An unhappy anniversary for the euro

Quoting  from John Grail in the Guardian Bill Mitchell in Billyblog elaborates why exactly the Euro is not and never was a success in any of the ways that matter. 

….So for 30 years or more, the European governments, in particular the Eurozone member states have been deliberately deflating their economies in search of their dream of monetary union.

The consequences are now dire and to continue this vandalism, the Euro elites are now attacking the democratic basis of the governmental system. They have deliberately ignored the preferences of the people in the individual nations and when a head of state has looked like deviating from the Troika-mantra they have been replaced by a non-elected technocrat with pro-Euro, pro-ECB, pro-IMF sympathies.

As John Grahl says:

… if the monetary union does survive, in the form now planned by EU leaders, then the cure could turn out to be worse than the disease.

He is referring to the so-called “fiscal union” which he says “does not involve a genuine co-ordination of macroeconomic policies or significant transfers of tax revenues”. He correctly views it as an “authoritarian structure that would subject the weaker states to permanent and extremely intrusive surveillance, formally by the commission and the ECB, in reality by Germany and the stronger northern European states”.

The very states that relied on the so-called profligate peripheral Euro states for the miserly employment growth they generated between 1999 and 2007. Without Greece and Spain and the rest of the now vilified PIIGS spending the non-PIIGS would have looked very ordinary indeed in terms of their economic aggregates.

While Germany is being held out as the example for all to follow, John Grahl notes that:

One alarming aspect of German views of the current “reforms” is a fascination with numerical limits – on public spending, on public borrowing and so on. In many ways these are analogous to the Friedmanite notion of numerical limits on the money stock and, just like money supply rules, they will prove to be either ineffective or dysfunctional. Public debt is not a control variable available to policymakers; it represents a relationship between the public sector and the unstable, unpredictable, private sector which does not admit of mechanical arithmetic constraints.

Yes, the obsession with ratios. It is correct to point out that these ratios are not “control variables”. As I have noted in the past, budget balances, for example (and hence shifts in public debt) are driven by the state of the business cycle. The major fluctuations in economic activity occur due to the variability of private gross capital formation (investment).

Strong private spending growth leads to smaller budget deficits (relative to GDP), other things equal. A rising public debt ratio is typically a sign that private spending is weak.

The only problem is that in a fiat monetary system where the currency is issued by the elected national government and allowed to float freely on international markets, these ratios are largely irrelevant to the conduct of government.

But in the Eurozone they are not as a result of the flawed design that the Euro elites introduced from the outset. As John Grahl notes it would have been a totally different situation right now if the Eurozone was built with a federal-level fiscal institution that was charged with the “genuine co-ordination of macroeconomic policies or significant transfers of tax revenues”.

The elites refused to include that essential capacity because they were ideologically opposed to the use of fiscal policy and sought to impose the rigid Stability and Growth Pact rules on all member states.

Not only were these rules impossible to keep within (because budget balances are not control variables) but they biased the region to a low growth future even before the crisis.

The only strong employment growth – as we have seen – were in areas and sectors – that could not sustain that impetus.

The first major negative aggregate demand shock was like a breathe of wind against a house of cards.


To repeat – the first 10 years of the Eurozone were not as glowing as the official rhetoric might have led you to believe. Sure enough there was some strong employment growth regions and sectors but the composition of that employment growth was never sustainable.

The redistribution of employment towards construction in Ireland and Spain was unsustainable.

The reliance on growth in the peripheral states which helped Germany run strong current account surpluses was unsustainable.

In general, the Eurozone was failing from day one.


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