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The rise of technocracy: Full analysis of the Council roadmap for the completion of the EMU

January 3rd, 2013

 

By Protesilaos Stavrou.

Emblem of the European Council. Picture credit: Wikipedia

One of the most important European Council meetings is concluded and we already find ourselves in the midst of a rapid and forceful emergence of a technocratic sovereign statewithin the EU; what I am already referring to as the Euro-state which encompasses all Euro area member states and which has the potential to incorporate all other member states that have committed to adopt the euro as their currency but have done so, i.e. all EU member states except the UK and Denmark. The Council has effectively reproduced most of the Commission’s proposals that were enshrined in its November 30, 2012 Blueprint for a deep and genuine Economic and Monetary Union. It has avoided any reference to euro-bills, i.e.debt instruments of the eurozone with a short-term maturity of up to two years, and it has also omitted any reference to the Euro area parliamentary chamber, as a special and more important committee within the European Parliament, equipped with more powers than all other existing parliamentary committees. My interpretation is not that they will seek to avoid these perhaps thorny issues altogether, but in line with their incrementalist modus operandithey will bring them forth at their future meetings, perhaps by the summer of 2013. 

With the above in mind I shall now proceed to a paragraph-by-paragraph commentary on the conclusions of the December 13-14 Council meeting, in particular on their Roadmap for the completion of the EMU. In this effort I shall abstain from commenting on all the facets of the financial/banking union, in particular on the Single Superisory Mechanism and its concomitant schemes for single resolution of banks and a common deposit guarantee mechanism. The reason I omit this subject is because the Council has published a more thorough document, a Council regulation to be precise, which I shall analyze separately in a future post. As such I shall not comment upon the few references on the ECB- and Eurosystem- related issues that are included in the Council’s roadmap. UPDATE December 16, 2012, 22:55 CET: I have just published my full analysis of the Single Supervisory Mechanism.

Proceeding thus, we read from the very first paragraph the following (all emphasis is mine and all quotes are taken from the Council’s Roadmap for the completion of the EMU, unless otherwise noted):

The European Council agreed on a roadmap for the completion of the Economic and Monetary Union, based on deeper integration and reinforced solidarity. This process will beginwith the completion, strengthening and implementation of the new enhanced economic governance, as well as theadoption of the Single Supervisory Mechanism and of the new rules on recovery and resolution and on deposit guarantees. This will be completed by the establishment of a single resolution mechanism. A number of other important issues will be further examined by the June 2013 European Council, concerning the coordination of national reforms, the social dimension of EMU, the feasibility and modalities of mutually agreed contracts for competitiveness and growth, and solidarity mechanisms and measures to promote the deepening of the Single Market and to protect its integrity. Throughout this process, democratic legitimacy and accountability will be ensured.

Brussels. Outside the European Parliament. By Protesilaos Stavrou CC BY-SA-NC

From a political science perspective the most important element of the negotiations that are now culminating in such a roadmap for the completion of the EMU, is that we have witnessed, in fact ever since the creation of the Euro as an effective clique of states within the EU, a timid though radical shift in the diplomatic approach to European integration. In the founding decades integration was forwarded on the basis of the Aristotelean golden mean, through measures and decisions that would promote the common good in a context of mutual understanding. In stark contrast ever since the installation of the euro-cartel we are bearing witness to the fruits of the method of enhanced cooperation of states willing to impose their dictates on other governments that would never offer their consent for certain policies.

The very existence of the euro is a clear-cut case, however in recent times we are seeing how integration proceeds without the approval of all parties involved, through an undemocratic and manifestly unjust process of intergovernmental cooperation, effectively between Paris and Berlin. The emergence of duos such as the “Merkozy” or of trios and other cliques that spearhead integration in line with the ideological mindset they uphold, is evidence of the deprecation of the old European Community and a fortiriori of the usurpation of the EU by the Euro-clique which gradually asserts the most fundamental of all statist fictions: state sovereignty, in the proper sense of the term which includes the power to compel and to be superior to any other authority within a given geographic area. This must concern at least those who wish to see a genuinely democratic European community, resting on real solidarity and mutual respect between all of its peoples and which is stranger to any pattern of thought that forwards ‘we-they’ syndromes and which initiates various antagonisms and races to the bottom.

Let us now proceed to the closer examination of the text:

1. In the light of the fundamental challenges facing it, the Economic and Monetary Union needs to be strengthened to ensure economic and social welfare as well as stability and sustained prosperity. Economic policies must be fully geared towards promoting strong, sustainable and inclusive economic growth, ensuring fiscal discipline, enhancing competitiveness and boosting employment, and in particular youth employment, in order for Europe to remain a highly competitive social market economy and to preserve the European social model.

I have always felt profound uneasiness with this deterministic tenet of reasoning which claims that integration must proceed at all costs for the sake of effectiveness and efficiency as a mere reaction to an exogenous stimulus, to the financial and economic crisis that has revealed all of the structural malignancies of the eurozone. I am of the impression that such an approach may only foster the false dilemma of “integration or chaos”, which inevitably leads a person to two suboptimal conclusions of either rejecting the EU altogether or of sacrificing all democratic and other principles to the altars of bureaucratic convention and technocratic expediency, in an inane effort to reinforce only the economic, fiscal, budgetary and financial facets of the Euro architecture, while casting democracy—genuine democracy that is—to the dustbin of history.

In my opinion this cheap excuse must not be accepted, but must instead be treated for what it really is: a grotesque panoply of falsehoods and outright lies. Integration can and must be forwarded only for the sake of establishing a European democracy to enhance our liberties, rights and other lofty ideals we may have. In that respect integration is the means to a better life, and not an end to be pursued as such, often to our detriment. To present integration as a reaction to an external shock is to downgrade all laudable principles civilized people must uphold; it is in effect an indication of the technocratic “rationalization” of the whole process that knows no ethical constraints in its quest for power and control.

Next point:

2. The consolidation of EMU rests not only on completing its architecture but also on pursuing differentiated, growth-friendly and sound fiscal policies. While fully respecting the Stability and Growth Pact, the possibilities offered by the EU’s existing fiscal framework to balance productive public investment needs with fiscal discipline objectives can be exploited in the preventive arm of the SGP.

This statement offers priority to the logic of fiscal discipline we have seen in Europe over the last years. While I have never been in favor of frivolous deficit spending and of the inflationary policies it necessarily requires, I must say that to effectively prohibit states from exercising fiscal policy in a counter-cyclical manner, is to elevate idiocy to the level of constitutional law. Yes states must adapt sound policies, but only as a means to the improvement of their citizens lives and not as a preordained, pseudo-moralistic objective. The logic of such fiscal rules rests on a tissue of unexamined and ill-grounded shibboleths. The rates of debt and deficit they are seeking to introduce as “golden rules” are nothing but arbitrary, for in the real world there is a much more complex, interweaving web of factors that influences the fiscal position of a state and the overall conditions in the economy. To isolate two or a few more parameters as the most important ones is to obstinately refuse to recognize the complexity of the economy and to labor in a mechanistic, and therefore fallacious, frame of mind.

Proceeding to our analysis:

3. Further to the interim report submitted in October 2012, the President of the European Council, in close collaboration with the Presidents of the Commission, the European Central Bank and the Eurogroup, has drawn up a specific and time-bound road map for the achievement of genuine Economic and Monetary Union. The European Council notes the “Blueprint” issued by the Commission which provides a comprehensive analysis of the relevant issues combined with an assessment of their legal aspects. It also notes the contributions made by the European Parliament. The European Council sets out the next steps in the process of completing EMU, based on deeper integration and reinforced solidarity for the euro area Member States.

I have two short comments to make on this paragraph:

1. The Eurogroup is an unofficial forum that enjoys no institutional legitimacy. To provide it with such a crucial function is to circumvent democratic rules, especially when we take into account the fact that the European Parliament is merely “contributing” to the whole debate through opinions that in truth face the fate of the recycle bin. In addition the planning board of the European Central Bank participates in all these negotiations with eager alertness and they—these unelected technocrats—will decide on what we the citizens will have as an authority over our heads, to regulate our conduct, to force us to do this and prevent us from doing that.
2. My concern is that “reinforced solidarity” might imply a greater dose of the kind of coercive “support” we have had over the last years, usually epitomized in the troika’s methods of adopting decisions under overwhelming duress and of implementing measures against the popular will, often by deploying police corps, tear gas and other methods of compulsion; decisions that have in many cases harmed the social and democratic fabric. Isn’t there a limit to all this chivalry, altruism and sainthood? Personally I have had enough of this poisonous solidarity.

Next paragraph of the Council’s Roadmap for the completion of the EMU:

4. The process of completing EMU will build on the EU’s institutional and legal framework. It will be open and transparent towards Member States not using the single currency. Throughout the process the integrity of the Single Market will be fully respected, including in the different legislative proposals which will be made. It is also important to ensure a level playing field between Member States which take part in the SSM and those which do not.

This remark is quite important from a legal point of view, as it states quite clearly that no treaty changes are needed to effectively reshape Europe root-and-branch and center it around a technocratic Euro-state. However please take note of the fact that in case we citizens call for genuine democracy in Europe, for say, an elected European executive to replace the hypertrophic technocracy that is the European Commission, we must go through excruciating treaty changes, where certain member states who now feel quite comfortable with the status quo and with the direction integration is heading to, will place all sorts of obstacles and will demand all sorts of concessions, effectively rendering obsolete any effort for the democratization of the EU/Eurozone.

As for the rest of the paragraph I believe it contains certain antinomies. For instance how can we have a euro-state that will operate as a unified entity and as a permanent majority in all fora of decision-making, and at the same time have a level playing field with non-euro member states? There is no such thing as equality in this new reality, since some states will have the power and the means to impose their whims and caprices on those who do not wish to follow, and this will be done via the praxis of enhanced cooperation.

Further issues:

5. The immediate priority is to complete and implement the framework for stronger economic governance, including the “six-pack”, the Treaty on Stability, Coordination and Governance (TSCG) and the “two-pack”. Following the decisive progress achieved on the key elements of the “two-pack”, the European Council calls for its rapid adoption by the co-legislators.

Immediate priority is given to the implementation of the rigid fiscal rules that are enshrined in the above-mentioned legislations, especially in the fiscal compact (aka TSCG). If we examine this in line with the time-horizon that the Commission had established in its Blueprint, we must not be surprised, since the Commission had already stated that first we will concentrate all important powers at the level of the Euro area and then “after 5 years” we will open discussions on issues of democracy (at the end of this article in Annex 1 I quote the Commission’s time-frame).

I am now carrying the commentary to the next paragraph. However please note that §6-11 refer to the financial union and to topics such as the Single Supervisory Mechanism, which as I already mentioned, I intend to scrutinize thoroughly and systematically in a future article. As such analysis now moves on to the last paragraphs from 12-14:

12. In order for the EMU to ensure economic growth, competitiveness in the global context and employment in the EU and in particular in the euro area, a number of other important issues related to the coordination of economic policies and economic policy guidelines of the euro area will need to be further examined, including measures to promote the deepening of the Single Market and to protect its integrity. To this end, the President of the European Council, in close cooperation with the President of the Commission, after a process of consultations with the Member States, will present to the June 2013 European Council possible measures and a time-bound roadmap on the following issues:

a) coordination of national reforms: the participating Member States will be invited to ensure, in line with Article 11 of the TSCG, that all major economic policy reforms that they plan to undertake will be discussed ex ante and, where appropriate, coordinated among themselves. Suchcoordination shall involve the institutions of the EU as required by EU law to this end. The Commission has announced its intention to make a proposal for a framework for ex antecoordination of major economic policy reforms in the context of the European Semester;

b) the social dimension of the EMU, including social dialogue;

c) the feasibility and modalities of mutually agreed contracts for competitiveness and growth: individual arrangements of a contractual nature with EU institutions could enhance ownership and effectiveness. Such arrangements should be differentiated depending on Member States’ specific situations. This would engage all euro area Member States, but non euro Member States may also choose to enter into similar arrangements;

d) solidarity mechanisms that can enhance the efforts made by the Member States that enter into such contractual arrangements for competitiveness and growth.

Starting from paragraph 12, there are two issues that need to be highlighted, the first relating to the coordination of economic policies, which effectively will encompass everything from employment policy, to social welfare, education, the pension system etc. for all may be interpreted as “economic” policy since such issues are interdependent with fiscal and budgetary affairs. If we assume that the kind of economic policy we will get is what the troika has already been forwarding in the countries under bailout programmes, then we must expect a radical shift in sociopolitical life in Europe and a harmonization along a specific, ideological economic model. Whether this is good or not, I shall leave it to the judgement of the reader. The second issue I would wish to highlight is that consultations and negotiations along these lines do not involve the European Parliament at all, when we should expect the only democratic institution of the EU to be the protagonist in such issues that will affect the daily life of all European citizens. The fact that technocrats are once again deciding for us, without us, is a lamentable failure to ensure at least a minimum of democracy and of principled norms of political conduct.

Now on to the subsections. First point (a): What I have been saying for quite some time now, is that all these negotiations are leading to the installation of a troika in permanence with sovereign jurisdiction over the whole area. In this respect I find point (a) as the supervisory facet of the permanent troika, since by coordinating economic policies on an ex ante basis it is meant that (i) elected governments have absolutely no autonomy over initiating any kind of fiscal or economic policy, (ii) a permanent mechanism for realizing this ex ante coordination must be set in place. In effect this is a political and institutional straitjacket for elected governments and I am much concerned about the prospects for true democracy once this system has been given flesh and bones, for its “efficiency” might seem quite appealing to the powers that be. Furthermore “coordination” amounts to inter-governmental decisions using the Commission as the spearhead. This method contravenes democratic decision-making since citizens have no direct say in any of these affairs, and also some member-states now possess disproportional power that they will use and abuse to impose their own understanding of policy-making on all the rest. This is the confederal method which all Europeans who stand for democracy should actively oppose (for more see my articles here,here, here, here and here).

On to point (b): I am not sure what kind of social dimension is meant here, given that this is a single sentence, that the precedent is not very promising, that such documents are the apotheosis of Orwellian palaver and that “social dialogue” with top-down faits accomplitsamounts to nothing.

Points (c) and (d) must be seen in tandem as they contain euphemistic language which clearly delineates what was noted quite explicitly in the Commission’s blueprint (especially in ANNEX 1 of their document), as troika-style reform mechanisms, compelling member states into certain modes of conduct or placing them in whatever fiscal, economic or other straightjacket.

And finally the last and most egregiously technocratic point I wish to touch upon on the Council’s roadmap for the completion of the EMU:

14. Throughout the process, the general objective remains to ensuredemocratic legitimacy and accountability at the level at which decisions are taken and implemented. Any new steps towards strengthening economic governance will need to be accompanied by further steps towards stronger legitimacy and accountability. At national level, moves towards further integration of the fiscal and economic policy frameworks would require that Member States ensure the appropriate involvement of their parliaments.Further integration of policy making and greater pooling of competences must be accompanied by a commensurate involvement of the European Parliament. New mechanismsincreasing the level of cooperation between national parliaments and the European Parliament, in line with Article 13 of the TSCG and Protocol No 1 to the Treaties, can contribute to this process. The European Parliament and national parliaments will determine together the organisation and promotion of a conference of their representatives to discuss EMU related issues.

Beware of the loopholes in the semantics I ought to say at this point. In my understanding the phrase “democratic legitimacy and accountability” is not equivalent to genuine democracy. Strictly speaking, democratic legitimacy means that all decisions must be in line with the rule of law and that the rulings of the judiciary are fully respected. This is mainly a theme of administrative and constitutional law and while it is an integral part of democracy, it does not cover the most important aspect of an inclusive political system: the direct or at least indirect participation of citizens in the decisions that determine their lives. Furthermore democratic accountability, also in a strict interpretation of the concept, suggests that the executive must explain its decisions before the legislative, which again leaves much to be desired since we already have such a process of “informing” the parliament(s) of all the predetermined decisions that are been made, and we know it is insufficient. Put together, the notions of legitimacy and accountability must be fully applicable to non-elected bureaus such as police, surveillance, judicial authorities and the central bank—in general to all unelected offices and centers of power. Consequently the Council advocates the creation of a sovereign Euro-state and in exchange they will offer basic principles of legality as substitutes to genuine democracy. To me this is a downgrade from whatever pitiful democracy and liberty we already have.

Furthermore the kind of political arrangement they envisage for the national level is in effect the identical praxis of the troika programmes in all countries that have been receiving bailouts. As we know, all of the troika’s dictates were approved by parliaments laboring under duress. In that perverted sense there was an “appropriate involvement” of national parliaments. As such this reference amounts or can amount to nothing principled. Directly related to this is the mere “involvement” of the European Parliament. As we know quite well the EP is currently involved in all sorts of policies but its role remains secondary to say the least. Moreover what is the effectiveness of such parliamentary involvement if the broader institutional arrangement that engenders faits accomplis through the inter-governmental route, remains in place and is actually reinforced with state powers of coercion and control?

Having said so it is fair to recognize that the cooperation between the EP and national parliaments is indeed something that can and must be done more effectively, but such a practice alone, or in combination with the above, does little to diminish the profound democratic deficit of the EU. The real and greatest problem, namely the lack of an elected executive and of genuinely democratic decision-making, has been completely omitted and is now being obfuscated by the diminution of democracy into an affair of communication between different parliaments, whose powers are substantially reduced before the omnipotence of existing inter-governmental decision-making.

As a conclusion I wish to remind my readers that I personally am in favor of a democratic, decentralized, federation in Europe as a means to expand on our liberty, prosperity and welfare, and to overcome the rigidities of the old nationalistic order in Europe. However what I now see emerging out of the current negotiations is antithetical to my principles, for it is a technocracy that no force will be able to restrain and which will hold powers that will intrude in every aspect of our daily life. To such a despicable technocracy, I shall always be opposed, regardless of what other federalists may think is happening in all this “integration” they so much laud. I want democracy and liberty, not economic tzars to compel me to do this and to prevent me from doing that.

Annex 1

The Berlaymont building in Brussels housing the European Commission Picture credit: Protesilaos Stavrou CC BY-NC-SA

The Commission’s time-horizon as stated in their Blueprint for a deep and genuine Economic and Monetary Union (pages 12-13):

In the short term (within the next 6-18 months), whileimmediate priority should be given to the full deployment of thenew economic governance tools brought by the six-pack as well as rapid adoption of current Commission proposals such as the two-pack and the Single Supervisory Mechanism, more can still be done through secondary law, in particular in the area of economic policy coordination and support to structural reforms necessary to overcome imbalances and to improve competitiveness. Once a decision on the next Multiannual Financial Framework for the EU has been taken, the establishment of a financial instrument within the EU budget to support re-balancing, adjustment and thereby growth of the economies of the EMU would serve as the initial phase towards the establishment of a stronger fiscal capacity alongside more deeply integrated policy coordination mechanisms. Together, the next step in fiscal and economic policy coordination and the corresponding initial phase of the build-up of a fiscal capacity could take the form of a “convergence and competitiveness instrument”. Following the adoption of the Single Supervisory Mechanism, a Single Resolution Mechanism for banks will be proposed.

In the medium term (18 months to 5 years), further budgetary coordination (including a possibility to require a revision of a national budget in line with European commitments), the extension of deeper policy coordination in the field of taxation and employment, and the creation of a proper fiscal capacity for the EMU to support the implementation of the policy choices resulting from the deeper coordination should be established. Some of these elements will require amending the Treaties. The reduction of public debt significantly exceeding the Treaty criterion could be addressed through the setting-up of a redemption fund. A possible driver for fostering the integration of euro area financial markets and in particular to stabilise volatile government debt markets is common issuance by euro area Member States of short-term government debt with a maturity of up to 1 to 2 years. Both of these possibilities would require amending the Treaties.

Finally, in the long term (beyond 5 years), based on the progressive pooling of sovereignty and thus responsibility as well as solidarity competencies to the European level, the establishment of an autonomous euro area budget providing for a fiscal capacity for the EMU to support Member States in the absorption of shocks should become possible. Also, a deeply integrated economic and fiscal governance framework could allow a common issuance of public debt, which would enhance the functioning of the markets and the conduct of monetary policy. As set out in the Commission’s Green Paper of 23 November 2011 on the feasibility of introducing Stability Bonds, the common issuance of bonds could create new means through which governments finance their debt and offer safe and liquid investment opportunities for savers and financial institutions, as well as a euro area-wide integrated bond market that matches its US dollar counterpart in terms of size and liquidity.

This progressive further integration of the euro areatowards a full banking, fiscal and economic union will require parallel steps towards a political union with a reinforceddemocratic legitimacy and accountability.

The progress in terms of integration will also have to be reflected externally, notably through steps towards united external economic representation of the euro area.

Also from the Commission’s Blueprint we get the following concerning the Euro-state:

(page 11) A comprehensive vision for a deep and genuine EMU conducive to a strong and stable architecture in the financial, fiscal, economic and political domains, underpinning stability and prosperity is necessary. In such a deep and genuine EMU all major economic and fiscal policy choices of its Member States should be subject to deeper coordination, endorsement and surveillance at the European level. These policies should cover also taxation and employment, as well as other policy areas crucial for the functioning of EMU. Such an EMU should also be underpinned by an autonomous and sufficient fiscal capacity that allows the policy choices resulting from the coordination process to be effectively supported. A commensurate share of decisions with regard to revenue, expenditure and debt issuance should be subject to joint decision-making and implementation at the level of EMU.

The above paragraph, as well as the afore-mentioned time-horizon envisage the savage destruction of national democracy via the gradual but systematic concentration of all important state powers at the Euro-area level; all this without a genuine European democracy in place. Integration must be predicated on direct representation and participation, on genuine democracy and democratic customs such as elections; themes that are meticulously excluded from all EU-related documents.

As for democracy behold the height of hypocritical speech and the perversion of reality, in the way they think of the existing framework and of any possible objections that might be posed to the rising technocracy:

(page 35) The Lisbon Treaty has perfected the EU’s unique model of supranational democracy, and in principle set an appropriate level of democratic legitimacy in regard of today’s EU competences. Hence, as long as EMU can be further developed on this Treaty basis, it would be inaccurate to suggest that insurmountable accountability problems exist.

Bon courage to all of us people…

 

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A (euro) crisis of nationalism

August 8th, 2012
By Protesilaos Stavrou.

I have repeatedly stated that the systemic crisis in the Euro area is not about economics, debt, markets, the balance of payments, the role of credit rating agencies, the austerity measures, the independence of the ECB etc. The crisis we see unfolding is one of a very peculiar and toxic kind: it is a crisis of politics, one that is deeply rooted in the banal nationalism and mercantilism that prevails in the EU.For roughly sixty years European integration, or else the laudable idea of a United Europe, has been forwarded by high politics, complex decision-making, opaque negotiations, lengthy treaties that no single individual knows what they really are about –legal experts included–, institutions that lack democratic legitimacy, bureaucrats that are detached from the reality of citizens etc.. The lofty ideal of a unified, peaceful, tolerant and progressive Europe was falsely branded, either consciously or not, as an elitist objective. It was thus kept separated from the “national interest” of each and every state that gradually joined the European Economic Community which in the early 1990’s evolved into the European Union.European integration was peddled as a more or less regionalized version of an international organization, whereby all heads of state gather to discuss issues that are of concern to them. It was never presented as a movement away from nationalism, the nation-state mentality and the implicit competition between states and “their interests”. In saying so, I am not referring to the pompous rhetoric and self-admiration that always surrounds the signing of a new treaty or the implementation of a decision that adds yet more complexity to the EU edifice; I am speaking of how integration has hitherto been an inter-governmental, statist affair. As is the case with all such types of cooperation, the underlying principle is that heads of states are meeting together to promote their own (the national) interest, which in the case of Europe happened to be a common interest in closer collaboration.Whatever progress was achieved thus far, was not the byproduct of some Europeanist vision, but the mere coincidence of several national interests, suggesting that it will last only for as long as these interests are aligned. This was made evident in the very birth certificate of the Euro, the Maastricht Treaty, which set to create a single currency along the lines of national cooperation. The monetary policy was unified, but fiscal affairs, as well as bank supervision remained at the national level; while the Euro area was denied of any mechanisms for collective action and tools for the mitigation of asymmetric shocks (e.g. those eurobonds that so many revile). Integration therefore remained mainly an elitist affair.The Euro was a political project to pass federalization through the back door. The obscurity and complexity of the whole venture, the unscrupulousness of promoting a federal Europe in secrecy, together with the lack of audacity and the apparent defeatism of the architects of the Euro, meant that the seeds for the demise of the project were sowed in the first day of  its existence, on the very paper that envisaged its becoming. Between the lines of the articles that established the single currency one could identify the principle of nationalism, of inter-governmental cooperation, in the profound unwillingness to put aside what was “our” (national) good.The Hobbesian war of all against all was fleshed out in the pernicious illusion of keeping national debts completely separated from one another while fully unifying the monetary policy. The debt of Greece remained “Greek”, the debt of Germany stayed “German” and so on. It was the perfect setting for a mercantilist race to bottom over which state can achieve the most favorable balance of trade at the expense of all the rest. It was the denial to accept that monetary union must always be underpinned by a single state (a genuine political union), by a common treasury (common debt), by a coherent fiscal policy and by a system-wide surplus recycling mechanism, without prejudice to the essential need of addressing internal market rigidities.

Today we see this conflict of national interests coming out in full panoply all across the Euro area. The Greeks put the blame on the Germans, the Germans on the Greeks and so on. Meanwhile nationalism or mercantilism has become the rhetoric and policy orientation par excellence of most, if not all, political parties, including the leftist, who wish to cling on to the state apparatus and become part of its power elite.

One may only be alarmed by the fact that nationalism is now mainstream. This is the harbinger of an era where ultra-nationalism and misanthropy can once again get the chance to enter the fray. In Greece for instance the neo-nazi party, Golden Dawn, received almost 7% of the votes in the last elections, while Syriza, the supposedly radical left-wing party and runner-up in the last elections, gained most of its support thanks to its anti-EU, anti-Euro, anti-Merkel palaver, together with its chimerical, megalomaniac idea of “we the Greeks” will overthrow “capitalism and neoliberalism” in Europe. Though in saying so I disturb many timid souls, the plain fact is that Syriza cultivated a different brand of a “we-they” syndrome and a peculiar type of jingoism, yet it never deviated from the path of nationalism, i.e. the folly that “we” have a collective interest against “them”.

For Golden Dawn the EU is undesirable because it threatens “the nation”; for Syriza the EU is evil because it hinders the interests of “the (Greek) people”. Just as nationalists treat the nation as a unified, ontological entity with faculties of acting, thinking and judging in and of itself (hence the “national” interest); so do Syriza-like, plonky radicals think of “the people” as a monolithic, independent agency with a definite interest of its own.

A similar pattern can be discerned in many other countries, to a lesser degree perhaps (or maybe not), and with different protagonists. For example when Mr Hans-Werner Sinn, the German neo-mercantilist economist, expounds on his opposition to eurobonds, a banking union etc. and when he stresses the importance of the balance of trade; he is speaking along nationalist (mercantilist) lines, even though he embellishes his propaganda with technical terms and professorial palaver.

The crisis of nationalism is ultimately encapsulated in two phrases: “A Europe of the Nations (or the states)” and “A Europe of the Peoples”. In both cases there is an explicit or implicit political divide between individuals on some arbitrary grounds of citizenship, place of birth, culture etc. In my understanding as a libertarian and bottom-up federalist, the only appropriate way of speaking of European integration should be along the lines of “A Europe of the Europeans”, whereby “European” is every individual –any individual– who lives on this continent. Alas, we are nowhere near that, as we seem to be erecting yet more physical and mental barriers and barbed wire between us; some on the internal borders, others on the external ones.

Divided we shall fall and be plunged into misery.

A (euro)crisis of nationalism | Protesilaos Stavrou.

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Has the European Central Bank lost its independence?

August 6th, 2012

By Protesilaos Stavrou.

In light of Mr Draghi’s latest press conference on the approach the European Central Bank will maintain in addressing the ongoing economic crisis in the euro area, prolific Greek economist Dr Yanis Varoufakis argues that the ECB has now lost its much-vaunted independence. Dr Varoufakis notes:

What Draghi is now saying is that, unlike those purchases which the ECB made without imposing conditionality on the three countries involved, any new purchases will come with strings attached; i.e. with a Memorandum of Understanding between the ECB, the EE [EU] and the member-state whose bonds the ECB will be purchasing in the secondary markets. This is, in my view, the end of any pretense to keeping monetary policy separate from fiscal policy. In effect, the ECB gives itself the task of enforcing into member-states particular (and highly austerian) fiscal policies.

 



This is an intriguing interpretation of what the ECB plans to do. At first it is indeed crystal clear that no easy money will be provided to stressed sovereigns as strict conditions will always accompany any kind of financial assistance. Towards that end it could indeed be said that this is a political decision tailored to the agenda of the German government and other net contributor countries to bailout funds; or it could perhaps be argued that the ECB remains in captivity thanks to the obstinacy of Mr Jens Weidmann, the Bundesbank chief, to cling on to the hard money approach that characterizes German central banking since the end of WWII. Along these lines skilled authors could provide a series of explanations on how the ECB has become a powerful weapon in the hands of governments who wish to impose a particular regime of measures in dealing with the crisis. Without monetary easing, stressed sovereigns like Spain and Italy will come to the need of a bailout earlier than expected, which will force upon them stringent conditions on fiscal issues and internal economic policy. Doing so, it is alleged, is a way of indirectly dictating fiscal policy; hence the ECB has lost its independence because it clearly facilitates a particular agenda.

To some extent this view is correct, at least on the surface. Yet as plausible as it may be, it leaves much to be desired. If it is true that the ECB has aligned its policy with the stratagems of core euro zone countries (net payers) by the mere fact of abstaining from massive bond purchases, then it can be deduced that if Mr Draghi had announced a massive bond buying programme, he would still violate the independence of his institution; this time by conducting monetary policy in accordance with the immediate needs of the periphery. If the short term conditions on the borrowing costs of Spain and Italy were improved, by means of monetary easing, that would still constitute an indirect influence on fiscal policy as it would temporarily alleviate the pressure for reforms and internal readjustments. In other words we would have to conclude, along the lines of this argument, that if Mr Draghi had announced the exact opposite of what he did, he would have still thrown to the wind the cherished independence of his institution, as he would have favored a particular fiscal agenda.

Understandably the argument can run both ways, which may only mean two things under the current conditions:

1. the ECB will always be political in the sense of forwarding the agenda of a particular group of countries at a given time (remember that nonsense about the “winners” and the “losers” of the last European Council summit?), or
2. the ECB retains its independence, by conducting monetary policy in accordance with its mandate, regardless of the fact that this may seem to serve the occasional interests of certain governments.

Given that point (1) is subject to the values, beliefs, prejudices, interests and political views of each individual, I think that any argument along those lines will ultimately be based on arbitrary, ad hoc definitions of value and theories that will be refuted by the very inferences that may be drawn out of them. Any discussion based on point (1) will eventually create confusion and arid controversies, while obfuscating the real issues at stake.

Whereas point (2) states the fact that the ECB has institutional independence, which means that being the monetary function of the broader institutional apparatus of the EU, it retains the discretion of conducting policy in ways that will best serve its mission, which is price stability (I say that the ECB is broader than the euro zone because it belongs to the European System of Central Banks, but this is a technicality that may be ignored). Whether one agrees or not with the current mandate of the ECB is irrelevant to the issue of independence per se.

Much has been said about the role of the ECB and sometimes the very notion of its independence has been challenged by heads of states, politicians, opinion-makers etc. (to avoid any misunderstanding, Dr Varoufakis has never challenged the independence of the ECB and I do not imply anything against his views). Yet there seems to be a fundamental  and egregious error of these vociferous critics in conflating the current monetary policy with institutional independence as such. What the fervent detractors of the ECB are saying when they scornfully contest the independence of the ECB, is that it should not be freed from the machinations and short-term opportunism of some or all governments and that it should “support” governments in need of funding in order to promote “growth”. In a nutshell they fallaciously think that independence equals a rigid monetary policy.

As a corrective of this erroneous perception, it must be stressed that the current policy approach of the ECB does not stem from its independence qua independence, but from the mandate it has been assigned to uphold. If this mandate is wrong or undesirable, the blame should fall on all those who signed and ratified the relevant Treaties, as anything else would be a perversion of reality and a denial of recognizing the source of the alleged or real problem.

It also needs to be noted that the independence of the ECB does not mean that it can do whatever it wants, as is often thought. It only means that it has the discretion to discern between a number of tools and means at its disposal to fulfill its role. Anyone aware of basic legal principles, of constitutional and administrative law in particular, knows that “discretion” does not mean omnipotence, but only offers a scope of flexibility to enforce the given mandate, in accordance with established principles and customs. This is perfectly in line with the democratic principle of the separation of powers, as was originally practiced in the early parliamentary system of Britain and as was later theorized by Montesquieu, eventually becoming a central feature of modern democratic states.

In economic terms, institutional independence of the ECB, means that the power to manipulate the money supply will not be abused by politicians who, in face of declining popularity, will go asking for easy money so that they may avoid politically costly measures, by offering blank checks to their voters (see analysis: Should the European Central Bank give money to states at 0% interest?). Instead of that, monetary policy is determined mainly by the Governing Council of the ECB, where all heads of National Central Banks together with the members of the Executive Board express their views and take decisions. Monetary policy under the given economic order of fiat money, should always be independent from short-term politics, because it must be conducted with the long term perspective in mind; otherwise erratic expansions or contractions of the money supply, will heavily distort relative prices and have a chilling effect on everyday commerce by making the business cycle ever more volatile. A healthy economy is one where prices are not influenced by the arbitrariness of officials. Within the context of modern monetary policy this may only be achieved through the complete independence of the central bank.

Finally if the main argument of the ECB’s critics against its independence were to be taken as a universal axiom, then we would also have to question the institutional independence of supreme courts, or the separation between the executive and the legislative functions; ultimately challenging the very foundations of a democratic institutional order of checks and balances, by sacrificing it to a groundless conviction in the metaphysical benevolence of the occasional government or certain bureaucrats in office. The logical extension of this view is that it is right to offer unlimited power to some individuals, if this happens to serve “our” definition of the good and appropriate policy at the time it best serves “our” needs. Such a principle may only provide the excuse to “enlightened” and philanthropic despots to shape society in accordance with their caprice always in the name of the public good, without any institutional constraints to impede their plans. If democracy is to mean anything at all, the institutional independence of the democratic functions must always be preserved, regardless of conditions. The stability of institutions is essential if we are to have a transparent and just political order. For if rules are to be violated anytime it seems convenient to do so, then their credibility will be shattered, throwing us back to the era of demagogy, charlatanry and chaos.

Picture credit: Wikipedia

Has the European Central Bank lost its independence? | Protesilaos Stavrou.

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The European Central Bank as a painkiller not a remedy

July 31st, 2012

By Protesilaos Stavrou.

There seems to be a consensus among economists that the ECB is not doing enough to arrest the crisis in the euro zone. The ECB is after all considered the big bazooka that can intervene in the markets to lower interest rates over the short-term thus buying up some additional time for policy-makers to implement their latest decisions that pave the road towards a banking and a fiscal union in the euro area. It is indeed correct that in theory the ECB could and perhaps should intervene in the secondary markets to prevent the worst from happening, however the answer is not as straightforward as many economists purport to show.

At first we must bear in mind that the ECB does not operate within the institutional framework other major central banks across the globe do. In the Euro zone there is no political union, no common treasury, no eurobonds, no unified banking system etc. Instead what we have in our case is a euro zone that resembles a federal system in monetary policy, but which has 17 sovereign states taking joint decisions and having to agree on ad hoc measures to make up for the initial flaws in the design of the euro. The lack of a common government produces great uncertainty as on one hand there is much controversy over how best to proceed forward; while on the other there is no legitimate pledge to secure the integrity of the euro, apart from some pompous statements of officials that they will do “anything” to preserve the single currency.

Within this context the ECB is facing several political and institutional constraints. The most apparent of them is that it is not backed by a common treasury, meaning that in case it needs to be recapitalized there will have to be a long decision-making process that will require the approval of 17 parliaments. Given that the ECB might need such a support, especially if/when it accepts to take losses on the Greek government bonds it holds or indeed on any other sovereign debt henceforth; the idea of a potential recapitalization may only be a source of concern. In addition without legitimate political checks and balances an omnipotent ECB that acts arbitrarily may only strengthen the fears of citizens across the euro zone that democracy is being eroded.

Moreover the actions of the ECB thus far have proven that monetary policy alone cannot prevent contagion, as in the absence of the instituions that guarantee the integrity of the single currency, any increase in liquidity will eventually end up in the perceived safe havens rather than be supplied to the states and the economies that need it most. For as long as the underlying confidence crisis is not addressed this will remain an unpleasant reality.

The two tranches of Long Term Refinancing Operation loans, worth €1 trillion, only succeeded in buying a few months time, when they were originally thought to be enough for a full three years. This is not because of the limited actions of the ECB, as many economists fallaciously suggest. It is due to investors being well aware of the institutional flaws of the single currency and the fact that no legitimate backstop exists to hold together the whole edifice. My take is that the single most important source of uncertainty is the lacunae that exist in the decision-making process and the fact that EU leaders keep dithering and contradicting their selves every few weeks on how to make the politically costly steps towards the federalization of the eurozone. Federalization of the euro area is the only way forward either we like it or not, the problem is that it is still highly uncertain whether that will be achieved.

Today just like last year during August, Spanish and Italian yields are at worryingly high levels and the ECB is the only institution under these circumstances that can buy a few more weeks until the ESM is brought into force. The ECB can either introduce a third round of LTRO loans which in my view is vain, as it will channel yet more funds to the perceived safe havens, while strengthening the negative feedback loop between stressed sovereigns and near-bankrupt banks; or it can step in the secondary markets through a reactivation of its Securities Markets Programme to buy Spanish and Italian bonds thus directly affecting the borrowing costs of these two states. Or perhaps there can be a combination of these two policies together with a further reduction of the benchmark rate.

Regardless of what the ECB will decide it must be made clear and above board that monetary policy alone cannot solve the crisis, even if the ECB greatly expands its already leveraged balance sheet. The ECB is at best a painkiller that can prolong maturities and keep rates artificially low. But as with ordinary painkillers, the effects tend to wear off faster the more they are consumed, while the after-effects are more deleterious as consumption increases. Same with monetary policy – it is not “free” nor does it always yield benign effects as many people seem to think. Ultimately the crisis in the euro area is a political issue, since it all comes down to how will power be distributed after the financial stress subsides and the necessary institutions are fully operational. Solutions or an eventual breakup will come from EU leaders, not from the ECB acting unilaterally.

The European Central Bank as a painkiller not a remedy | Protesilaos Stavrou.

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European Union: The truth about Credit Rating Agencies and speculators

July 19th, 2012
By Protesilaos Stavrou.


“Ban Credit Rating Agencies!” is the kind of call we hear every time there is a downgrade of the creditworthiness of an ailing Euro zone economy. Uttered by demagogues or other “socially conscious” opinion-makers who think that downgrades per se cause the crisis, this cry against “the speculators” is supported by masses of European citizens. Their principal idea is that these downgrades worsen the position of hardly-pressed Euro area member-states; and as such something should be done to mitigate such a potent threat to our institutional order and social fabric. It is alleged that if we ban or stringently regulate these sirens, then our countries will no longer fall victim to “market attacks”. We are made to believe that controlling credit rating agencies will offer EU policy-makers the chance to implement their agenda with greater ease; and therefore the European citizens will not have to experience untold suffering.

After all, as the President of the European Commission, Mr Barroso, once said in an infuriated reply to some credit downgrades: “our institutions know better […] our analysis is more refined and complete”. Since it is somehow established that the EU’s omniscient bureaucracy knows better, it would be reasonable to prohibit or drastically diminish the scope of action of credit rating agencies; and perhaps replace their function with some Euro-wide board that will feature objective descriptions and detailed ratings of each and every country in the euro zone; always based on “our own” more credible information and “refined” analysis.

This view is widespread as it is expressed by top-ranked EU officials and other policy-makers, while it enjoys the support of newspaper editors, political parties, NGO’s, quangos, do-gooder groups and other activists. In fact this idea is so popular that even the most absurd of libels against credit rating agencies in particular and the “markets” or the “speculators” in general, is thought of as a self-evident truth.

While it would be safe to go along with the trend and replicate the tissues of misunderstandings and fallacies peddled by the media and the political elite, each time there is a credit downgrade; I shall instead state my objection to the above account. My disagreement will be delineated in two parts. Namely: (i) core fallacies, (ii) cronyism. My conclusion is twofold: (1) the real problem is the inability or unwillingness or cautiousness of European leaders to proceed with determined banking/fiscal/political integration, (2) the set of perverse policies, support, pampers and other favoratist governmental edicts needs to be revised so that credit rating agencies (and megabanks) will no longer enjoy an official oligopoly status, but will instead be subject to the forces of the market, and the potential losses therein.

Core fallacies

At first let us unearth the two core fallacies that underpin the above-mentioned fancies:

The markets are treated as ontological entities

One only needs to open almost at random a newspaper, magazine or website critical of “the markets” to observe a truly unique and spectacularly chimerical conceptualization: namely that the “market” is “deciding”, “acting”, “thinking”, “conniving” etc. Markets are treated as if they were beings of their own. One may say that such phraseology is but a mere poetic representation of complex phenomena and is only used for conveniency in writing. Though in general such a justification would indeed be legitimate, I nevertheless contest such an argument. I do not think that such phrases are only used as mental shortcuts, since it is crystal clear to anyone who is aware of social sciences that there always is a tendency for generalized aggregations, simplifications and stereotypes in thinking, writing and researching. In particular disciplines such as macroeconomics, sociology and certain strands of political science and history, have as their subject of study the “society”, or the “economy”, or the “nation”, or in general any other arbitrarily defined group.

To such disciplines the individual does not really exist, as they are only concerned with the given group. These group concepts are fallaciously treated as if they were distinct agencies with faculties of acting, thinking, feeling and discerning in and of their selves. For example the macroeconomist is concerned with the economy as a whole and develops elegant mathematical models and theorems that depict and even predict the “behavior” of this fictitious entity.

Yet the plain fact is that there is no such thing as “the economy”, which can be observed in the real world. The concept of “the economy” is but a mere mental tool we humans use to conduct thought experiments, or in other words to conceptually divide things that in the real world are inextricably bound up together. An independent entity named “the economy” does not exist and can never be observed as such. Despite that the devoted macroeconomist continues to follow his chimera and draws several conclusions out of his study, which are in most cases mechanistic and misleading since the very premise is false.

In truth all that exists are individuals who have established their own imaginary institutions and who live together in what we call “societies” or “communities” (for more see: Castoriades, Cornelius. “The Imaginary Institution of Society”). These individuals are the only beings who possess faculties of acting, thinking, feeling and judging. The groupings that politicians, theoreticians or scientists might make, such as “the nation”, “the economy”, “the team”, “the party”, “the society”, are nothing more than mere concepts and/or imaginations, which certainly lack any capacity of acting, thinking, feeling and judging in and of their selves. To speak therefore of a group mind, or a national character, or indeed of “markets attacking nations”; is but a crass misinterpretation of reality. Such fictions and figments cannot possibly be accepted if we are to make any serious discussion.

Utopian authors of such kind can be found on both sides of the spectrum from the nationalists who think of “the nation” as if were a real being of its own; to the marxists who have on one hand “discovered” some irreversible constant of history, while on the other have been treating people as mere automatons that only operate in accordance with their “class interest”; whereby the concept of “class” receives a mystical understanding as it were an ontological entity.

To make it clear, groups of all sorts are but imaginary constructs. The truism is that only individuals think and act; and individuals is all we have in this world. As such the whole debate of “the markets”, “the states” and “the nations” being at odds with “one another” is but a mass of fantasies at best and egregious fallacies at worst.

The warfare-like language is misleading and inappropriate

As stated above, there is no such thing as “the market” with powers of thinking, acting, feeling and judging; and a fortiriori the idea that “markets” attack is from the very outset completely absurd and meaningless.

Markets do not attack. First because they do not exist at all, as distinct agencies that could “act” against (attack) someone or something, in this case our nations; and second because the whole concept of “attack” relates to situations that have nothing to do with the decisions of (economically) acting individuals.

When for example Greece has to pay 25% interest in order to borrow money, it is not because of some metaphysical voracious appetite of a fictitious being called “the market”; but the consensus among individual investors who have taken into account their implicit and explicit costs, together with any other available information they might have; and have reached the conclusion that Greece cannot possibly repay its debts, thus the risk premium is significantly greater than the rest, hence the higher interest rate.

This is not anything like an attack and can never be considered as such. Only governments, army generals and despots may launch an attack against people. Investors can only invest or abstain from investing in a given security, or in a given country. Investors are of course individuals, and individuals have the freedom to act freely. Thus no one has the right to say that an individual or a group of individuals who abstain from investing in say Greece, is somehow “attacking” Greece. The same can be said for all those who choose to withdraw their savings from Greece in search for safer destinations for their property.

Moreover the concept of an attack implies that it is the unwillingness of investors to invest which causes the crisis; that it is because of these “attacks” that the euro area can actually disintegrate. If we strip away any absurdities of conspiracy theorists and focus only on the argument of well-meaning people; such a mode of thinking is erroneous as it puts the cart before the horse, by completely neglecting the very reason investors changed their behavior in the first place.

In particular an investor will be more risk averse in case the circumstances change; if for instance the political system becomes volatile, or the state imposes taxes and arbitrary cuts every few weeks, or the legal framework is constantly revised, or political leaders keep dithering about the solution to the crisis etc. Investors will abstain from putting their money in a country if they feel that their money is at greater risk; conversely they will be perfectly willing to invest if they expect higher returns. To be sure there is nothing related to the kind of warfare language we always come across in such cases. Investors only act in accordance with their incentives and their expectations (whether those are correct or not is irrelevant).

Therefore if we really want to be precise and specific in our discussions on the role of credit rating agencies and/or speculators in the eurocrisis, we need to abandon such rhetoric. Only in doing so, will we comprehend the issue and find the solution to it. Misleading parlance is but a gift to demagogues, despots, misanthropes and others who may only do more harm than good.

Credit rating agencies and cronyism

From the more theoretical we may now proceed to the practical. Ever since the Great Recession commenced, the three established credit rating agencies (Standard & Poors, Moody’s, Fitch) have lost the “credibility” they once enjoyed. Their excellent ratings for financial derivatives and other assets that proved to be toxic, effectively forced investors to reconsider their methods in calculating risk and in pricing assets. These agencies proved to be utterly oblivious in predicting the crisis, as their ratings suggested that the market was rather robust, when in truth the bubble was becoming increasingly unsustainable. The grand failure of these agencies (and their regulators) to calculate risk is to a large extent rooted in bad regulations and the perverse incentives these engendered. Though it is commonly believed that credit rating agencies are byproducts of unregulated markets, the fact is that the exact opposite is true.

Economist and fellow blogger Vuk Vukovic trenchantly argues that Credit Rating Agencies enjoyed an official oligopoly status for several years. In his research paper titled “Political economy of the US financial crisis 2007-2009”, he states the following:

The rating agencies were, like Fannie and Freddie, privately owned companies that enjoyed large government benefits. A large amount of institutional investors such as retirement funds, insurance companies and banks were forbidden to purchase securities with a lower rating than BBB as determined by the recognized rating agencies. The regulator in certain cases allowed only the purchase of highest AAA rated securities creating thus a favourable market for credit rating agencies. In 1975 a government regulating agency, Securities and Exchange Commission (SEC), gave an oligopoly status to three rating agencies in the US. Standard & Poor’s, Moody’s and Fitch became the only agencies that had the right to give out official ratings to various market securities. They were set as NRSROs (Nationally Recognized Statistical Rating Organizations) and they were the only ones good enough to comply with SECs regulatory requirements in order to evaluate the riskiness of a security.

Such a decision brought about a large distortion of the financial market as the impact of the decision had severe consequences on fi nancial stability. The regulators restricted the supply of ratings, empowering only the NRSROs to provide ratings to which the rest of the fi nancial industry needed to comply. They also increased the demand for rating agencies services as the entire fi nancial industry that was under regulatory supervision had to use the NRSROs ratings in order to determine their capital requirements. The government was also using the same ratings, as all the securities issued by the government, including its GSEs, were rated with the highest investment grade. Companies that would not use the NRSROs ratings faced a limited market for their securities. The system became much too dependent on the role of the rating agencies.

“The rating agencies faced little market discipline, had no significant regulatory oversight, were protected from competition by regulators and enjoyed a burgeoning market for their services” (Levine, 2010). In a situation with limited competition due to a restricted access of entry to the market the agencies had no incentive to use up to-date methods and no incentive to reveal their credit making process creating thus a lack of transparency. There was no market-correcting mechanism to ensure accuracy. In addition, the agencies operated in a particular business model where the “issuer pays” for the rating. Before the 1970s the agencies were operating in an “investor pays” model where if one agency was giving out bad ratings the customer would simply buy the rating from one of its competitors. The new model of “issuer pays” automatically implies the problem of a conflict of interest. Companies prefer favourable ratings as this can lower their costs of capital. They care less about the accuracy of the rating. Since the rating agencies depend on revenue from the securities issuers, who wish for the best ratings possible, the desire of the agencies to please their customers may result in sub-optimal ratings.

I find the point of Vukovic crucially important. But in case someone thinks that this was some “American disease”, I have to point out that the European Central Bank followed a similar path, as it officially used the ratings of these three agencies to evaluate the condition of the European banking system, within the context of “External credit assessment institution source (ECAIs)”. In a reply to the Commission, dated February 2011, the ECB makes the following remark (emphasis mine):

The Eurosystem has a keen interest in the policy debate concerning possible measures addressed to reduce overreliance on external credit ratings, in consideration of the important effects that the perceived existence of shortcomings in the rating activity performed by CRAs [Credit Rating Agencies] may have on market confidence and the possible adverse effects on financial stability.

Understandably the reference to the need of reducing “overreliance on external credit ratings”, implies two things: (1) not only did the ECB/Eurosystem used the evaluations of the rating agencies in their assessment of the European monetary system, but they also “overrelied” on them, (2) the reliance on the credit rating agencies needs to be reduced but not be completely interrupted.

This means that the crocodile tears against “the speculators” only obfuscate the fact that regulators do not really wish to chop away the oligopolistic status of these agencies and to put an abrupt end to their cozy relationship with their cronies. Moreover this eventually raises concerns about the validity of Mr Barroso’s claim that they “know better”; while it also makes us question the very practices of EU/Eurozone regulators. The fakery and humbuggery that characterizes the whole story, seems to suggest that in truth officials are not willing to dismantle the crony capitalist system that has been created over the last decades; but instead they are seeking ways to perpetuate its existence, by refining the perverse capital adequacy criteria, or by “better regulating” credit rating agencies, state-sponsored private megabanks etc.

Concluding remarks

Today the impact of credit ratings on the decisions of investors has been drastically reduced, because credit rating agencies are no longer thought of as the omniscient gurus of risk assessment. Moreover because of their grand failure to price risk prior to the crisis, they themselves have become much more conservative and austere in their evaluations. As we have seen time and again ever since the crisis started in the euro zone, credit downgrades always come after a given period of stress in bond markets. Downgrades are therefore ex post confirmations of what investors have already decided to do; and only to the extent that there is a correlation between the downgrade and increasing interest rates.

However as I have noted before in several articles, investors in the Euro area are greatly influenced by the actions of the ECB and the decisions of EU leaders (for example see here). It would not be an exaggeration to say that the ECB and EU regulators are to a certain extent manipulating the allocation of capital. Credit rating agencies and their ratings are largely irrelevant, both because investors no longer trust them and because the crisis in the euro area is influenced by different factors.

In a nutshell the crisis in the euro zone continues to spiral because the euro lacks essential institutions and mechanisms to mitigate asymmetric shocks. The monetary union needs a banking union, a fiscal union and a political union, for the single currency to be viable in the long run. The absence of this institutional framework creates problems as it prevents decision-makers from acting quickly and effectively. Moreover the problem is exacerbated by the enervating indecision of EU leaders and their self-contradictions throughout these last two years, which have created the impression that the euro zone can be dismantled in part or in total, therefore sustaining and invigorating the confidence crisis that has gripped the euro.

With all of the above in mind, I find the entire discussion on credit rating agencies as largely irrelevant; or rather as an attempt to misdirect attention and to obfuscate the fact that European leaders are facing great difficulties in making the two basic compromises for the survival and integrity of the euro: (1) make transfers politically acceptable, (2) make loss of sovereignty possible, by strengthening EU democratic legitimacy.

Concerning the call for the prohibition of credit rating agencies, I may say that it is misplaced. The point is that only once we fundamentally revise our approach to the financial sector, will we be able to make real progress. In particular the Basel Accords which effectively strengthen the collusion of big government and big corporations, need to be discarded; while the whole monetary system needs to be reconsidered so that:

1. the arbitrariness of central banks and regulators is diminished
2. the privileges to the financial sector are withdrawn
3. competition and the profit/loss system is restored so that reckless financiers may be allowed to go bankrupt
4. the whole regulatory framework be simplified, so that systemic crises be avoided (systemic risk is the byproduct of complex and multi-faceted regulation)
5. private corporations no longer be able to abuse loopholes in the system to create fictitious (toxic) private money

Within this context credit rating agencies need to be left to open competition and to the forces of the market, whereby bad decisions may lead to bankruptcy. The solution is not to prohibit/restrict credit rating agencies nor to refine the system that brought us here, but to put an end to crony capitalism and corporatism.

Originally posted at www.protesilaos.com.

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Latest EU deal is the first step to debt mutualization and federalization

July 8th, 2012

By Protesilaos Stavrou.



 

The latest European Council meeting of June 28-29 must be considered a minor success since on one hand it did make progress in areas where solutions are desperately needed due to the absence of essential institutions and mechanisms, while on the other it has still left many details open and many more things to be done in the months ahead.

European leaders agreed on measures whose purpose in the short term is to lower the borrowing costs of Italy and Spain, the eurozone’s 3rd and 4th largest economies respectively. The main agreement centers around the use of the existing bailout mechanisms and their redeployment as funds for the direct recapitalization of banks (forget the charade of the “Growth Pact”).

This is a step in the right direction since it breaks the vicious cycle between cash-strapped sovereigns and quasi-bankrupt banks. Before that, the banking system of the eurozone remained compartmentalized, with national authorities being fully responsible for the supervision and recapitalization of their respective banks, despite the fact that all shared the same currency, the same payment mechanism (TARGET2) and all operated in a single market with free movement of capital, among others.

Anyone aware of the European political reality and the inadequate institutional order of the EU in general and the EMU in particular, knows that the reason we did not have a genuine banking union in place, is because that would deprive national politicians from the power to draw credit from their local banks; a practice that they exercised liberally over the past years as it is clearly reflected on the balance sheets of domestic private banks which are replete with their respective government’s bonds. A banking union will put an end to the cozy relationship between national politicians and national bankers, hence this might be considered as a loss of “sovereignty” (in the very broad sense).

Such a loss of sovereignty was not desirable for any national government, even though it was crystal clear that the monetary union would never be viable without a banking union. Now the decision of the European Council effectively opens a broad sluice gate for a series of reforms that will eventually lead to a banking union, with bank supervision resting at the EU level (without prejudice to the principle of subsidiarity).

In economic terms a banking union was always required for the single currency to be sustainable. The reason we did not have it from the outset, was political. In fact the entire problem with the eurocrisis has hitherto been political; an insight that many often ignore. We all know that there is much doom and gloom concerning the survival of the euro and many people argue that we have already passed the point of no return. This could have been correct if the problem was about economics and in particular about the insolvency of the euro economies. But in our case such a point does not exist, since the economic fundamentals in the eurozone are far better than say the USA or Japan. Europe has deep pockets, the question that we still have not answered, is how to best use that money, in way that is politically acceptable by all groups of states. With respect to this account and the events in the last summit I tweeted the following, which I think encapsulate what I have been arguing for over the last months:

WallStrt “experts” saying how #EU should work, is ridiculous. Bankers subsidized by US inflationist moneyprinting ponzy scheme speak of debt
— Protesilaos Stavrou (@Protes_Stavrou) June 29, 2012

#Eurocrisis is not about economics. It ultimately is about (1) making transfers politically acceptable, (2) sharing sovereignty #euco
— Protesilaos Stavrou (@Protes_Stavrou) June 29, 2012

Hollande will get his #growthpact, Merkel her #fiscalcompact, Monti, Rajoy their banking quasi-union and soon the ECB will pump in liquidity
— Protesilaos Stavrou (@Protes_Stavrou) June 29, 2012

In addition to the above, I would like to make a comment on the statements made by the German Chancellor Mrs Merkel and now her Minister of Finance Mr Schaeuble, concerning the introduction of eurobonds. Both seem to agree that such a prospect will only happen over their own bodies, after they “are dead”. People who are in favor of eurobonds were infuriated to hear such seemingly absolute statements and reacted strongly, rightly so; but what most of them seem to neglect is that: (1) during negotiations it is common for a side to adopt a maximalist position so as to bring things towards its own end, when compromises eventually take place, (2) political pontifications are only true within their fixed time period and are often in contrast to future actions, in other words politicians often act in a self-contradicting manner. The perceived hard line of mrs Merkel’s government is but a tactical approach to an ongoing bargaining process over how will the EU and the Euro area be shaped over the medium to long term. My first reaction to the comment of Mrs Merkel was this:

#Merkel says no #eurobonds as long as she lives spiegel.de/politik/auslan… < yes ok! just like “there is no debt restructuring for #Greece” – lies
— Protesilaos Stavrou (@Protes_Stavrou) June 27, 2012

I remember well that at the time Greece was negotiating the first bailout, more than two years ago everyone was denying any talks about a debt restructuring, arguing instead that a debt restructuring would create uncertainty in the markets (for example read this article from Reuters dated Apr 27, 2010). Of course now we all know that such talk was pure nonsense from beginning end, as Greece has thus far received a second bailout, a 50% reduction on the net present value of the debt held by private investors (the “haircut”) and soon there will have to be a renegotiation of the existing package, for it to be feasible.

Thus regarding the comments on the eurobonds coming from the German government I may say that they are hypocrites, because the latest decision to use the bailout funds to directly recapitalize domestic banks is in fact a pooling of debt, litanies to the opposite notwithstanding. If the German government already agreed on such a scheme then they will eventually agree on eurobonds, which is intrinsically the same. Again I repeat that the crisis is political and eurobonds of some sorts will be established, when the necessary concessions from all sides are made, or when the political environment for their introduction is mature enough.

Finally I believe that what was agreed on the last summit is still largely insufficient to convince the markets that the crisis is under control. There will have to be much more audacious steps henceforth, especially towards the direction of a genuine fiscal and political union. We must not forget after all that just as we want to see this crisis solved, we also need to have the institutional framework that will make the EU and the Eurozone viable over the long term. Moreover it must be underlined that greater democratic scrutiny will be required. Judging from the events as these unfold, this too is heading towards the right direction, though it is done in an excruciatingly slow way. At any rate the crisis is far from over and we will experience much more uncertainty in the upcoming moths. The first will come from the ECB and the position it will take in the weeks ahead. Will there be a third LTRO? Or is it going to wait until the ESM gets a banking license so that it may leverage its capital with new liquidity? These and many other questions are in the minds of investors, together with all other open possibilities in the countries that experience the most chilling effects of the crisis.

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Is higher inflation in Germany a way to help Greece?

July 7th, 2012

By Protesilaos Stavrou.

Often we come across the argument that one of the ways for Greece in particular and the eurozone’s periphery in general to overcome the crisis is for Germany to tolerate high inflation. The idea is that if there is more (inflationary) money in circulation in Germany, the German consumers and producers will “spend more” and will thus import whatever goods Greece and the periphery have to sell, or they will have “more money” to go holidays in these countries and thus help them overcome the crisis with less pain. This account enjoys widespread approval, despite the fact that it hasn’t really been clearly thought out. I uphold that there is a series of errors in this simplistic mode of thinking which I shall document in this article.

At first it casts to the wind the single most important lesson of economics: there is no such thing as a fixed pie. Indeed if there is anything we have learned from the study of economics all these centuries, in fact at least ever since Aristotle, is that through cooperation, trade and division of labor, we increase the scope of goods and services that we all can have. The more we work together, the more we economize and thus the more we increase the total amount of things we can enjoy. It is non-economics, trade barriers, closed borders, barbed wire, stringent migration controls, warfare etc. that can pit humanity in what game theorists call a zero sum game, or in other words a situation where the size of the pie is fixed and one can only gain at the expense of everybody else. Therefore the argument that Germany must practically lose for Greece and the periphery to gain, is incorrect from the outset because it assumes that the pie is fixed and that Greece may only gain if Germany loses. As a corrective to such thinking it must be noted that we do not have a zero sum game in Europe since we fortunately do not have economic nationalism between these states – we had in the first half of the 20th century and we all know what happened.

Secondly this argument is way too simplistic, to the extent that it is not an economic argument at all, even though it uses macroeconomic magnitudes like inflation. Such thinking is tantamount to the laboratory experiments that chemists conducted to observe the behavior of liquids in communicating vessels. What the chemists noticed, is that if there is more liquid in one vessel, there will necessarily be less liquid in all the others. In chemistry this is indeed correct, but in the real, complex world of economics such thinking is dubious at best, because it excludes the infinite possibilities that open up in the inflationary process. Why will an increase in inflation in Germany lead to such a proportional and equilibrated expansion in Greece and the rest of the periphery? What makes them so certain that an increase in the money supply in Germany will necessary feed in to the imports sector and that the importers will necessarily buy more Greek and other peripheral goods? Why not buy more Japanese goods? Or more iPads and other American high-tech products? Why not go holidays to Turkey instead of Greece? etc etc. My point is that this argument takes many things for granted and misinterprets reality, as it reduces the complex system of the economy, with all the acting human individuals in it, into a chimerical “communicating vessels” experiment.

Moreover this account completely neglects two other economic principles: (1) incentives, (2) expectations. To understand this better we need to make it clear and above board that an expansion in the money supply will first and foremost feed into financial institutions, because this is how the current fiat monetary system works. For those of you who follow events in Europe, I may only remind you that the LTRO, that massive infusion of one trillion euro by the ECB, did not reach out the real economy but instead flowed into state coffers, overnight bank deposits at the ECB and in general other areas that have nothing to do with consumers and producers. The inflationary money always goes first to the financiers. So the question is what kind of incentives and expectations do financiers have to pass that extra liquidity into the real economy in the form of credit, so that we may witness all these supposed benign effects of higher inflation in Germany?

As the situation currently stands financiers have little incentive to supply credit to the real economy, since they can use that extra money to buy more government bonds instead, ideally from Germany, which can then be used as top quality collateral to raise the bank’s capital adequacy, or for even more cheap liquidity from the ECB or it can even be put together in some nice financial derivative and be traded at Wall Street. Same applies for their expectations: A political system that can only find a solution to the eurocrisis through inflation is in fact implying that there is no solution at all, which means that financiers will expect things to get worse and this can only make them even more averse in supplying credit to the real economy. Again the possibilities are practically infinite, and therefore the simplistic “communicating vessels” approach which draws out human behavior among all others, cannot withstand scrutiny.

Lastly I must stress that the very reason we have all this deterioration in Greece and the periphery in general is because of the inflationary, erratic capital inflows that started together with the introduction of the single currency. I have restated this in my article on money illusion as a solution to the eurocrisis, but I will say it again: In Greece, in Spain, in Ireland etc we experienced roughly six-seven years of unsustainable growth, of massive misallocation of scarce resources and of inflation, also known as bubbles. The reason we had that in the first place is because German and French banks, which with the establishment of the euro had the opportunity to go international, suddenly gained access to a tsunami of new capital they had to invest. Some of it went to Wall Street’s wildly speculative toxic derivatives, some to the property bubble in Spain, some to the consumption bubble in Greece and so on. Do we want this to happen again or will we finally realize that we need a massive reallocation of resources in the production of real goods and services and in the tradable sector? What we need is real growth not another series of bubbles. If we agree on that basic principle, then we must comprehend that inflation does not create real growth, it only creates artificial growth which eventually will have to collapse, as bubbles burst, leaving behind tons of devalued capital, failed projects and masses of unemployed.

The nostrums of the inflationists, those mechanistic over-simplified ideas which have no application in the economic sphere, may only lead us to more trouble. The belief that inflation in Germany will help Greece is flatly incorrect. Real investments will help Greece; reallocation of resources to increase productivity and exports will help Greece; a simplification of formalities and a dismantling of the sclerotic bureaucracy will help Greece; a stable political system that gives confidence to investors will help Greece; a modernization of public services and a rationalization of the public sector will help Greece; a simpler and much more efficient tax regime and tax collection mechanism will help Greece; a more effective judicial system will help Greece; a decrease in military spending through open minded compromises with neighboring countries will help Greece.

In a nutshell real reforms will help Greece, not the inflationist bungling. Inflation can do nothing of all this, except from satisfying the delusions of some macroeconomists and econometricians who know nothing about Greece.

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