The mess at the heart of the EU
from Lars Syll
The EU establishment has been held to account for the euro mess, for austerity policies that turned recession into depression, for the galloping inequality, and for the millions and millions of unemployed.
The EU austerity policies bread understandable and righteous anger — but also ugly far-right xenophobic political movements taking advantage of the frustration that austerity policies inevitably produce. Ultimately this underlines the threats to society that austerity policies and mass unemployment are.
The neoliberal austerity policies pursued in the EU is deeply disturbing. When an economy is already hanging on the ropes, you can’t just cut government spendings. Cutting government expenditures reduces the aggregate demand. Lower aggregate demand means lower tax revenues. Lower tax revenues mean increased deficits — and calls for even more austerity. And so on, and so on.
Without a conscious effort to counteract the inevitable forces driving our societies towards an extreme income and wealth inequality, our societies crackle. It is crucial to have strong redistributive policies if we want to have stable economies and societies. Redistributive taxes and active fiscal policies are necessary ingredients for building a good society.
Societies where we allow the inequality of incomes and wealth to increase without bounds, sooner or later implode. The cement that keeps us together erodes and in the end we are only left with people dipped in the ice cold water of egoism and greed.
In a society with a huge shortage of homes, a precarious job market, and a marginalized and pressured working class, EU to a large extent becomes a question of class and inequality.
In a market economy, it is money that counts.
In a democracy, it is your vote that counts.
If you’ve got money, you vote in. If you haven’t got money, you vote out.
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Real-World Economics Review Blog 
Monetary and fiscal policies need to work together to make it possible for citizens to live without austerity and without inequality. The technocrats that run the EU financial system either don’t understand how finance works or have put in place policies that award this “misunderstanding” so that it is the financial elite who benefit and the citizens who lose.
Europe is a confederation not a federation. So was America up to the Civil War. That war brought about the Federal Union, which is too much for Europeans to stomach. The solution to Europe problem cannot be found without federalism, and so, Europe is doomed to die from its ineptitude.
A rare case where we partially agree, but the USA under the Constitution was always much more of a federation than Europe is now. A national government with a national currency and national spending and taxation. Europe now is closer to a worse version of the US under the Articles of Confederation. Also, just killing the Euro and the Eurozone instead of real federation is a good solution too. Europe worked much better without the Euro, and would work better again.
Hi, Calgacus, to my knowledge all contracts require payment in a specified currency. If a country drops the Euro for either a new or previous currency, that is an automatic default. It would be particularly onerous with large debts where there is likely to be no easily available security to be given in repayment. Somewhat like walking away from a marriage?
(This reply seems more relevant to my reply to you in another thread here, but no matter.)
If a country drops the Euro for either a new or previous currency, that is an automatic default.
Not at all. Defaulting on obligations and (re) creating a currency are two completely different things. What I would recommend (Warren Mosler has said the same) for a country like Greece or Italy would be to introduce a drachma or lira, but do not touch any Euro denominated obligations either way.
Don’t default on the state’s Euro obligations, don’t force conversions of private domestic Euro denominated accounts into drachma or lira. If private sector entities can’t meet Euro obligations, tough luck for them and their foreign or domestic creditors; nothing to do with the state.
Just do all spending and taxing in the new currency, that’s it.
Calgucus,
Yes, because the ECB will not come across with sufficient Euros and prevents member states from creating them themselves such a round about path is necessary. However, if the EU and its central bank (or a separate monetary authority) was to simply implement a relatively high percentage discount/rebate policy in the places I suggest, particularly at the point of retail sale which is both the terminal ending point of the entire legitimate economic/productive process and also the terminal expression point for any and all price inflation…a high enough percentage discount and rebate would not only end any inflation, but actually be able to integrate price deflation painlessly and beneficially into profit making systems for both the individual and commercial agents. It’s the difference between
1) palliating a problem and resolving it,
2) using a deeper understanding of double entry bookkeeping’s digital nature, the economic and temporal universe significances of the point of sale and of retail sale and so
3) seeing how it is able to integrate factors to the point of direct and immediate effect and also accomplish inversion and transformation of the problem…all of which are primary signatures of paradigm changes.
You see the problem with macro-economists is they look through a glass darkly. Steve Keen correctly observed several years ago that economists could get their PhDs in economics without so much as taking an elementary course in accounting. I complimented him on that insight and directed him to look at the subset of double entry bookkeeping, cost accounting, and also at the digital natures of the debt, money, and accounting systems, but apparently he neglected to do so. Hence I see that he is still trying to solve the real monetary of the economy (scarcity of aggregate individual income) by referencing the velocity of money on his patreon site. Of course the velocity of money is a circuit of money whose relevance to adding aggregate individual income is zero to nil. Why? Because:
1) the classical illustration of the velocity of money is false because it shows businessmen treating business revenue as if it were their individual income which a) it is not b) it is accounting fraud to treat it as such and c) if you do it only a little bit you end up having to stiff your vendors which both wrecks your business and also ultimately bankrupts you.
2) no matter how much money is circulating/re-circulating within the economy is again by definition business revenue….it doesn’t create any additional individual purchasing power…because increased business revenue doesn’t one for one or even at all translate into the vast majority of labor’s income going up.
So if economists would instead look at the facts/realities in my post above this one, they’d be able to discover policies that indeed WOULD increase aggregate individual incomes directly and business revenue reciprocally….and poof! A large component of macro-economic figure-figure would dissipate and the new paradigm would become apparent to them.
Long an American living in either Denmark or Germany, I see we have very different cultures at work in the EU. The Germans, Dutch & some others buckled down in recent hard times, saving even more. The Spanish attempted to clear up some mistakes they had made with real estate investments, & with some austerity the country seems on its way again. Of course, the business competence of such areas as Barcelona helped a lot. Eastern Europe has sent its workers west, with remittances headed home. Greece & Italy, filled with charming people, stumbled ahead with monumentally inefficient government, neither coming close to collecting the taxes which were due. Etc. Vignettes.
Working with businesses, I know which countries are a delight for competitive firms–growing economies & reasonable goverance being paramount. Thus, the obvious generali- zation is that with only loosely aligned nations–anything but states in a union–the future will be trade-offs between each member. Merkel has backed off her support of refugees, partially because their current numbers are not increasing much, although a lot of moving between nations is challenging the open border idea. For most citizens in the 16 years I have lived in the EU, the benefits seem clear in my eyes whether I am in a village in Poland, Hungary, France, Denmark or Germany, among other places. I recommend such travels to all. (My wife is a Polish national & one of her three sons is a master carpenter in Scotland, so I have their take as well on a personal, familial level.)
Thank you again Lars.
Further to previous comments and that empires, like all centres of power and their citizens implode from within, if there are no reasonably strong balancing “robes” in which case the only ropes will hang the destitute.
Economists really do need to start teaching.
As first steps let them read “Paradise Lost” by Milton, and the following passage from Scholars SELECT on Travels of Rabbi Petachia of Ratisbon for an even more moving and older piece of wisdom. I mention these as they are particularly relevant to those who pushed the Botton illegally.
“…Steps led down from the mountain, whence he was accustomed to reach milk to the poor. from thence he went to Damascus. This is a large city; the King of Egypt rules over it…Damascus has goodly lands; it lies in the midst of gardens and pleasure grounds. There are also high fountains from which the water pours, and many large pools…If paradise be on earth then Damascus is the Paradise, and if it be in heaven, then Damascus is opposite on the earth…” (P53 – N.B.: This precious book remains “In the public domain in the United States, and possibly other countries…as no entity or individual has a copyright on the body of the work…”
Yes, Helen, once an economist has tenure & unless they are considered rabble rousers on campus or want publication in the “correct” journals, they can teach pretty much what they want–if it does not upset the local economic/political power structure. That means in some places you have constraints on social (e.g. race or gender) or political (e.g. unions or gerry- mandering) issues as well as economic ones (e.g. concentration of wealth & income). Since I have had innumerable papers rejected over the years, I am experienced in some of this: better for me to teach mostly foreigners in a foreign land, either on engineering/IT analysis or the fundamentals of a realistic global trade system (do unto others as you would have them do unto you, Mr Trump).
The EU can survive as a confederation….if it chooses the abundance for all agents that the new paradigm of Direct and Reciprocal Monetary Grace as in Gifting temporally provides . The thing about new paradigms is that they totally transform the body of knowledge they apply to while at the same time fitting seamlessly within its structures and eliminating or transforming only the dominating force in the old paradigm.
Monetary and economic abundance also has the strong tendency to make the worst of the xenophobes, racists and third rate populist intellects crawl back under the mental rocks from which they have emerged due to austerity, neglect and/or exploitation.
Those that have eyes….let them see.
Hi, Craig, I like your use of the word “abundance”. We, however, are in a culturally/legally nationalist setting over here as you well know. Germans think their views are best for all–frugality, personal responsibility to a large degree, etc–and evaluate other nations accordingly. Since each nation is sovereign, we are in a classic-trade off situation between EU members, as you also know.
James,
Yes, all the more important that domestic economies be enabled to generate sufficiently abundant aggregate individual demand via both employment and the policies of the new paradigm of Gifting so that a true and humanly satisfactory subsidiary international confederation can result…as opposed to moralistically justified export platforming or financially manipulative reserve currencies.
Combining a universal dividend and a policy of equal monetary debits and credits at the point of sale throughout the entire economic/productive process including final retail sale is the way to:
1) implement the new paradigm of Direct and Reciprocal Monetary Gifting
2) end the reign of Finance’s monopoly paradigm of Debt/Burden/Cost Only
3) with a 50% discount-debit/rebate-credit policy double everyone’s purchasing power and double the amount of debt free and available demand for any and all enterprise’s products and services
4) not only end modern economy’s chronic problem with inflation, but within the current paradigm miraculously, painlessly and beneficially integrate price deflation into profit making systems
5) eliminate the “necessity” of transfer taxes for welfare, unemployment insurance and quite quickly even for social security thus further reducing costs for business and increasing individual take home pay
6) except for a smallish but sovereignty establishing percentage, end the ruse that taxes are necessary to prevent inflation and to fund government on all levels, thus enabling a monetarily sovereign government to fund itself (guided by the many aspects of the pinnacle natural philosophical concept of grace) and thus vastly reducing personal and business taxation
7) combine and integrate the best aspects and highest ethical considerations of the alleged agendas of the political left (monetary and economic democracy) and right (the protection and furtherance of free enterprise) thus exposing any objection to such integration as a covert or unconscious means of maintaining the current monopoly paradigm of finance
8) make entirely possible the vital financing for environmentally cleansing technologies and energy and resource efficiency innovations so badly and urgently needed
9) end the failed and oppressive experiment/covert enslavement of homo economicus and begin the civilizationally transformational move toward man having under girding systems that enable and encourage the self actualization of his true species designation of homo sapiens sapiens, wise and discerning man
Look at it, keep looking at it, especially number 3….until you actually see it and all of the rest of its benefits….and go OMG!
What can I say dear Prof. James, I share your rejected past! Somehow one’s face, writings did not fit in, not even to a degree to be institutionalised on a part-time basis for sheer economic survival. Life goes on. Perhaps, the same allowing, you and I can write a short paper together entitled ” What Did I Do to Deserve This”?
Hi, Helen, life is a learning experience for all of us. Even as I have become very practical, I see many others who have sold out their fine brains. Like you I remain an idealist who could have lived no other way.
After reading several of your comments about Italy, I kindly suggest you the learning experience to reconsider some (apparently German-borrowed) stereotypes you seem to be devoted to.
Cincin, I represent lots of businesses who are in Italy or have tried to enter that country. Are you Italian? What part of the country? Would you be willing to discuss your line of business? Respectfully, dealing with the realities of dealing with your government. Mine, American, is lost in Mr Trump’s version of government. P.S. If you are in garment manufac- turing, I need 10,000 garment workers by contract. Can you deliver?
You are correct of course. I also think that death (of others so far) is an equally necessary part of the learning curve. Otherwise something happens to the curve. And yes, too many have done so. For me, their brains might have been fine, the problem lies with their heart. A disconnection between the “brain” and the heart is a disconnection between body and soul, ultimately resulting in a “stagflation” situation: the brain is inflated and the heart stagnates. Not very good. I’m afraid “Idealism” is beyond reach for me, so I shall remain a critical realist. That is more than good enough for me, but, as in all previous comments, democratic discourse is the only way forward, so all enlightened positions that move forward rather than sideways or backwards are fine with me.
Hi,.Helen, I think our “learning curve” in the US has been that the poor disappear from public sight. Without mentioning places or genetics, they are “lazy bums who fish or make moonshine”, when in reality they are offered awful educations, have unmet medical needs & often worked in one-industry towns which produced coal, steel or. Often share-cropping farmers were the same when the weather didn’t cooperate. Here in Europe we have those “awful” gypsies who don’t settle down & get a job or at least local public welfare–when actually they do both to a limited extent. My point: when we think of them at all, we mostly brush them aside by indicating that it is THEIR problem or more specifically that they are incorrigible in some way(s). Right?
Economists in general have the worst record to give these type of ideology a high dominion!Sadly throw history!
Austerity has become a theological argument among supporters and opponents. Emotions run high, evidence is deliberately mistreated or just plain ignored, and there is virtually no agreement on when and how to use austerity to achieve identified results. We learned a few lessons over the last few years about austerity. First, cuts in government budgets don’t generally improve the economy, particularly hurting ordinary workers, retirees, and small businesses. Second, with low nominal interest rates, austerity reduces demand even more that otherwise expected. Third, the debate over whether it’s always good to reduce deficits and balance government budgets continues. Neither seems essential in creating an economy that works. But they are often necessary to placate investors who tend to shy away from bonds of governments with high deficits and/or unbalanced budgets. This is more psychology than economics. What policies accompany austerity is important. For example, austerity hurts more if it is not accompanied by daring monetary loosening.
Hi, Ken, once again I return to the matter of culture & possibly political leadership. Some nations are savers & penny-pinchers. I am living in one. America, from which I came 16 years ago, as you well know is not. The radical leadership here has attached itself to the convenient rejection of foreigners’ troph. meaning that many locals don’t feel enough well off it seems to me. Combined with adequate to good safety nets, we are led away from the questions of better training, better wages, more secure jobs, & the rest which we discuss here so much. Just as Trump seems unable to depart from his “me & the rest model”, so future EU discussions will center on who makes the budget & how much public borrowing will be permitted. Absent new leadership I doubt we will go from that in the foreseable future. In the short term we have Brexit, Trump’s hold on American government & possibly Putin’s becoming aggressive again in Eastern Europe. Asia will continue to grow economically & the Middle East will continue to fight. (I have met no refugees who want to return home, as much as they love their homelands.) The EU will grow 1.5%-2-0% a year in GDP, China & India at about 6% & the US–depending on Mr Trump–as much as 2.5% a year over the next, say, three years, I expect. That seems our most likely short-term future as best I can see, forcing lots of unhappy people to deal with their personal lives as best they can.
James, partly correct. Economics is a part of culture. Culture is invented based on specific historical events, combined with human assessments and decisions. A high rate of saving is one possible result. As is prodigious and wasteful spending. The Great Depression left many who lived through it with a compulsion toward thrift. Some of course took it too far but in general most wanted conservative governments and banks that protected them from similar events in the future. This includes many US citizens. But most are now dead. They can no longer influence policy for the nation. In the case of Germany add Nazism and the destruction of the country in WWII to the history of current German culture. None of this translates to German or American culture not changing in the future. Trump is harassing American culture, but his actions have not yet changed it. Even the deliberate effort of American plutocrats and corporations to transform American into a neoliberal (Fascist) culture has not been successful. Although these efforts have created uncertainty and animosity and allowed domestic fascists to come out into the open.
Hi, Ken, not sure if we disagree. Germany & the US are largely what they are for historical reasons. I add China in the same vein, with its desire to gain acceptance & overcoming that Asian sense of shame with which I can’t emotionally connect. (I have a long history with Asian women of various nationalities.) So here we have the American spenders, German savers & China combining the two–spending only on what will have a large economic payoff for the society with some people remaining in charge.
For the sake of their political careers I believe most current EU national politicians will bend a bit toward growth, absorbing as many refugees as possible & trying to send the remainder back. Today however I noticed a new emigrant group in town–their absorption will require additional efforts, I believe. Exciting but largely peaceful times.
James, fair and non-violent immigration integration would be a big step forward for the US and Germany, and most of the rest of the west. Which makes the issues of what integration is and what its results ought to be very important. In Ursula K. Le Guin’s science fiction novel, The Lathe of Heaven, the main character George Orr whose dreams change “reality” is asked to fix the racial problems in the world. When he awakes the next day every human on earth has grey skin. Racial problems solved. But it’s not that easy. Most problems humans face require interaction, talk, and expanded self and other understanding to resolve. All of these are in short supply, and always have been.