>> Monday, October 14, 2013
To: The Voting Public
From: Prime Minister of Eurozone Periphery X
My fellow citizens, we have been telling you for the past four year that the reason you are out of work and that the next decade will be miserable is that states have spent too much. So now we all need to be austere and return to something called ‘sustainable public finances.’ It is, however, time to tell the truth. The explosion of sovereign debt is a symptom, not a cause, of the crisis we find ourselves in today.
What actually happened was that the biggest banks in the core countries of Europe bought lots of sovereign debt from their periphery neighbours, the PIIGS. This flooded the PIIGS with cheap money to buy core country products, hence the current account imbalances in the Eurozone that we hear so much about and the consequent loss of competitiveness in these periphery economies. After all, why make a car to compete with BMW if the French will lend you the money to buy one? This was all going well until the markets panicked over Greece and figured out via our ‘kick the can down the road’ responses that the institutions we designed to run the EU couldn’t deal with any of this. The money greasing the wheels suddenly stopped, and our bond payments went through the roof.
The problem was that we had given up our money presses and independent exchange rates – our economic shock absorbers – to adopt the euro. Meanwhile, the European Central Bank, the institution that was supposed to stabilize the system, tuned out to be a bit of fake central bank. It exercises no real lender-of-last-resort function. It exists to fight an inflation that died in 1923, regardless of actual economic conditions. Whereas the Fed and the Bank of England can accept whatever assets they want in exchange for however much cash they want to give out, the ECB is both constitutionally and intellectually limited in what it can accept. It cannot monetize or mutualize debt, it cannot bail out countries, it cannot lend directly to banks in sufficient quantity. It’s really good at fighting inflation, but when there is a banking crisis, it’s kind of useless. It’s been developing new powers bit-by-bit throughout the crisis to help us survive, but its capacities are still quit limited.
Now, add to this the fact that the European banking system as a whole is three times the size and nearly twice as levered up as the US banking system accept that it is filled with crappy assets the ECB can’t take off its books, and you can see we have a problem. We have had over twenty summits and countless more meetings, promised each other fiscal treaties and bailout mechanisms, and even replaced a democratically elected government or two to solve this crisis, and yet have not managed to do so. It’s time to come clean about why we have not succeeded. The short answer is, we can’t fix it. All we can do is kick the can down the road, which takes the form of suffering a lost decade of growth and employment. You see, the banks we bailed in 2008 caused us to take on a whole load of new sovereign debt to pay for their losses and ensure their solvency. But the banks never really recovered, and in 2010 and 2011 they began to run out of money. So the ECB had to act against its instincts and flood the banks with a billion euros of very cheap money, the LTROs (the log-term refinancing operations), when European banks were no longer able to borrow money in the United States. The money that the ECB gave the banks was used to buy some short-term government debt (to get our bond yields down a little), but most of it stayed at the ECB as catastrophe insurance rather than circulate into the real economy and help you get back to work. After all, we are in the middle of a recession that is being turbocharged by austerity policies. Who would borrow and invest in the midst of that mess? The entire economy is in recession, people are paying back debts, and no one is borrowing. This causes prices to fall, thus making the banks ever more impaired and the economy even more sclerotic. There is literally nothing we can do about this. We need to keep the banks solvent or they collapse, and they are so big and interconnected that even one of them going down could blow up the whole system. As awful as austerity is, it’s nothing compared to a general collapse of the financial system, really.
So we can’t inflate and pass the cost on to savers, we can’t devalue and pass the cost on to foreigners, and we can’t default without killing ourselves, so we need to deflate, for as long as it takes to get the balance sheets of these banks into some kind of sustainable shape. This is why we can’t let anyone out of the euro. If the Greeks, for example, left the euro we might be able to weather it, since most banks have managed to sell on their Greek assets *). But you can’t sell on Italy. There’s too much of it. The contagion risk would destroy everyone’s banks. So the only policy tool we have to stabilize the system is for everyone to deflate against Germany, which is a really hard thing to do even in the best of times. It’s horrible, but there it is. Your unemployment will save the banks, and in the process save the sovereigns who cannot save the bank themselves, and thus save e the euro. We, the political class of Europe, would lie to thank you for your sacrifice.
Tot zover de brief die Mark Blyth een eerlijke politicus laat schrijven. Ik heb hem in zijn geheel overgenomen.
Het zal hoop ik duidelijk zijn waarom de politiek dit niet eerlijk tegen de kiezer zegt. Wat niet zo duidelijk is waarom journalisten dit niet doen, daarover misschien een andere keer.
Het Europese banksysteem is zo groot worden dat zij de politiek op haar knieën dwingt. Het resultaat is eindeloos bezuinigen, want elke bezuiniging doet de economie verder krimpen, waardoor weer nieuwe bezuinigingen nodig zijn. De logische consequentie is dat Europese economie krimpt tot het moment waarop de lonen zo laag zijn dat wij kunnen concurreren met China en India. Dit zal niet gebeuren omdat de verarming dan zo ernstig is dat voor die tijd iets anders gebeurd: Europa en de euro vallen op een chaotische manier uit elkaar.
Het zogenaamde hervormen dat onze economie sterker moeten maken is dan ook geen modernisering, maar een regressie.
*) Ik heb een klein puntje van kritiek op de brief: vanuit Europees perspectief kan Griekenland misschien wel uit de euro stappen, maar voor de Grieken is dat geen oplossing. De drachme is afgeschaft en van het moment van aankondiging dat je uit de euro stapt en het in roulatie brengen van de nieuwe drachme - minimaal enige maanden – ligt de economie stil. De chaos en depressie die dat zal veroorzaken is nog ernstiger dan chaos en depressie van nu. Zonder geld functioneert de economie niet, en zonder economie functioneert de maatschappij niet.