Klaas Knot, european central banker, wants to abolish democracy
Klaas Knot, president of De Nederlandsche Bank, part of the system of Eurozone central banks, stated in a recent speech in Hong Kong (emphasis added):
“Secondly, debt ratios should gradually be brought well below the ceiling of 60%. This lower debt ratio can only be realised and maintained through independent enforcement of the European fiscal rules, and by anchoring these rules in national legislation. A politically independent European authority that can increasingly intervene in the fiscal policy of countries breaking the agreements is essential here.”
We already have an independent Eurozone Central Bank (ECB) which according to the plans will soon also become the Eurozone banking supervisor. To this an independent, undemocratic, bureaucratic Eurozone fiscal authority with binding powers has to be added, according to the quote. Sounds to me like ‘dismantle democracy!’.
This is clearly not about saving the Euro anymore. Ideologically it sounds like the bureaucratic version of some ideas of Friedrich Hayek for which even Margaret Thatcher ‘birched’ him. But do we need this?
And Knot’s economic reasoning behind these ideas is a disaster.
1. To proof that the Eurocrisis is caused by democratic irresponsibility Knot uses a graph showing government deficits for three countries (Greece, Portugal, Italy) which however does not show what he states that it shows (I’ve added some lines to highlight this).
2. The graph above shows the developments in three countries. Knot however uses a sample of seven countries in his discourse. Four of these are not shown in the government deficit graph. There is a reason he doesn’t show these data. When we look at the government deficits of these four countries (Germany, Ireland, Spain, The Netherlands) Knot’s argument completely derails (graph 2). The very large government deficits for the Netherlands and Germany in 1995 were caused by bailing out the Treuhandanstalt (Germany) and a debt/asset swap of the Dutch government and the Dutch social housing corporations which led to more short term government debt but also to less future government liabilities. Hmmm.
3. The more interesting point however is if Knot is right that Greece is fundamentally irresponsible as it has a culture consistent with a system in which ‘seigniorage’ and the ‘inflation tax’ in stead of a normal tax is used to finance the government. Graph 3 gives a little bit of information about this (the German data are not too precise but may serve for now).
Monetary government financing in Greek clearly abated after 1981 (though it does not seem entirely impossible that in the same period more attention could have been paid to improving the quality of tax system) – Greece did shed its old habits. And did not relapse. Nowadays, the ECB takes care that no monetary government financing takes place anymore and that the making of seigniorage profits is outsourced to the banking system. The Irish example however shows that private sector money creation can be excessive, too, the government in this case reaping not a seigniorage profit but a kind of ‘inflation tax’ as it could sell land and building permits against inflated prices while the banks reaped the seigniorage profit as they could charge (net) interest for the newly created money. Also, Greek money growth up to 2008 does not seem to have been excessive, compared with the Eurozone average. And post 2008 events of course show the deeply deflationary nature of the present crisis. The real
Greek European problem is not Greek irresponsibility and too much money chasing too few goods – but northern european irresponsibility and money chasing assets in stead of new products and services. With at this moment 25% unemployment and about 70.000 bankruptcy’s in Greece as a result.
So, his argument is flawed. Knot does not argue in any coherent fashion that we really need to abolish democracy. His data seem to be incomplete and deliberately distorted. But maybe we should start to think about abolishing something else, in the Eurozone, however. To me, the choice between the admittedly bad old Greek habits and the new habits proposed by Klaas Knot is easy.