.

    But public debt was not a problem in Spain before the GFC. It was private debt. Spain suffers from a burst housing bubble, like the USA. The bubble was grown by whom? The ECB? No the ECB warned about financial instability long before the Lehman event in the USA. The Spanish government had to bail out whom? The ECB? No, it had to bail out the local tentacles of the proverbial Wall Street Bankers. Why? Because it is the Spanish government and not the EC which is responsible for its domestic financial system. Hence Spain’s government debt increased as a consequence of the credit bubble. The idea that the Spanish government can quickly transform workers from the collapsed building industry into whatever is assumed in macro-models to get unemployment down quickly through spending is, I believe theorising in thin air. All the government is able to do quickly is to prevent further carnage by keeping the local financial system alive and pay unemployment benefit and try to get a bit more revenue through taxes. Yes, a welfare state relies on the absence of massive credit misallocation. If this condition is not fulfilled then the desirable state of welfare is no longer possible.

    My education in economics taught me one must first identify the problem before it can be solved.

    If someone now comes and says the increase in Spain’s public debt is evidence that austerity did not work, I say this someone has a solution to a problem which does not exist. Furthermore, providing a solution to a problem which does not exist, creates a problem.

    My education in economics taught me that it is bankruptcy which creates a discontinuity in an economic system. A discontinuity is not the same thing as a cyclical behaviour. It an involve a cusp. Nobody knows what to expect at this point. How does bankruptcy come about? Through credit. Who flogged housing credit? And who ranked financial debt securities, which have the characteristics of risky equity, as investment grade bonds? It was the US rating agencies. I don’t think I need to scapegoat anybody. It is pretty obvious. The GFC is the child of the proverbial Wall Street bankers and their helpers, the rating agencies.

    In contrast to Spain, the problem in Greece was public debt and it still is.

    The interesting aspect in the article referenced is that no-one actually said that Spain had a public debt problem before the GFC (but Greece did), even though it is implied by the conclusion. The reality of the differences in local economies is totally obliterated by means of averaging. This is the wonderful world of macro-economics. It has fascinated me since my undergraduate studies. Any argument can be supported by suitable choice of statistics, which, strictly speaking are precise numerical characterisations of nobody, living nowhere, at any time under all conceivable conditions.

  15. Ikonoclast
    August 23rd, 2013 at 07:34 | #15

    @Ernestine Gross

    I take your points in your post referenced and in your post below that. I made an earlier post in a previous thread (The Economic Theories of Rudd and Abbott). In it I said I do not agree with the “either/or” thinking of many pundits. This point is not aimed at you. Either/or thinking is the thinking which says it’s one thing and one thing only which limits the economy. The argument might be that it is lack of real resources or lack of deficits or lack of surpluses or lack of labour market reform or lack of employment or lack of capacity utilisation or lack of regulation or too much regulation and so on. People tend to fixate on one issue (their particular bete noir) and forget that it’s possible and indeed probable that multiple limiters to economic performance exist at any given time.

    With respect to “cause”, again people tend to focus or fixate on one proximate cause which suits their theories. For example, to hold that financial de-regulation and excess lending leading to asset bubbles caused the GFC. Indeed, I subscribe to that theory myself as a proximate cause. However, if we follow a philosopher like Leo Tolstoy (yes he was a philosopher as well as a novelist), we learn not to ascribe simple, simplistic or single causes to events. Tolstoy points out that world is a vast set of complex, interrelated phenomena and that nothing has a simple, single cause. For example he points out that every cause had many causes antecedent to it and that this chain of causes runs right back to the beginning of history.

    GregvP alludes to this issue by identifying a list of antecedent factors and causes before the proximate causes of the GFC. One can also demonstrate systemic causes of the broadest kind. For example what systemically is the cause of the GFC or the cause of booms and crashes? One can say, as Marx correctly did, that it is capitalism itself. This is not to that other economic systems would not have their own unique ills. It is simply to say that crises such as the GFC are typical of the capitalist system (particulalry when unfettered or laissez-faire) and understandable in terms of its dynamics.

    With respect to the EU, I sense a pro-EU bias or propensity in your thinking. I would argue that the EU model is flawed whereas you would argue it’s a work in progress. Where the EU model is particularly flawed in my opinion is as follows. Put simply, it has put the cart before the horse. By this I mean it has set up a currency union before setting up political union or federation (in the proper sense of the term). Europe first needed to become the United States of Europe or the Federated Republic of Europe before attempting a currency union. Political union must precede currency union. Otherwise it is not possible to construct an Optimal Currency Area (OCA).

    The current EU is not an OCA precisely because it has not a unified Federal government. Only then could currency and taxing powers be properly exercised and horizontal transfers between states be properly organized (as a single unitary state with a Federal govt.)

    What are the chances of getting a United States of Europe or the Federated Republic of Europe? They approach zero in my opinion. I have on several occasions, in my travels, witnessed first hand the ethnic hatred and divisions with which Europe is riven. The animostity of the Poles towards the Russians, of the Germans and Russians with each other and the supercilious contempt of the English for the whole Continent has to be experienced to be believed. These are just a few examples. However, the French and Germans are now remarkably amicable with each other on the whole (which might be surprising).

    So, without political union coming first, currency union is bound to fail. Why does it fail? It is not an OCA. The currency cannot find a floating value which suits the needs of all regions. The full mechanisms of corrective horizontal fiscal transfers do not exist as they exist in a true Federation or Commonwealth which is a unitary state. The horizontal transfer mechanism that the EU does use are not to be compared with the full apparatus and democratic responsiveness of a unified democratic nation state. Ergo it cannot work, it will not work and it is not working in fact. The European crisis continues unabated and is indeed worsening month by month. All the statistics demonstrate this.

    The EU is a corporate, neoliberal economic union not a democratic union. It’s a dream come true for corporate neoliberals and the bankers and a nightmare for the common people. Your support for the current EU concept is quite a puzzle as it goes against all of your other values, particularly your very justified rejection of neo-liberalism and modern corporatism.

  16. Ikonoclast
    August 23rd, 2013 at 11:28 | #16

    Professor John Quiggin, what say you to my assertion that;

    Hard Keynesianism ? Austerity ? Neoliberalism .

    For that indeed is my position and the reason for my economic disagreements with you. I feel you are operationally too close to the austerity camp in macroecomomics. Your social democratic credentials and general humane approach however show you are in far better ethical shape and a much more empirically supportable position than the “Austarians” (and better than the “Austrians” for that matter too).

    Personally, I think the Overton window has moved too far if Keynesians (of any variety) think that 6% unemployment is OK or if not OK that it is an acceptable trade-off (real or imagined) for low inflation. To misquote Keynes, we set ourselves far too easy a task if we accept 5% or 6% unemployment (not to mention under-employment) as the price that others (not us) must pay for price stability. We ought to be able to do 3% unemployment and 3% inflation for example. I would rather see 2% unemployment and 4% inflation. It would be quite reasonable. A little bit of inflation now would allow people to inflate their debts away. And with 4% price inflation, wages should be permitted to inflate at 4% also.

    In continuing to fight the inflation war, economists are like the generals who always, aphoristically, are said to be fighting the last war and not the current or next war (in terms of methods and approaches).

  17. Ikonoclast
    August 23rd, 2013 at 11:29 | #17

    Typo: It should have been “Austerians”.

  18. Graham
    August 23rd, 2013 at 12:01 | #18

    It’s depressing. It seems that the worst you do economicly the better you do politically…ironically due to economic perception. It makes me wonder what the incentive is for politicians to do the right thing by their people.

  19. Ikonoclast
    August 23rd, 2013 at 14:16 | #19

    @Graham

    The political system is very odd now. Both sides competing to be the most inhumane and to give the most benefits to the rich at the expense of everyone else. Democracy is seen as impeding the market. Apparently, we need more market freedoms (really more power and freedom for the already rich to do what they like) and less democracy. Can’t have those pesky middle-class and poor people demanding anything can we?

    The politicians have no incentive to do right by anyone but the rich and the corporates. It’s a closed club. The two main parties and corporate capital power basically agree to keep the game in a certain zone. Neither party will offer anything except neoliberal policies in the main. It’s a two party system but a one ideology state.

  20. Ikonoclast
    August 23rd, 2013 at 14:21 | #20

    I mean you know things have come to a grim pass when Malcolm Fraser finds even Labor far too right wing for his tastes. Malcolm Fraser is correct when he says; “I haven’t moved. Everyone else (in politics) has moved to the right of me.”

  21. Ernestine Gross
    August 23rd, 2013 at 15:37 | #21

    @Ikonoclast

    In reply, quickly:

    1. Yes, you wrote about the problem of polarised argumentation (either or).
    2. No, my points are not about my ‘values’ but about technical matters (a critique of the Dexter Whitfield approach, if you like) and they are restricted to the topic of this thread.
    3. I’ve read the Dexter Whitfield paper in the meantime and I don’t need to revise what I wrote regarding the heading of this thread. But the paper contains an interesting section, section 4, which, in my language, tries to trace the steps of the great move forward to the 19th century, starting in the US in the 1970s (individual items have been treated by JQ over the past few years). This approach, a ‘strategic analysis’ approach, if you like, conveys the idea the monumental dumbing down was a planned thing (ie a ‘strategic move’). I say monumental dumbing down because, the theoretical and empirical work since the 1950s has been ignored to arrive at the great leap forward to the past). In the context of a strategic analysis, I’d like to provide a different angle, by quoting Professor Alf van der Poorten, “I used to think it was University policy to annoy me, but then I realised that the process was so successful that it could only be a series of accidents.” (Prof Poorten’s web-site at the MU, 2001)
    4. I don’t subscribe to grand narratives, hence you and I often talk at cross purposes.
    5. It is news to me that pointing out a problem with a paper involving the EU is a justification for you to impute to me a pro-EU bias. I don’t accept it.
    6. My link to a paper by Stiglitz is in a post which is still in moderation. IMHO, the issues raised by Prof Stiglitz are general (not linked to political economy but economics).

  22. Troy Prideaux
    August 23rd, 2013 at 16:05 | #22

    Can the IT person/people looking after this service please do something about the persistent auto-moderation problems?

  23. August 23rd, 2013 at 20:27 | #23

    @Troy Prideaux

    Suddenly harsh and apparently random moderation of long-time commenters was one of the contributing factors in the decline of “theoildrum” and decision to close the site.

    Weirdly, I can’t recall seeing as many bizarro spam comments actually getting published at this site (in fact I don’t remember ANY) as have recently appeared.

    And just so I don’t get moderated for being OT – Austerity is a scam.

  24. SJ
    August 23rd, 2013 at 23:26 | #24

    which, in my language, tries to trace the steps of the great move forward to the 19th century, starting in the US in the 1970s

    Um, what? Don’t make commments on Friday nights.

  25. Jordan
    August 24th, 2013 at 04:30 | #25

    @SJ
    Austerity is 19th century economics, so E.G. wrote corectly about it.
    A lot of achievement in economics became forgoten and obscured, just as Keyness solutions to Great Depression are abandoned and economics went back to discarded knowledge from previous age before Keyness.
    Why?
    It is not allowed to talk about money (endogenous money) in economics. It is also not allowed to talk about Marxist insights in economics. What is left?; Lets repeat and rinse theories whithout finding solutions.

    Why is not known on how Hitler did come out of GD, and also how FDR operationaly did come out of GD? Operationaly, Hitler printed money and employed all resources available so it was called National SOCIALIST way while FDR organized banks in state ownership that could print the money and banks were capitalized with Treasury Securities instead of money so there was no direct money printing by state as in Germany.
    CapitaIism does not allow direct money printing by state while SociaIism does not allow bank money printing, only state can print money and employ it. Fiat money gives more oportonuties and more ability to solve economic problems then systems on Gold Standard and that is why GS is abandoned.
    Economics do not study effects and possibilities with such operational changes that occured in last 100 years so they went back to 19th century theories.

    Austerity is 19th century economics.

  26. Jordan
    August 24th, 2013 at 05:24 | #26

    Ikonoclast
    Really precious piece of writing you present today. Moreover, it is consistent use of verbiage that makes it easy to comprehend which most of the professional economists lack.
    Just one small thing, it is the rise in wages (incomes) that rises inflation, most of the times. There is one time that price of energy drove inflation.
    Rise in wages allow for more credit creation which translates in higher prices and that then again pushess wages up (that is if there are unions to achieve that).

    Allowing for inflation means allowing the rise in wages, so this sentence; “And with 4% price inflation, wages should be permitted to inflate at 4% also.” is a bit inconsequential.

    All in all, it is a nice gem to have and to spread comprehension of economics to masses.

  27. Ikonoclast
    August 24th, 2013 at 07:21 | #27

    @Ernestine Gross

    Yes, I have misconstrued you again and we are talking at cross purposes. A considerable amount of the fault must be mine as I muddle along as a layperson who imagines he can debate with professional and/or academic economists. JQ has certainly taken to ignoring me completely and putting myself in his shoes I can understand why.

    I am not sure why you don’t directly address my argument that political union must precede currency union for overall reasons of Political Economy. Unless you have addressed it obliquely by saying you don’t subscribe to grand narratives. However, I have offered cogent reasons (I believe) why a political union is required to allow a currency union to occur that can reasonably approximate an OCA (Optimal Currency Area). To recap, a fully democratic union or federation (like Australia) offers;

    1. Full democratic federal parliamentary control to the entire polity affected by the the currency union and the attendent need to be responsive to the needs of all regions of that polity.
    2. Full soveriegn control of the fiat currency.
    3. Full soveriegn control of fiscal and monetary policy.
    4. Full powers to makes horizontal fiscal tranfers as appropriate.

    With political union all these functions are with the federal Parliament. Without full political union these powers are delegated to a supra-national undemocratic or quasi-democratic body at best and the fiscal and monetary policy is run by econocrats (read neoliberal capitalist bankers and their mates).

    You talk about institutional settings at times and the effect of these on economics. In addition to the above illustration, a prime example is the set of laws, institutions, practices etc. enabling the current model of corporatism in Western or at least Anglophone economies. An even more fundamental example is the overall system of ownership and money and labour relations in our society, namely capitalism itself. I keep harping on, at times, about the fact that the subject we should be studying and debating is Political Economy not Economics. Strictly speaking there is no such thing as pure Economics except perhaps economics as a sub-discipline of Political Economy in the areas of econometrics, macroeconomics, business economics and so on. These sub-disciplines are all conditioned by Political Economy. The macroeconomics of Feudalism (if such can be said to exist) are different from those of State Capitalism (the old Soviet Russia) are different from those of mixed economy capitalism and so on. Macroeconomics without a gold standard and with floating exchange rates is different from macroeconomics under a gold standard with fixed exchange rates.

    Microeconomics is a large set of intricate academic exercises usually with little relationship to the real world. Too many simplifying assumptions need to be made to get the formal models. Agency as volitional, learning, complex, evolving behaviour and the general issue of emergent phenomena introduce too many variables and unknowns for micro-economics to become a science. Not to mention institutional arrangements (which are forms of emergent phenomena) conditioning the whole complex system.

  28. Ernestine Gross
    August 24th, 2013 at 09:08 | #28

    @Ikonoclast

    The topic of this thread is “Failure of austerity in Europe”. While our host is very tolerant, I do believe we should show respect by not derailing threads.

  29. SJ
    August 24th, 2013 at 21:24 | #29

    Ernestine, my apologies. And thank you Jordan for explaining. I couldn’t make head nor tail of it.

  30. Ernestine Gross
    August 24th, 2013 at 22:56 | #30

    SJ, no need to apologise – happens to, maybe not all of us, but surely to me (remember the COD). Nice of Jordan though to clarify so quickly.

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