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The Eurozone Torture Chamber

letsgetitdone's picture


Warren Mosler

(With permission of the author)

Looking like it was another 'buy the rumor sell the news' near term.

After you do the maths it still doesn't add up.

It can't add up.


Given today's institutional structures- pension funds, insurance reserves, etc.- that include massive, tax advantaged, demand leakages where private sector credit expansion is bound to periodically fall short full employment levels,and with the private sector necessarily pro cyclical, counter cyclical fiscal adjustments are, for all practical purposes, entirely in the realm of the issuer of the currency- the ECB, and not the users of the currency- the euro member nations.

In other words, as previously discussed, the maths can't add up without the ECB, directly or indirectly, writing the check.

And that includes the banking system, which, to serve public purpose, requires credible deposit insurance, again meaning support from the issuer of the currency.

The last few weeks have demonstrated that the ECB does 'write the check' for bank liquidity even though it's not legally required to do that, (and even though some think it's not acting within legal limits) but it won't just come out and say it.

And, apart perhaps from the Greek PSI (100 billion euro bond tax), which they still call 'voluntary', no government has missed a payment, also with indirect ECB support either through bond buying or via the banking system, but, again, it won't just come out and say it's an ongoing policy.

So while the ECB can and has 'written the check' as needed, there has been no formal proclamation of any sort that it will continue to do so. Nor does it look like there will be any such over policy announcement for a considerable period of time.

This means any manager of 'other people's money' with any fiduciary responsibility will continue to remain on the sidelines.

And even as markets fluctuate, and then some, underneath it all all payments are met on a timely basis and the banking system continues to function to service deposits and loans.

And budget deficits will continue to be deemed too large, (at least until private sector credit expansion exceeds the 'savings desires'/demand leakages) ensuring the maths don't ever add up without the assumption of the ECB writing the check.

One last thing.

Publicly, at least, they all still think the problem in the euro zone is that the public debts/deficits are too high. And to reduce debt the member nations need to cut spending and/or hike taxes, either immediately or down the road.

A good economy with rising debt and ECB support to keep it all going isn't even a consideration.

They've painted themselves into an ideological corner.

And deficit spending, exacerbated by austerity, may nonetheless be high enough for it all to muddle through at current (deplorable) levels of economic performance.

This economic 'torture chamber' of mass unemployment can, operationally, persist indefinitely, even as, politically, it's showing signs of coming apart.

The founders of the euro believed a single currency would work to prevent a third great war.

So they did what it took politically to get the consensus needed to create the euro. Ironically not realizing what they created to promote unity has turned out to be the instrument of social disintegration.

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mtngun's picture
Submitted by mtngun on

I always enjoy reading Warren Mosler's thoughts.

I used to assume that the powers-that-be simply didn't know what they were doing. That they were blinded by ideology.

Now I am not so sure. It's looking more and more like this is deliberate shock doctrine to kill social programs. Maybe it didn't start out that way, when the EU was first created, but it has evolved into a class struggle.

Rangoon78's picture
Submitted by Rangoon78 on

The aha! moment for me: This is the money quote that rings true:
Euro-Crisis Used to Destroy Social Contract
Rob Johnson: European adjustments are not the product of a mistake, but a design to break down some of the leftover architecture of the Cold War, which might be called the insurance premium that was paid against conversion to communism.

The spread of communism no longer a fear; the European elite don't have to prop up the rabble (citizens of western Europe) anymore. Austerity is a return to the life condition of the european common man since the industrial revolution. Oh and you can include us American peasants in that too. 

Naked Capitalism:

In a Real News Network interview, Rob Johnson of the Roosevelt Institute describes further how the EuroCrisis has become a tool to break the social contract:

Submitted by Hugh on

I agree: deliberate. The 1% and the elites that serve them do not accidentally loot. It is a like a coin toss where it is called an accident or just chance that one guy wins 97% of the time. Statistically possible but not even remotely likely. And each win making it even more unlikely. I think the 1%s in both the core and periphery put the euro together because they thought they would profit handsomely and more easily with it. And they did. They blew bubbles and profited mercilessly from those, and when they blew up, they stuck the 99%s with the bill. Periphery 1%s moved their gains to the core. On top of their gains, the core 1%s pushed their losses off on to periphery banks, then governments, and then finally Europe and international institutions. Austerity is just another way for these 1%s, especially the core 1%s, to get the 99%s to make good their losses, and increase their power.

The poster continues the fiction that the European elites acted in good faith and have only made bad policy choices. This is an argument that has been debunked repeatedly. If the European elites are so bad at policymaking, we would expect their policies to harm themselves as much or more than the 99%s. But as in the example of the coin toss, while the 99%s consistently lose, the elites and the 1%s consistently win. Sure when a bubble bursts the 1%s lose money initially but their losses are made good out of the hides of the 99%s whereas the 99%s only get poorer and more endebted, having to pay not only for their own losses but those of the 1%s.

The failure to make kleptocracy central to the analysis results in letting the 1%s and the elites off easy. 35 years of theft and the most massive lootings in history and we are still being told it was, at worst, an honest mistake. I can not help but see this as either elitest thinking or indoctrination. Ultimately, it functions as a defense of the elites and the 1%s because it continues the lie that they are reformable. Otherwise, why not call them out for the criminals they are?

Valley Girl's picture
Submitted by Valley Girl on

Thanks Hugh. fwiw, I have a friend in the UK who observes such things closely, and of an age to have paid attention when UK was being pressured adopt the euro. He certainly agrees with your take - the euro was created to benefit the 1%.

btw, I lived in UK pre-euro, and left about a 2 years before the currency issue was debated there. I was totally preoccupied with surviving to get tenure, so I paid little attention as to the reasons the UK did not adopt the euro. And, in citing the view of one person (above) I don't mean to imply his view was generally held in UK at the time. I rather suspect that the reason UK kept sterling was one of national pride and suspicion of change.

This is a bit aside from the main issue you address, Hugh, but in your research has it become clear why the UK did not go "euro"? I know I could read around on the internet, but I don't have your analytical skills re: monetary policy- so I'm taking a shortcut by asking you!

Submitted by Hugh on

That was a while ago and before I started tracking economic events. Offhand, I would say the British didn't want to cede monetary decision making to the Bundesbank or more broadly speaking the French-German axis. I think that monetary sovereignty and euro-scepticism were the politically popular and more accessible forms of the argument. But the real reason was probably that the British government was running interference for the City. It is difficult to see how London could remain a center for world banking, especially the freewheeling banking of the City, if the rules were written and the shots were being called in Paris and Berlin.

Valley Girl's picture
Submitted by Valley Girl on

~~But the real reason was probably that the British government was running interference for the City. It is difficult to see how London could remain a center for world banking, especially the freewheeling banking of the City, if the rules were written and the shots were being called in Paris and Berlin~~

Given that this was when Thatcher was PM, I buy your take.

And, by no means did I mean to imply that the Brits don't have their very own kleptocrats- you didn't say that I did, but I wanted to make that clear.

Nailed it as usual, Hugh.
~I think that monetary sovereignty and euro-scepticism were the politically popular and more accessible forms of the argument.~~