Part 1 Saving Private* Euro from her (his) deeds
The dire deeds of Euroland
On May 1 a dancing host of Eastern Revellers entered in great pomps and circumstances the land of the thousand promises, Euroland. At the same time, in this very land of the future, there was a finance minister of France, one of the mightest nations of Euroland who became obsessed by the amount of the public debt as if he were the treasurer of a bankrupt Baron in early middle-age who overspent on conspicuous items (Chivalry, Crusades, mistresses and worse), the minister decided to liquidate the state most productive assets while robbing the coffers of the central bank. Herein lies a fundamental paradox : why in a land hallowed to the future finance ministers are deemed wise when they restore policies sensible at the turn of the first millenium ? Why mighty nations would be transmogrified into poor baronies under the threat of avid creditors ?
Let us call this restored threat the Euro-Baronial syndrom. What are its causes ? Herein are crucial questions of which our revellers are not aware, no more than the overwhelming majority of the First nations of Euroland.
At the beginning of Euroland a fragile currency
only rooted into dramatic Baronial constraints
Contrary to what has been proclaimed by Euroland rulers, the Euro was born a very fragile currency deprived of the supports maintaining the value of other currencies.
1/ Being a common currency, it is a supranational currency, which means that each member State had to surrender its monetary sovereignty ; A logical consequence is that no member State might henceworth protect the liquidity of its banking system by the flux/reflux of its currency generated by Public Finance. Logically each member State can no more independantly issue by its own will liquid liabilities denominated in the currency.
2/ There is not a genuine Central Bank in the like of the FRS (through
the Federal Bank of New York) providing liquidity to private banks at their
will and closely associate to a State Treasury taking care of losses. I
entirely agree with Otto Steiger** in his remarkable study on the European
Central Bank (ECB) ; it helped me to understand what is at stake :
It is a mere illusion bereft of all the normal characteristics of Central Banks.
Its balance -sheet is misleading by construction.
* It does not issue notes.
* It does not hold public and private debts.
* It cannot provide liquidity to banks.
* It is connected to no Treasury
3/ The sole Central Banks are the Domestic National Banks (DNB). Together (with six representatives from the ECB) they are the supreme authority (the European System of Central Banks ESCB) in charge of Monetary Policy. Only Domestic National Banks may issue notes and hold liabilities. Nothing has been said relative to the provisions of liquidity (the lender of last resort) !
4/ Logically « Commonality » requires that the lender
of last resort rôle should be played by DNB together after a collective
decision of the council of governors of the ESCB (in which the ECB has
only a minority vote).
It is not so ! Such a common role is outside the normal functions of the Council. Could it be implemented independantly by each Central Bank ? :
No, it would contradict the harmonization of the financial structure.
Ultimately a very fragile currency has been created (at the explicit request of France). Herein lies the explanation of the outrageous and rigid norms imposed on member-States. As if Gold has been restored, the Euro is a foreign currency relative to all members. A logical consequence is that their debt is no more the most liquid and soundest asset for banks. Its liquidity has to be rooted into scarcity, herein is the sole sensible explanation of the dramatic strait-jacket forced upon member-States :
Targeting first While targeting Ultimately targeting
balanced budget a fall in the ratio Debt/GDP a surplus as our
Creditors have to be repaid (out of current outlays) to restore confidence !
An unsustainable regime :
The threat of Ponzi finance generates Ponzi finance
The Baronial Euro Syndrom must be cured.
1/ The threat of Ponzi finance (a State unable to redeem its debt) generates a permanent squeeze of profits in the Euroland leading to a fall in the value of private liabilities reflected by increasing losses for banks and Domestic Central Banks. By their own deeds striving to apply the norms, governments force private holders to doubt the liquidity of their liabilities. Private holders start to look States as if they were private debtors, henceforth there can be both a strong inequality in the value of debts (interest rates diverge) and a decline in the average value of State debt.
2/ There could indeed happen a time when private banks would impose harsh credit-worthiness norms on States as the prerequisite for increasing their stock of public debt.
3/ What compounds the dramatic impact of the Euro Structure, is a
side effect of the Euro-Baronial Syndrom :
3.1/ There are now unwanted deficits in France, Germany and Italy resulting from a collapse of tax revenues
generated by a strong decline in domestic aggregate demand. It is the outcome of a sharp drop in private
demand and investment compounded by a rise in desired household saving.
3.2/ Since all rational private firms know that governments are pledged to squeeze, effective
profits generated by unwanted deficits have no positive impact on expected profits. There is
worse, expected profit could fall because of expected future surpluses.
3.3/ Herein is the explanation of a Euro paradox : Rising unwanted deficits cannot raise private employment
enough (to cut effective unemployment) and investment.
In the army of currencies, Private* Euro is indeed in a dire situation.
Its relative rise in terms of Dollar does not contradict this conclusion.
« Speculators » reveal their wisdom : Euro assets are sharply
undervalued in the long-run, there must be a reversal of policies, the
Euro-Baronial syndrom is to be cured. Yes it is right, it will be the subject
of my second part.
Part 2 Saving Private* Euro
Part 1 revealed that by its deeds private* Euro endangers revellers
in both new and old Euroland. If it is not rescued on time, it could endanger
the whole world economy. Herein is one of the legitimate predictions of
the future (according to my third piece)
If nothing changes in the character of the Euro, one must bet on the worse, abstracting from absolutely unknowable (quasi-miraculous) future events (in the like of a sudden revelation awakening capitalists animal spirits at a sudden convinced to start some investment crusade for the ultimate achievement of the continental new order, a revelation dreamed in the very early fourties of the XXth century by the french economist François Perroux in his famous article published in La revue díéconomie contemporaine décembre 1943 « La monnaie dans líéconomie internationale organisée »pp 5-12.
Playing cunningly with the rules
One may assume that there are governments genuinely worried by their impotence while to wise to indulge in the fancy tricks recommended by those addicted to the Euro-Baronial syndrom. What is required first is a sensible interpretation of the rules germane to the core principles of Macro-economic theory :
The deficit rules
The general theory of the monetary circuit perfectly integrates Keynes and Robert Eisner theory of the dual budgets. As long as the notion of « deficit » is used to account for the net creation of wealth resulting directly from State spending, one is obliged to rely on two measures of the deficit :
1/ The gross deficit in terms of money flows accounting for the State net spending.
2/ The real or net deficit equal to the gross deficit minus aggregate public investment
(including amortization), the sum of tangible and non tangible public investment.
What only matters for a genuine appraisal of the rôle of the State is the real deficit, which requires a correct measure of all public assets (including the human capital).
Since the Growth and Stability Plan (GSP) does not explain what is the « deficit », the whole set of rules relative to deficits should be applied to the sole « real » deficit. With an accurate measure of aggregate public investment, one should discover either that many excess-deficit countries run a zero real deficit or a real surplus (real negative deficit). I do believe that it is the case of Germany and France.
The debt rule
What only matters is the net debt position (or net worth, >0, <0 or 0). It is equal to the difference between the value of liabilities and the value of all assets, including tangible assets and financial assets of all kind. Debts generate payments to holders of those debts but assets generate income. The GSP just mentions the « Debt » without explaining to what notion of debt, gross or net, it refers. It is therefore perfectly sensible to rely on the sole net debt position. For most countries, certainly for France and Germany, the net indebtness is far below the 60% limit. I do think that an accurate measure of the value of assets and debts could generate a negative net debt position (positive net worth) for France, Germany and may be Italy. What is henceworth to be done is to deem such a positive net worth as the real long-term surplus of the State.
Cunning States may therefore exterminate the germ of the Euro-Baronial
Each of them might undertake a long genuine full-employment policy automatically meeting the GSP rules. The growth of States gross deficits will be reflected by the growth of public investment (tangible and non tangible) embodied into long-run programs. It is to generate an equal growth of State assets maintening or increasing the net-worth position, the real surplus.
Finance should never be a problem whatever the accounting relationship between domestic treasury and domestic Central Bank. In any case, private banks would be keen to accumulate State liabilities, the value of which being anchored into the net-worth position of the State. State debts would still be deemed the most liquid assets for banks targeting a net worth own position.
Playing with the rules is not enough, the Euro-Baronial syndrom
An existence condition of « Commonality » is that there is not too much divergence, from country to country, in the value of liabilities denominated in the « common currency ». This « sustainable divergence condition » holds for States and private liabilities. Were it not holding, the « common » currency would be nothing but a mere illusion, which would dramatically increase the fragility of the supporting financial structure.. It requires that there is some convergence in State net worth position, the ultimate anchor of the value of State liabilities when States have been deprived of their power to issue money. It also requires that there is some convergence between the domestic effective rates of profit, the ratio of domestic aggregate profits to private labour income. For reasons already explained, they are the ultimate anchor of the value of private liabilities.
Now, let us look closerat our intelligence game when it is played in a non « command » way. It could lead to extreme divergence between States net worth position and between domestic rates of profit for, at least, three reasons :
* Some players could be much more concerned by a Genuine Full Employment Policy (GFEP) than others
and therefore keener to accept an intelligent interpretation than others. To day (may 2004) the french
government rejects any shrewd interpretation of the rules and indulges in the strangest tricks (the most
severe form of the Baronial syndrom)
* They start from very differrent net worth positions, which could have an impact on their expected
degree of freedom.
* Privatisation forces a liquidation of State assets, which shrinks its net worth. Different paces of
privatisation increases the inequality in net worth positions and therefore in the expected sustainable
growth of public investment.
Ultimately, a non-command game leads to an extreme difference between the growth of net spending reflected by unsustainable difference between long-term States net worth and rates of profit. It could give the lethal blow to a currency which is not protected by a strong and unique Central Bank sustained by a unique (common) treasury and therefore a European institution (whatever the legal term) free to issue the currency through its budget.
Burning the veil of illusions and deceit. Beyond the myth of a
Monetary Union :
Governments could play together in harmony but it would mean that there is a
European unique fiscal policy, a European true budget and henceforth some
common institution issuing currency out of its expenditures while destroying it
by its taxes. The necessity of rigid common rules would disappear. Such a true
common fiscal policy cannot exist without a true European Central bank
playing the part of the Federal Reserve System in the USA. At last a true
common currency would exist, and the danger of french Euros, german
Euros....latvian Euros would be removed for ever.
Such a deep reform goes far beyond the illusion of a pure Monetary Union
without any centralized (common) supporting structure. It is to be the
outcome of the twin fights for GFEP and the true financial stability. Herein lies
the fight economists should launch to awaken the people of Euroland.
* an allusion to the famous movie « Saving Private Ryan »
** Réference Otto Steiger (feb 2004) Which lender of last resort for the Eurosystem ?( A contribution to the theory of Central Banking) slightly revised version of a paper presented at Complexity,Endogeneous Money and Exogeneous interest rates : a Conference in honour of Basil Moore Stellenbosch University, Stellenbosch, South Africa January 7-11 2004. The final version of this paper is to be published in : Victoria Chick, ed., The Challenge of Endogenous Money: Theory and Policy, London: Palgrave Macmillan, Autumn 2004.
Added May 28 2004
Following a very interesting debate with Warren Mosler, I have to explain
some points of my
Salvation Plan for Private Euro.
1/ When I addressed the nature of State Outlays,
I never believed that the operating budget should run
a surplus financing public investment (like in Keynes). I never said that future returns of public
investment (discounted at some rate of interest) are to be accounted as balancing savings (like in
2/ We must get a Monetary Theory of
the State and therefore of the Deficit, as I always wrote
(especially in my Monetary Theory of Public Finance to be published soon in the special issue
of the International Journal of Political Economy edited by Mario Seccareccia) : It is missing
in Keynes, Domar and Eisner.
3/ The State Deficit (Net Spending)
is always reflected by a private surplus (for a generalisation, see
my paper for the Kansas City International Post Keynesian Conference June 2004). There is
therefore an equilibrium level of the State deficit meeting the desired private net surplus
(accumulation of wealth).
4/ One should think more on this crucial
Theory of the State instead of being obsessed by
Back to the three first pieces