Some thoughts about the new Macro-Economic Imbalances Procedure of the European Commission (graph)
Steve Keen has to change his website. On this site he states: “As an economist, I do something very unusual: I treat money seriously” and goes on to say that any serious analysis of money and a monetary economy has to include debt,
“But this “inconvenient truth” is omitted from economics–not because economists are deliberately hiding it, but because they have deluded themselves about the nature of money”.
But the tide is changing. The European Commission (EC) includes several stock and flow metrics of private and public debt in its new Macro-Economic Imbalances Scorecard (MIPS), which serves as part of the warning system of the MIP, the Macro-Economic Imbalances Procedure, which in its turn serves as a procedure to discipline ‘irresponsible’ countries.
The economists of the EC are of course right to include debt-related variables in this scorecard. The MIPS data shows, again and as we all know, that the present mess in Europe is not caused by high government deficits and debts. Government deficits and debts even were at a historic low, in 2008, at the onset of the crisis. The mess was caused by absolutely reckless increases of private debts, in some countries as much of 40% of GDP a year and in many countries over 15 or 20% of GDP for many years in a stretch, increases which reached their zenith in 2006-2007. Private debts were at a historical high, in 2008. But nobody cared. Seemingly, the economists of the EC took this lesson to heart. Chapeau.
The MIPS is however part of the MIP, a new and very powerful tool of the (undemocratic) institute of the European Commission, aimed at disciplining individual countries. All EU countries except the Czech Republic and the UK have subscribed, without consulting their parliaments (the Czech Republic has the best MIPS-score of all the EU countries, by the way). So, what to think of the MIP and the MIPS, aside from the fact that it’s a good thing that the MIPS includes private debts? I’ll leave the MIP to others, for the moment, and will concentrate on the metrics, the MIPS:
What’s the matter? In a sense, the MIPS fills several voids left by the most powerful economic actor on the Euro scene, the European Central Bank.
I. The policy of the European Central Bank (ECB) is explicitly aimed at the Euro and the Eurozone and not at individual countries. This is the core of the culture of the ECB. Period. Area wide inflation has to stay at 1,9% in the medium run. Period. Never mind that some (low wage) countries have persistent higher levels of inflation than other (high wage) countries. Area wide money growth has to stay at 4,5%. Period. Never mind that M-3 money growth in Ireland was 38% in November 2006. But the MIP and the MIPS explicitly do look at these individual countries – and for instance set a 15% of GDP warning-threshold on the private sector credit flow (which for reasons of double entry accounting is about the same as M-3 money growth). See also this post. They still do this, however, to guard the Euro, even when it’s about non-euro countries (which except for Sweden and Denmark are supposed to join the Euro, once). The ECB illusion of a large, neo-liberal, euro zone wide market has been shattered. But they still try to engineer it – even by surpassing democratic institutions and the MIP is one of the tools they use. And not to ensure prosperity, employment or economic stability but, in the end, it seems, only to expand the Eurozone. Why?
II. The ECB clearly has problems with variables like unemployment and private debts. Unemployment is not included in its most important models, never mentioned in speeches (at least not in those I’ve read) and private debts are mentioned but even when the M-3 metric of the stock of money, which by and large shows the increase in private debts, went out of control in 2006 and 2007 no decisive action was taken to curtail private credit growth. Actions which, as the German example show, can consist of prudent rules which restrict reckless lending instead of just increasing the interest rate. Lending and borrowing behavior is not just about interest rates but also about rules – as show by German banks which of course did practice reckless lending abroad, where prudent rules were lacking. The MIPS however explicitly includes unemployment and variables showing stocks and flows of private debts and explicitly states that out of control increases of private debts can be destabilising. This is way beyond any ECB statement about this.
III. The ECB is (was?) not interested in current accounts of individual Eurozone countries as it tended to see the Eurozone as an economic unity like the USA, where the current accounts of the individual states are not of any interest. The MIPS includes the current accounts as well as the net international investment position of individual countries.
IV. Asset price increases (real house prices increases) are included in the MIPS, while the ECB was and is ill at ease with these increases and did and,officially, does not consider them to be part of the inflationary process (unlike the Fed).
V. Competitiveness is not only measured by the flawed concept of ‘Unit Labor Costs’ (though the EC-economists are smart enough to use nominal ULC, not ‘real’ ULC) but also by looking at the change in the share of world exports of the individual countries (declining for Germany, by the way).
The scorecard is not used in a ‘mechanical’ way, but serves as a warning system, whenever a lot of imbalances show for a country, additional metrics on for instance productivity are analysed.
Summarizing: the MIPS (and therewith the MIP) can be seen as a kind of re-nationalising of economic analysis of the Eurozone. It’s a good thing that, following the lead of Radical as well as Post-Keynesian and Austrian strains of economic thinking, more attention is given to private credit, private debts and asset price inflation – the idea of the Eurozone as some kind of economic General Equilibrium area has been abandoned.
However. It can be argued that low wages in combination with lower interest rates and a heightened feeling of security, caused by the introduction of theEuro and membership of the Euroclub, led to the devastating flows of capital which caused the present mess, increased risks and (depending on the country) led to malinvestments, asset price inflation and relative large increases in wages or debt fuelled consumption booms. The Euro itself was (and is) the problem. From this perspective, the MIP and the MIPS are still “Kurieren am Symptom”, taking a painkiller to cure tuberculosis.
Clearly, economists still delude themselves about the nature of money.
Addendum: The ECB did not care about this (graph)!