Tags
Draghi, euro, Europe, European Central Bank, eurozone crisis, Greece, Papademos, Reaganomics, Robert Mundell, supply-side, voodoo
To the extent we are even aware of the Eurozone financial crisis here in America, it is pretty complicated and confusing. What is easy to understand is tax evasion for the rich, and austerity for everyone else. Increased power for the oligarchs, and privatized public utilities and services for everyone else. Less accountability for plutocrats and more unemployment for everyone else. This is exactly what is occurring in Europe today.
In an effort to better educate myself, however, on the specifics of the history and current situation of the financial crisis, I will attempt to sort some of the basics out. There are a lot of media reports and commentaries out there right now trying to establish that this is simply a case of a bunch of lazy irascible Europeans who just don’t want to put in an honest days work in order to pay for their house. Just imagine if this happened in America: Salaries are falling (by 35-40% in some sectors) while new taxes are invented, some backdated to the beginning of the calendar year. That is a small slice of what is occurring in Greece right now, under the new leadership of the installed ‘technocrat’, Prime Minister Papademos. (Technocrat = politician who pursues radically anti-democratic public policy in favor of big banks).
Anyway, there is a lot to unravel in Europe right now, so there will be multiple posts on this subject. Today, I’ll just briefly discuss the genesis of the Euro currency. I’ll also have posts discussing Iceland, Greece, Italy, France, Germany, the Troika (European Central Bank, International Monetary Fund, European Union), and Goldman Sachs. These will all have the common theme of how financiers undermine democracy, autonomy, and standards of living through debt and austerity.
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To understand the creation of the Euro, we must first understand supply side economists. For the true believers in supply side economics (Reaganomics), there is nothing more odious than the image of a democratically run European economy where the workers have job security, health care, vacation time, and the audacity to support a thick welfare safety net. (The idea is that economic ‘freedom’ should take supremacy over democracy and equality). This is especially the case when such economies generally do really well, but are not completely dominated by international executives and bankers. They must look like a big fat Christmas goose, just out of arms reach.
That goose just needs some voodoo.
The connection between Reaganomics and the Euro is much more concrete than you might think. They are linked by Nobel Prize winner Robert Mundell, a central figure for Reaganomics, and the father of the Euro. He proposed the idea of the Euro out of his frustrations with overly democratic economies with disjointed monetary policies. As posted on his website, “the euro promises to be a catalyst for international monetary reform.”
Monetary policies are broadly those policies dealing with how to supply currency in a way that balances inflation and unemployment. Here in America, these are controlled by the Federal Reserve, so we are already used to these policies having little foundation in democracy. In fact, the conventional wisdom for many is that monetary policies and fiscal policies — those dealing with government revenues and spending — are largely separated.
However, Mundell’s baby was designed to affect fiscal policies for Euro nations as well, through strict membership rules on debts and deficits. As he says, “Monetary discipline forces fiscal discipline on the politicians as well.” One predictable fiscal response to difficulties controlling government debt, is to privatize publicly owned services, which shifts those services off the government balance sheet, and on to the individual citizen’s balance sheet (oh, and plus a healthy profit margin).
So we have a relatively new currency – the euro – which has centralized monetary policy across the Eurozone. The strict rules on debt and deficit in turn impact fiscal policy for democratic governments struggling to balance budgets.
The next key point is that the European Central Bank operates differently than the US Fed, because it does not simply print more money to cover interest. As economist Michael Hudson points out:
Britain’s economy also is staggering, yet its government is paying just 2% interest. But European governments are now paying over 7%. The reason for this disparity is that they lack a “public option” in money creation. Having a Federal Reserve Bank or Bank of England that can print the money to pay interest or roll over existing debts is what makes the United States and Britain different from Europe. Nobody expects these two nations to be forced to sell off their public lands and other assets to raise the money to pay….
By contrast, the Eurozone has a central bank, but Article 123 of the Lisbon treaty forbids the ECB from doing what central banks were created to do: create the money to finance government budget deficits or roll over their debt falling due.
So, in Europe we have a monetary system that not only gives itself radical influence over formerly autonomous fiscal policies, it also imposes severe limitations on itself to create money as needed. This is the dream for bankers and supply-side cheerleaders. It set the stage for the current grab for money and power from democratic governments/societies we are seeing in Greece and Italy by the banking institutions.
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Update: As I’m finishing writing this, there has been breaking news that the European Central Bank will be offering unlimited loans to European banks at 1%. This is a fundamental shift in ECB policy, brought about by its newish director, Mario Draghi, yet another Goldman Sachs former employee. The key part of this new announcement is this: “If, for example, a bank takes out a loan for $5 billion euros at 1 percent and buys the same amount of 10-year Italian debt at 7 percent, he will net 6 percent difference on the trade. It’s a carry trade windfall, a direct subsidy from the central bank.” In other words, instead of restructuring the financial system or directly financing fiscal budget deficits, the ECB is giving money away to private banks, while sovereign states still have to pay outrageous interest rates.
