EU disunityIn this article I ask a question on everyone’s lips: Almost everyone agrees that the Eurozone was a one-legged giant; a monetary union lacking a political ‘leg’ to stabilise it. If so, why has the Euro Crisis (which surely strengthened that view on the back of its ferocity and durability) not strengthen the hand of the federalists? Of those who were, supposedly, waiting to pounce upon any opportunity to create a United States of Europe? (This article was compiled from extracts of a keynote speech I have on 25th August 2014 at the University of Tampere, Finland, in the context of a conference entitled Power, Knowledge and Society.)  

Monetary Union is an attempt to usher in Federation through the back door.” Margaret Thatcher, 1990

We now know that Mrs Thatcher was wrong. The Euro Crisis, that broke out in th aftermath of the 2008 global financial implosion, was a splendid opportunity for federalists in Berlin, Brussels and Paris to push for the federal moves that they, purportedly, always planned to make on the back on the common currency.

Just look at the so-called Banking Union that the EU has agreed. The unification of banking sectors across the Eurozone, which was and is absolutely essential for the survival of the Eurozone, was recently proclaimed in name to be denied in practice.

This raises a poignant question: The United States also had serious trouble consolidating its union, its federation. It took a century of deliberation, a bloody civil war, a series of banking crises and depressions and, of course, the Great Crash of 1929, not to mention the civil rights marches in the 1960s (which spawned Lyndon B. Johnson’s Great Society) for the United States to achieve proper political unity. But with every crisis, the United States pulled closer together.

Europe is doing the opposite. It is coming apart. Even though we came to the brink in 2012, when Mr Mario Draghi, the head of the ECB, admitted that the euro was about to collapse (famously invoking the ‘convertibility risk’), not only did we not come closer together but, indeed, we did precisely the opposite, if one looks at the reality behind the rhetoric.

The question is: Why was Mrs Thatcher wrong? Why was a genuine political union not on the cards? Why is this crisis causing the re-nationalisation of many areas of policymaking, including the link between banks and governments? Why is the crisis failing to produce an Alexander Hamilton or a Franklin Roosevelt but, instead, reinforces unendingly the centrifugal forces tearing the EU edifice down?


Right from the beginning, the original signatories of the Treaty of Rome, the founding members of the European Economic Community, constituted an asymmetrical free trade zone. And when new member-states, like Greece, Portugal etc. entered, the free trade zone became even more asymmetrical.

To see the significance of this asymmetry, take as an example two countries, Germany and Greece today (or Italy back in the 1950s). Germany, features large oligopolistic manufacturing sectors that produce high-end consumption as well as capital goods, with significant economies of scale and large excess capacity which makes it hard for foreign competitors to enter its markets. The other, Greece for instance, produces next to no capital goods, is populated by a myriad tiny firms with low price-cost margins, and its industry has no capacity to deter competitors from entering.

By definition, a country like Germany can simply not generate enough domestic demand to absorb the products its capital intensive industry can produce and must, thus, export them to the country with the lower capital intensity that cannot produce these goods competitively. This causes a chronic trade surplus in Germany and a chronic trade deficit in Greece.

If the exchange rate is flexible, it will inevitably adjust, constantly devaluing the currency of the country with the lower price-cost margins and revaluing that of the more capital-intensive economy. But this is a problem for the elites of both nations. Germany’s industry is hampered by uncertainty regarding how many DMs it will receive for a BMW produced today and destined to be sold in Greece in, say, ten months. Similarly, the Greek elites are worried by the devaluation of the drachma because, every time the drachma devalues, their lovely homes in the Northern Suburbs of Athens, or indeed their yachts and other assets, lose value relative to similar assets in London and Paris (which is where they like to spend their excess cash). Additionally, Greek workers despise devaluation because it eats into every small pay rise they manage to extract from their employers. This explains the great lure of a common currency to Greeks and to Germans, to capitalists and labourers alike. It is why, despite the obvious pitfalls of the euro, whole nations are drawn to it like moths to the flame.


The United States proves that an asymmetrical monetary union (e.g. between California and Missouri) can succeed. Nonetheless, most asymmetrical monetary unions, wherever and whenever tried in combination with free trade and deregulated capital movements, ended up in tears and retribution. The Gold Exchange Standard in the mid-war period, the various pegs between domestic currencies and the US dollar (in S.E. Asia, Argentina, Mexico etc.), the European Exchange Rate Mechanism, which crashed and burned in 1993, the Eurozone that followed the latter’s collapse etc. they all resembled invasions of Russia – that is, a brisk beginning full of enthusiasm and hope, rapid progress that seemed unstoppable, followed by a heart-wrenching slowdown as Cruel Winter took its toll, ending up with blood on the snow and infinite retributions thereafter.

What is the ingredient that allows an asymmetrical monetary union, involving free trade and free capital movements, to survive? An efficient Extra-market Surplus Recycling Mechanism is the answer. Mechanisms for recycling surpluses come in two different guises: Market-based ones, that rely on the financial system to channel surpluses, in the form of loans and credit, to the deficit countries and regions. And extra-market recycling mechanisms that rely on political institutions and some form of collective agency; e.g. fiscal transfers within a federation, the Marshall Plan etc.

Can Market-Based Recycling suffice, without Extra-Market Recycling? Under no circumstances. Here is why:

When asymmetrical national economies are bound together with politically engineered fixed exchange rates, as was the Gold Exchange Standard of the 1920s or the Eurozone today, there is a tendency for capital violently to migrate from the surplus to the deficit countries. From the Germanies to the Greeces of the monetary system. Why?

Because the German trade surpluses cause capital to accumulate in Germany, pushing real interest rates down there. At the same time, Greece is starved of capital and so the Greek real interest rate rises, attracting the money slushing around in the German banks. And if the exchange rate is fixed, German bankers labour under the self-reproducing illusion that they need not worry about a drachma devaluation, and so they lend to the Greeks as if there is no tomorrow.

These capital flows from the banks of the surplus country to the deficit country build bubbles in the deficit country which therefore experiences Ponzi-growth that, in turn, creates demand for more German exports, therefore reinforcing German surpluses while magnifying the deficits of the deficit areas.

Alas, the bubbles at some point burst. When they do, un-payable debts pile up in deficit countries like Greece. If the political response to this insolvency is to put all the burden of adjustment, and debt repayment, on the weak, insolvent shoulders of the deficit countries, the result is permanent depression there and a slow-burning recession in the surplus countries, as the deficit nations can no longer afford to import from them. Ponzi-growth thus gives rise to ponzi-austerity…

None of this is, of course, new. It is the story of the mid-war, Great Depression. That Europe saw it fit to repeat that piece of sorry economic history in the 21st Century is mindboggling.

What is most disturbing, however, is not that our leaders do not understand these simple facts of macroeconomics. What astounds and depresses the sober onlooker is that their incomprehension leaves them completely unashamed!


To understand why Europe has not been egged on by its Euro Crisis toward the adoption of a federal Extra-market Surplus Recycling, and why its leaders continue to dither, we need to delve into the EU’s history, its DNA so to speak.

As Europe was exiting the WW2 nightmare, the New Dealers that were in power in Washington at the time began to plan for a United Europe as part of a global design that would last for at least two decades.

Having dealt with the Great Depression in the 1930s, and as WW2 was ending, the New Dealers’ most immediate grand fear was that the American economy would slip into another depression after 1949, as factories would begin to lay off workers once the war effort ended. With the dollar the only convertible currency, the new crisis would spread like a bushfire through the rest of the capitalist world.

Being the sole surplus nation globally, they understood that the only way of avoiding this calamity would be to recycle their own surpluses to Europe and to Japan in order to create the demand that would keep their own factories producing all the gleaming new products, washing machines, cars, television sets that American industry would switch to producing. Thus, the project of ‘dollarising Europe’ began. A most impressive hegemonic program that demonstrates vividly the sharp difference between hegemony and authoritarianism. And reminds us of how badly today’s Europe needs an hegemonic, as opposed to an authoritarian, Germany.

The New Dealers understood that their own industrialists, as well as business in Europe and in Asia, craved a fixed exchange regime that would afford them certainty. But they also understood that a fixed exchange rate regime, like the Gold Exchange Standard, would create bubbles that would then burst leaving nothing but tears and un-payable debts behind, and, possibly, a devastated global capitalism ready to fall prey to the emerging Soviet Union.

So, here is what they decided: They would re-create a fixed exchange rate regime (which came to be known as the Bretton Woods system) but equip it with an Extra-market Surplus Recycling Mechanism in order to stabilise it (with the Marshall Plan being only one of its, even if the most vivid, manifestations), to prevent imbalances between the deficit and the surplus nations from exceeding certain levels, to stop bubbles from forming (by introducing strict capital controls) and, in cases of recession, to inject capital as well as liquidity into the affected economies to prevent a depression that might spread throughout global capitalism.

To underpin the dollar-anchored fixed exchange rate system (also known as Bretton Woods) they selected the yen and the DM and set out to reinforce the industrial foundations on which these currencies sat. So Germany and Japan, the recently defeated nations, were to become the regional powerhouses east and west of the American Goliath.

However, powerhouses need ‘vital spaces’ – large markets around them capable of producing the demand for all the products that come off the production lines and which the German and the Japanese markets could simply never absorb. Thus the New Dealers had to answer the question: Where will demand come from for German and Japanese manufactures? In the case of Germany, the answer was: the rest of Europe – what we now know as the EU. In the case of Japan the original idea was to turn China into Japan’s vital space but when Mao wrecked that idea the United States did not hesitate to turn its own backyard into Japan’s vital space.

To implement this plan for Europe as part of America’s global planning, Washington had to overcome a major obstacle: the French demand that German industry be dismantled! Indeed, seven hundred German factories were destroyed by the allies and the agreement of Allied Command was that another thousand should follow. That had to change. To bring the French elites around to their idea of a German Powerhouse at the heart of a United Europe, the New Dealers offered Paris a simple deal: Accept the notion of a re-industrialised Germany dominating a Northern and Central European heavy industry cross-border cartel and we shall offer the graduates of the Grand Ecoles the opportunity to administer the cartel’s institutions and to the French bankers access to German surpluses.

The one Frenchman that put up the greatest resistance against this plan was none other than General De Gaulle. Eventually, and once elected President, he changed his mind and went along with America’s European Economic Community (EEC). “The EEC is a horse and carriage” de Gaulle once said to a journalist. “Germany is the horse and France is the coachman”. And when Henry Kissinger asked him how he would prevent German dominance of the EEC, de Gaul answered: Par la guerre! One wonders what Mr Hollande’s thoughts would be on this subject today…

Washington had to make one major concession for the EEC to be built along the Franco-German axis: European Unity would be built upon a cartel of heavy industry, rather than on the Americans’ preference for fairly competitive markets.

The process, once it began, was inexorable. First a German dominated cartel of coal and steel emerged, with a cross-border French-dominated administration. Once tariffs on coal and steel were removed, it was a natural next step to remove all tariffs. But to co-opt French farmers, a common agricultural policy was established the purpose of which was to extract the farmers’ consent to a free trade zone by handing over to them a chunk of the cartel’s monopoly profits. The Treaty of Rome was no more than a codification of that deal.

This fledgling European Economic Community created large surpluses that fuelled post-war prosperity in a stable world environment where the Bretton Woods system was constantly stabilised by the United States which took it upon themselves to recycle to Europe and to Asia almost 70% of their surpluses – but also to regulate ruthlessly all large financial flows. That was the Golden Age of low unemployment, low inflation which spawned the dream of Europe’s shared prosperity. It was (at the expense of treading on European sensibilities) an American triumph.

Alas, by the late 1960s it was dead in the water. Why? Because America lost its surpluses and could no longer stabilise the global system by recycling surpluses it no longer had. Never too slow to accept reality, the United States announced the end of that era. The calendar read: 15th August 1971. The dollar was de-coupled from gold, from the yen, and from Europe’s currencies. John Connally, Richard Nixon’s Treasury Secretary, visited Europe to tell our Europe’s smacked leaders: “The dollar is our currency but it is your problem”.

Europe had suddenly become unhinged!


All of a sudden, Germany was buffeted by a rising DM against the dollar while Italy and other countries that were crucial for northern European exporters were pegging their currency to the falling dollar. The post-war, American, design of a Central European heavy industry cartel, plus a common agricultural policy cutting the (mainly) French farmers into the deal, was in peril.

A fixed exchange rate regime was imperative to keep it going. Thus Europe set off on the road to creating its own Bretton Woods within the EU. Tragically, they ended up with something much more like the Gold Exchange Standard than a European Bretton Woods. Why? Because they never planned for an Extra-market Surplus Recycling Mechanism!

Did President Giscard ‘ Estaing and Chancellor Helmut Schmidt, who negotiated in secret the European Monetary System in the 1970s, not know this? Did Francois Mitterrand and Helmut Kohl not know what they were doing when putting together the Eurozone in the early 1990s? Were Europeans merely unschooled to this very simple economic principle? I think they did know. Their problem was that the political arithmetic on which they relied was not conducive to the idea of extra-market surplus recycling within the EU. And here is the rub. Therein lies our collective misfortune.

Three were the reasons why an Extra-market Surplus Recycling Mechanism was not included in the European monetary design. The first was that the strains within the European family were too great. Indeed, France, Germany, Spain and Italy got bogged down into monetary warfare that lasted from 1971 until the 1990s. The second was that such a mechanism requires a powerful hegemon to set it up. Neither Germany nor France had that power on their own, either in the 1970s or in the 1990s, and were incapable of acting in unison to create it. Third, and most importantly, the need for an intra-European Extra-market Surplus Recycling Mechanism subsided by the early 1980s because of the United States and its audacious new global role.

Let’s for a moment go back to 1971. As the American authorities were dismantling the Brettton Woods system they adopted an audacious strategic move: once the United States had lost its external surplus position, and could no longer be global capitalism’s surplus recycler, it would (in Paul Volcker’s inimitable words) have to recycle “other people’s surpluses”. How? Instead of tackling the nation’s burgeoning twin deficits, America’s top policy makers were to do the opposite: boost them!

And who would pay for these deficits? The rest of the world! How? By means of a permanent transfer of capital that rushed ceaselessly across the two great oceans to finance America’s deficits, attracted to Wall Street by the prospect of higher returns. The deficits of the US economy, thus, operated for decades like a giant vacuum cleaner, absorbing other people’s surplus goods and surplus capital. In turn, powered by America’s deficits, the world’s leading surplus economies, Germany, Japan and, later, China, kept churning out the goods that America absorbed. Almost 70% of European and Asian profits were being transferred back to the United States, in the form of capital flows to Wall Street. And what did Wall Street do with it? It financed the rise of financialisation; a process which the French and German banks joined in enthusiastically.

This was the reason why Europe, despite having introduced an unsustainable Gold Standard in its midst, seemed to be prospering: the necessary intra-European surplus recycling was provided by the Franco-German banks on the back of the global recycling generated by America’s twin deficits and completed by the flow of global capital to New York. Wall Street’s bubbles financed Europe’s internal bubbles (especially in the Periphery) as well as the importation of Europe’s, and of course, Asia’s, net exports to the United States.

Europeans, like the Bourbons who remembered everything and learned nothing, assumed that America’s recycling role would survive ad infinitum. On the basis of this foolhardy assumption, they imagined that Europe does not need an Exta-market Surplus Recycling Mechanism of its own. That, once again, it would rely on the Americans for all the surplus recycling Europe needed. Thus, European leaders set out to recreate the Gold Exchange Standard within the European Union, demonstrating a grandiose failure of perception of what they were about to do. Keynes had described the Gold Standard as “a dangerous and barbarous relic of a bygone era”. Little did he know that Europe would recreate it in the late 1990s and defend it to the hilt after our 1929 hit in 2008.

Quite naturally, when following Wall Street’s collapse in 2008, America lost its capacity to recycle the world’s surpluses, it immediately ceased generating the aggregate demand that had hitherto stablised the European Union. At the very same time, Wall Street’s toxic money, that had hitherto ‘lubricated’ intra-European surplus recycling via the preposterously badly managed Franco-German banks, turned to ashes.

The rest is history. The Eurozone’s architecture was incapable of sustaining such shockwaves and it has been unraveling every since. Once Europe’s leaders barricaded themselves in the iron cage of radical denial that the Eurozone was in a systemic crisis, the European Union’s foundations began to crumble. The European Parliament elections of 2014, and the rise of organised misanthropy from Denmark to Greece and from France to Hungary, offer generous evidence to that effect.


Many Europeans, deep down, hoped that Mrs Thatcher was right. That monetary union was an ‘underhanded’ move toward federation. That, perhaps, President Mitterrand and Chancellor Kohl knew that the euro, once created, would sooner or later cause a crisis which would then place their successors in a dilemma between (a) allowing the common currency to collapse or (b) moving toward political union. Even if this were true, it now turns out that Mitterand’s and Kohl’s successors, our current leaders, are incapable of (or unwilling to) proceed in a federal direction, preferring to allow the Eurozone to continue along a path of fragmentation which causes the fault lines between surplus and deficit countries to deepen irreversibly. The question, however, remains: Why?

Despite its numerous faults and toxic politics, the American Constitution evolved through an unabashedly political process of conflict between vested interests, between federal and states authorities, between capitalists and labour unions. The United States has been a political process from its inception, well before turning into a fully-fledged fiscal union. Economic and financial power was, of course, always at the heart of that political process and played a substantive role in the outcome of the ongoing political struggle. Nevertheless, economic power in the United States, while highly concentrated, was of a relatively fluid type. The dominant corporations came and went, their power being fairly widely dispersed. The mighty corporations of the 1900s are no longer central to the political game in Washington today, having been displaced long ago by ‘upstarts’. There were even instances when the federal government would attack and destroy large cartels, even confine for decades the financial genie into a tight, proverbial, bottle (e.g. Standard Oil, the Glass-Steagall Act).

In contrast, the European Union’s bureaucracy was always built as a democracy-free, even a politics-free, zone. Its founding fathers, men like Jean Monnet, harboured a deep distaste for democratic politics and aspired to creating a technocracy in Brussels that would direct Europe’s macro-economy in a corporatist manner in the interests of the Central European heavy industry cartel. Many of the Central European corporations that were dominant inside that cartel in the 1950s are still dominant within it today. In contrast to the fluidity of the United States spectrum of corporate power, the Central European industrial terrain is remarkably stable and in a stable relationship of co-dependence with Brussels; i.e. with the European Union institutions that were created to administer the legal and institutional framework functional to the interests of the ubiquitous Central European cartel. In this context, it seems natural that the European Common Market was an attempt at de-politicising the European integration project and subjecting it to the guidance and administration of unelected technocrats who would consistently reduce politics to management and democracy to consultation.

Mrs Thatcher’s error was to mistake the Central European, traditionalist, corporatist, and highly conservative notion of a ‘Europe of Nations’ for a penchant for a Federal Europe. There was never any political project, backed by powerful European interests, to create a federal, democratically elected government. The idea was always to erect a mighty bureaucracy that would work together with, and on behalf of national governments, in a manner that makes democratic accountability utterly impossible. How? Whenever an elected minister, or Prime Minister for that matter, returns home with a European deal that her or his own Members of Parliament find unfathomable, the retort is simple: “It was the best I could achieve.” Clearly, the ‘Europe of Nations’ is a super-state decision-making process lacking any mechanism by which electorates, and their elected representatives, can scrutinise its decisions.[1]

The ‘Europe of Nations’, seen from this perspective, was utterly consistent with and functional to the dominance of the capital goods, heavy industry cartel that was the foundation and motivating force of our, supposedly, United Europe. The notion of a Federal Republic where the sans culottes of France, of Spain, heavens forbid of Greece, would elect a common, a federal government on a one-person-one-vote basis, and have real influence on how United Europe would be administered, was and remains anathema to our elites and leaders. It simply did not, and does not, compute.

Thus, the EU’s radical reluctance to move in a federal direction following the Euro Crisis is not a mystery, after all. No cartel that controls the administration of its vital space directly wants to concede this exorbitant privilege to some democratically elected central government. Especially when a huge, expensive bureaucracy has been set up in Brussels precisely to preclude this. A bureaucracy that includes some very skilled technocrats who harbour a deep, Platonic, contempt for both history and democracy.


Well meaning Europeanists, who dream of that which Mrs Thatcher feared (i.e. a Federal Europe) fail to understand that it is not a simple matter to graft a federal democracy upon a Brussels-based technocracy representing the unholy alliance between run-of-the-mill apparatchiks, a powerful Central European cartel of heavy industry, national politicians who have their own cosy relationship with bankrupt local bankers, and large international banks.

They need to grasp what a Herculean task it would be to inject genuine representative democracy into the institutional mélange representing this unholy alliance, which has evolved into a European Union atavistically inimical both to democracy and to any form of extra-market surplus recycling.

If anything, the Euro Crisis has made this titanic task even harder. It is for this reason that, faced with a stark choice between fragmentation and federation, the European Union is currently drifting toward the former.


In the next article I shall be proposing, along the lines of the Modest Proposal, ways in which the European Union can be stabilised in a manner that makes possible a clean break from its undemocratic posture and from an ignominious future.

[1] Anyone who argues that the European Parliament fills, or can potentially fill, that role is clearly innocent of any understanding regarding what a real Parliament does.


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  5. I still do not understand (since you have never explained the precise mechanisms involved) how the following makes sense: “Almost 70% of European and Asian profits were being transferred back to the United States, in the form of capital flows to Wall Street.” First of all, how can one confirm or disconfirm the veracity/accuracy of that figure? Where is the publicly available data-set from which this estimate is derived? Secondly, are these profits from exporting by European and Asian firms to the U.S.? Are you claiming that nearly 70% of European and Asian profits were ‘invested’ in “Wall Street”-manufactured financial products? If so, how did they ‘finance’ the U.S.’s fiscal deficits? The U.S.’s fiscal deficits do not need ‘financing’ as you ought to know very well.

    A few of us have asked you to explain this part of your argument in the Global Minotaur before, but we have not, to the best of my knowledge received an answer. Either we’re missing something, or your formulation of your argument is imprecise, or the argument is factually/operationally wrong.

    • Apologies if I have not addressed your questions in a more timely manner. But let me get started now.

      The data for capital flows into the US, on which I based my claim that almost 70% of Eurasian surpluses ended up in Wall Street, comes straight from the US Bureau of Economic Analysis. The raw data on capital inflows into the US is available for free but the more detailed, disaggregated per country, data requires a subscription (which many US universities do have). (Capital inflows include all forms of capital transfers into the US, not just those of manufacturers.) To compute the ratio of these flows over total Eurasian surpluses, and come to the 70% figure, my team delved into World Bank data and painstakingly compiled figures for total financial and non-financial (mainly industrial) surpluses for the European Union, Japan, China, India, Russia and the oil exporting nations (e.g. Norway, Saudi Arabia, the Gulf state and Indonesia). The actual ratio comes to around 68.1% for the period 1986-2007.

      You ask: “Are you claiming that nearly 70% of European and Asian profits were ‘invested’ in “Wall Street”-manufactured financial products?” No, of course not. What I said was that almost 70% of Eurasian surpluses/profits found their way into Wall Street. From there, they were channelled in a variety of ways; e.g. into US Treasuries, as foreign direct investment, into equity, into loans to US financial and non-financial corporations and, of course, into Wall Street’s financialisation machine.

      You also ask: “If so, how did they ‘finance’ the U.S.’s fiscal deficits?”
      Directly and indirectly. Directly because a great deal of these capital flows ended up (as I stated above) into US Treasuries. And indirectly because of their multiplier effect on domestic income (wage and profit) flows that generated government taxes.

      You state: “The U.S.’s fiscal deficits do not need ‘financing’ as you ought to know very well.” Perhaps they do not need financing, as the creation of fiat money suffices, from a public finance perspective. Nevertheless, the external position of the US, that allows it to preserve dollar’s ‘exorbitant privilege’, required a constant tsunami of capital inflows to keep the balance of payments… balanced. (If not, Zimbabwe would have had no difficulties financing its fiscal deficits either…)

    • I would add to Yanis that if, for instance, you look at US Treasury holdings and buying, (http://www.treasury.gov/ticdata/Publish/mfh.txt) that you can see the investment. And if you think about it, it’s very rational. China and Japan have needed to sell to the USA. Their buying of dollars keeps their currency weaker, and redistributes money into the USA so their products can be bought. Similarly, if you look at the EU nations together, since December they have collectively done a huge amount of buying of US treasuries. As of June, the EU held almost $1 trillion in US treasuries, up over $200 billion since beginning of December 2013.

      The MMT argument that US deficits do not need financing is not correct because the USA has legal requirements for creation of money by the Fed. In our modern fiat system, all money is debt. This net zero concept of all positive balances having equal and opposite debt understood by MMT.

      What I think you are referring to, GrkStav, is a proposal based on MMT. That proposal says that sovereign currency governments can spend as much as they wish, creating money by declaration. But the other half of that proposal is that to balance the money creation, taxes would be levied to control inflation. That proposal is, in theory, possible if we collectively decide that is how we will start running the world. In theory, we could even eliminate banking interest, and switch to a system in which government allowed the creation of capital simultaneous with a loan.

      However, even if that quite radical MMT proposal were to be accepted, it would not help Greece, Portugal, or Spain one bit. The reason is that those nations are not sovereign currencies. So there would be no functional difference really. Instead of the ECB we would have something else controlled by the most powerful nation(s) of Europe. We would still have Germany operating the EU as a mercantile system to benefit itself. And we would still have politicians in the southern/periphery feeding the public the lies it wants to hear and buying votes with ‘free money’ until the bill comes due.

      In other words, the situation would not change with full implementation of MMT. The EU would still be faced with a crisis that required it to break up or else federalize. And both options would have huge resistance. MMT isn’t magic.

    • (Hopefully this isn’t a duplicate. One disappeared, maybe because I had a link to fed treasuries.) An addition to Yanis’ comment.
      If you look at US Treasury holdings, you can see the transfers. China and Japan each have over a trillion. The EU, if you add it up, has almost a trillion, and added over $200 billion in US treasuries from beginning of December 2013 to end of June 2014. That move by the ECB and then most of EU’s national banks (with the exception of France, which broke ranks) weakened the Euro. That was done to have austerity and exports too. And current ideas to charge bank accounts are, arguably, stealth taxes to levy on the EU as a whole. Thus to financial systems evolve.

      The MMT argument that no nation needs to finance its debt is wrong for the following reason. The USA has legal requirements for how the Federal Reserve operates. It must sell debt to create reserves. What that means is that, just like every other currency, all modern money is debt. This is a well understood concept in MMT, that the national debt is also the national positive bank balances.

      What you are referring to, GrkStav, is a proposal in MMT that government stop bothering with that step, and directly create money without debt. The other side of that proposal requires that taxes be levied to control inflation an ‘destroy’ created money. The problem with that quite radical proposal is, that we have to agree collectively that we will operate our monetary systems that way. A large nation like the USA could do it and drag everyone else along. A small nation like Greece, even if it exited the EU, would have trouble I think.

      And switching to that system wouldn’t help Greece, Spain, Portugal or Ireland. To do it requires being a sovereign currency. So Greece would still be stuck. And to implement redistribution of money within the EU would require large taxes levied and used by the EU itself, not, as in the current system, levied and used by the nations making up the union.

      The EU would still be facing the same wall — federalization. The Euro would still be a bastard child, neither sovereign nor subordinate. Neither fish nor fowl. Germany and France would still operate the Euro for their benefit and want to hold onto positive balances. Politicians in the southern/periphery would still be corrupt and buy votes with bread and circuses using “free money” until the bills come due.

    • “Nevertheless, the external position of the US, that allows it to preserve dollar’s ‘exorbitant privilege’, required a constant tsunami of capital inflows to keep the balance of payments… balanced. (If not, Zimbabwe would have had no difficulties financing its fiscal deficits either…)”

      The RoW (with which the US have been running external deficits) by definition becomes a net saver of USD’s.Due to flexible rates this does not constitute a leakage of base money from the domestic US economy.The holders of these dollar savings can either buy Treasuries,or other USD denominated asset classes or buy goods and services,or let them sit at the Fed doing nothing or exchange them for another currency which would simply change the holder of these savings (and alter the exchange rate perhaps).Still these holdings would ultimately be sitting at the Fed.
      Even dollars paid to the Arabs (by the RoW that holds dollars) for oil will ultimately end up sitting at the Fed and they (the Arabs) will too have the same options on how to use them as described above.
      Compare this with the Eurozone.Euros leaving Greece due to it’s external deficit, can leave “forever”.They don’t have to be spent on Greek treasuries,equities or other asset classes.They don’t have to be spent on Greek goods and services.Their holders can buy German Bunds or German cars and so on.That’s an actual leakage (which only partly existed when Greece had the drachma because the exchange rate was still not perfectly flexible but that’s a policy choice) and Greek deficits would indeed require actual financing.
      But there’s no close resemblance to the case of the US or any other country issuing its own currency under a flexible exchange rate regime.

      It would also be interesting to examine the causation between the fiscal and external deficits of the US.Perhaps the public deficits fueled the external deficits (this is likely the case if your story that the US purposely decided to “recycle other peoples’ surpluses” is correct).
      For example it has been shown that after 1995 the external deficits of Greece have been Granger causing the public deficits while the opposite was true before 1995 http://www.levyinstitute.org/pubs/wp_771.pdf

  6. Superbly clear, well structured and informative summary of modern times’ calamities…

    …Laughed my guts out (in a good way) when stumbled across the “(…) dangerous and barbarous relic of a bygone era (…)”… Man, could have not said it any better!😎


  7. What if you are wrong, and Thatcher was right? (about her statement that “Monetary Union is an attempt to usher in Federation through the back door”–after all, she said “federation”, not “democratic federation”:-).

    Who can really tell what was in the mind of people involved? And in the final analysis, who cares? Why not concentrate the mind and the dialogue on the actual choices ahead: “either fix the EU/Euro or dismantle it”?

    I am eagerly awaiting for the next article as announced, where you promise practical answers.

  8. A few comments. First, it is rarely mentioned that the neo-classical economic model requires perfect income redistribution in order to be stable. During the heyday of American hegemony, not only did what you describe exist, but American internal tax rates had extreme indexing above 90% on the top tier. This created the stable, post-depression, post-war society and made the USA probably the most equal nation on earth during that period. With the election of JFK, the “reform” of the USA’s tax system to increase and perpetuate inequality and extreme wealth. began. Very quickly, major economic effects began. In 1965, When I was a child, my executive father made just 3X what the milkman who drove a delivery truck did down the street, and this considered normal. The USA’s tax system has steadily eroded. Today, a many like my father with 15,000 people under him would be expected to make at 100 to 200 times what a milkman makes — except that the milkman has disappeared. It’s no longer viable. The EU is now more “American” in its tax structure than the USA is. How that impacts the world is that the USA is whirling toward neo-classical terminal instability, and has been since the late 1960’s. Hence, the USA is increasingly incapable of doing anything for the rest of the world. It is not just the EU that has turned its back on “extra-market surplus recycling”. It is the entire world. The neo-conservative nonsense of Grover Norquist, and the followers of Ayn Rand’s fantasy drivel has become the guiding principles of the generation that is now guiding policy. Consequently, income redistribution is anathema. But in reality, income redistribution, (generally in the form of extremely high taxes on the top 1% and top 0.1%) is the bedrock necessity of a system operating on the neo-classical model. Greece itself is also in the grip of this Ayn Randian, inequality optimizing baloney that is hollowing out the United States.

    Second, as you outline, Europe in general, and the EU that grew out of it, has been operated as a mercantile system to benefit the core–Germany, and to a lesser extent, France. The USA wanted a strong Europe to keep the USSR from rolling all the way to the English Channel. I think this had a lot to do with the decision to focus on a strong Germany and France.

    Third, the operation of the EU itself as a quasi-mercantile system was, I think, based on simple political expediency focused on the near term. Just as the USA’s political system is now dominated by favors handed out to those with vested interests. Those interests are corporate welfare. That is precisely what the Brussels arrangement has created. Everyone with a grain of sense knew that lending large amounts of money through the ECB system so that German products could be bought by the periphery wasn’t sustainable. In a system with good income redistribution, the huge positive balances in the core would be redistributed to the periphery. But the EU is wedded to the same Ayn Rand nonsense as the USA is today.

    Fourth, the core nations of Europe are benefiting greatly by the flood of educated young workers from the periphery into the core to get jobs. This is ameliorating Germany and France’s demographic crisis of aging. But it exacerbates further the inability to pay off the debt incurred in the periphery through loans pushed from the ECB onto the periphery.

    Consequently, the EU is stuck in a stalemate. It cannot go left, right, forward or back. But it also cannot sit still.

    • This is all good and fine. But let’s simplify things for our own good.

      Is there any particular reason for the Eurozone to exist? The EU can survive as a loose trading area but nothing further than this. The “stable currency” argument is laughable. There are a number of currencies that could be thought of as stable and each European citizen could choose a favorite currency(among a choice of 3 recognizable currencies) for his/her savings.

      Yanis argument that the Left embraced the euro in Greece because it provided a stable platform of protection for the common people who have no other source of income other than a savings account is not a serious one. Most Greeks hold their wealth in real estate (principal residence or other). So the effect of the Eurozone on Greece is that the Greek euro has lost at least 30% of its value (due to the internal devaluation) and the Greek real estate has lost 90% of its value. These are enormous losses and they can’t be justified by the “stable currency” argument.

      The claim that somehow the EU is a brotherhood/sisterhood project and that it has prevented another European war is patently false. I can’t remember any other time in recent history that Europeans are so eager and ready to shred other Europeans to pieces just because they consider them the main cause of their misery. If this is our idea of peace in Europe ( a non-stop boiling brew of anger and frustration) then real war can’t be this far behind.

  9. Pingback: Argentina’s Use and Abuse of Keynes by Andrés Velasco – Project Syndicate « Dr Alf's Blog

  10. That is one of the best and most readable summaries of the history of the EU and the political and economic crisis in the last 5 years. Thanks. Excellent.


  12. You may be surprised to hear this Yanis, but it appears that Australia too is about to witness the unravelling of our own ponzi scheme. Due to the currency war that China is waging on the USA, our currency is severely overvalued and this is decimating our industry. We have record low interest rates and foreign capital is still pouring in. Despite our mining boom, we are rapidly becoming like Greece just before the crisis started. Allow me to explain. If you have followed Steve Keen’s blog you will be well aware that Household debt in Australia is quite a bit higher than it was in the US in 2007. There is a link between our house prices and the value of the iron ore we export to mainly China. When the GFC was at its height, China was our saviour. Not only were we receiving record commodity prices, but the boom had already given us the oppurtunity for a huge fiscal stimulus and then a further investment boom which is only just beginning to taper. Now that the tide is going out, we have an uncompetitive wage structure. Our auto industry is already in the process of closing down. Our largest manufacturing industry is food processing and it is shrinking rapidly. A can of asparagus from China costs half as much as the local produce. My point is, you don’t have to be in a less than ideal monetary union in order to be impacted by larger economies. The reason I am more concerned about Chinese “hegemony” than that of the US or Europe is their exchange rate manipulation which does not allow any give and take. It is ultimately a one-way street. I could give you many more examples of the ways that this country is being shaped by global forces but I suspect you will hear about them in the media over coming years.

  13. Pingback: Europe Is Not "Coming Together" in Response to the Euro Crisis. Why? | naked capitalism

  14. I think there is another obstacle in the way of a truly unified European Union. It’s the notion of strong competition between nations being a driving force of economic growth for the entire union that seems to be shared by the technocrats, national politicians and corporate leaders alike. At least it is in the surplus countries, i.e. Germany.
    As long as the member states are forced to compete for their the biggest share of corporate ‘love’, like little children seeking the approval of their elders, no proposal, however modest, will convince our political elites to grow up, work together and thus free themselves of their sociopathic foster parents.
    Instead our democratically elected governments are working hard at dismantling the very principles of democracy by catering to the needs of large capital enterprises via tax exemptions, reduced governement fees, low minimum wages and reduced workers’ rights in order to indulge big capital and convince it to invest in their respective countries so that growth may occur, jobs may be created and the electorate may be spared economic annihilation a little while longer. There is no room for concern for the competition.
    It’s ‘beggar thy neighbour’ writ large and institutionalized.

  15. The whole basis of this analysis that somehow saving the EU is a good thing is enormously wrong. The EU and particularly the Eurozone need to die a cruel and irreversible death. For the good of the people that is.

    • A crystal clear point, Dean, that should be followed ASAP in a coordinated dismantling of the Eurozone and EU, too. Before it will be too late.
      In international relations there are no fetish and standards. Nor eternal friends or foes. Only each one’s country own interest.

    • Agree. Also, to borrow from my field of engineering, although you can prop up and otherwise ameliorate a poor physical structure, so that it can continue to stand (Yanis’ suggestions), you can never build further on it nor undo its faults. A propped-up, ameliorated structure remains just that.

      The EU as a concept was not of EU origin. It is not a bottoms-up structure. Furthermore all the recent, enormous transformations of the EU after 1989 – from trade bloc to nascent federal state – went hand in hand with the reinvention of NATO ie Re-integration of Germany, Yugoslav war and break-up into 7 statelets, Maastricht and Lisbon Treaties, Eurozone. With the accession of the last group of ex-Warsaw Pact countries, membership in NATO became mandatory – please pause and consider this: why should a European state be obliged to be inside this US dominated treaty, where an attack on one obliges all to counter-attack? And what does this mean for Europe self-determination and European independence? Furthermore, new members are also obliged to join the Eurozone.

      The present EU has now eliminated the 3 principles on which the EU was based: 1) ‘never again’ war inside Europe and 2) inviobility of borders – both destroyed by the Yugoslav war; 3) equality of nations – destroyed by the Eurozone/crisis. The Eurozone has also destroyed the original structural balance between France and Germany, and also the one feature of the EU that an overwhelming majority of its populations supported: the Social Pact.

      We are left with an arbitrary assortment of countries making up an EU which has completely abandoned all its founding principles, dominated and led by the one country – Germany – that no other EU nation likes or trusts (apologies to Hubert and other German friends and commentators); and subjugated to the will of US foreign policy inside a dreadful, transmogrified Atlanticism.

      I bring these non-economic political facts to the discussion, to add to the fact that, as pointed out here, the economic structure of the EU was political in nature – it was never formulated to encourage thriving economies of different sorts in its member nations – and as Yanis has pointed out over 5 years, the economic decisions taken by the EU since the crisis have also been 100% political in nature.

    • @Dean

      But if it does die. What comes next?


      No need to apologize. I absolutely agree with your asessment of Germany’s role in this. But you should really see what most of the german media outlets make of it. According to those, all the world just loves us for our economical prowess and technical ingenuity. It’s like that moviestar who everyone either wants to become or be with. And those who don’t are either just worthless socialist crybabies consumed by their envy of the great nation that is the fatherland or simply just russian presidents.

    • George K.



      I never thought of it in terms of engineering (although I should have due to my background) structures and I think this is a very powerful way to describe the problem. The EU is a structure that has no foundations, poor architecture, no ability to transfer loads from the floors through its columns to its bearing foundation. It’s a poor structure that waits for the next mild earthquake to absolutely level it to the ground. The more I think of your analogy the more I like it. Thanks; that was refreshing.

    • Hubert:

      What comes next? A loose trade association based on national currencies. Read if you can the Telegraph article posted as the last entry here. The EU/Eurozone has zero delivery record.

  16. Federal Europe?, Democratic EU? Let’s better talk about this as a Late(Mid)summer Night’s Dream.
    Not only because of Yanis’ analysis, but rather because such a thing as a representative system OR Democracy is nowhere an active political system in EU (and not only in EU). So it can’t really be enforced seriously in a Fed Europe.
    Now in the dire straits that EU mothership is about to wreck, Germany’s own vessel is trying to sail in more wind before taking the longest and lonely tack towards its own survival.
    By the way the whole article is a very good short idea of what the Global Minotaur Book is all about.

  17. Federal Europe?, Democratic EU? Let’s better talk about this as a Late(Mid)summer Night’s Dream.
    Not only because of Yanis’ analysis, but rather because such a thing as a representative system OR Democracy is nowhere an active political system in EU (and not only in EU). So it can’t really be enforced seriously in a Fed Europe.
    Now in the dire straits that EU mothership is about to wreck, Germany’s own vessel is trying to sail in more wind before taking the longest and lonely tack towards its own survival.
    By the way the whole article is a very good short idea of what the Global Minotaur Book is all about.

  18. Very nice work, Yanis! Very much agree with your analysis. That is why I do not think that the EU elite will likely accept your modest proposal.

    Right now, the EU has got itself in a very big mess in the Ukraine and caught up in the mounting costs, boomeranged by accepting US trade sanctions against Russia that may well push Europe into recession again and break their currency union. Blindly following the US State Department put the EU into a really bad position.

    As fellow Penn alumnus, Mark Adomanis, says: “getting involved in this free trade agreement was a rather reckless gamble”. We will see now whether like their US counterparts, the EU remains eager for the ‘boots and blood strategy’ that the US has been pushing in the Ukraine for a military solution to solve disputes with the Russians or the Europeans will backtrack and press the Kiev government for peace talks with Russia and a ceasefire. A Russian bailout of the Ukraine together with the lifting of the sanctions would help the EU economically. Seems very difficult that the EU can carry the woes of the Ukraine. Time will tell in this complex crisis that is the worst since the Yugoslavia tragedy.

    • Good point on the Ukraine being another blow to EU’s prosperity…Diran

      Obama and EU are really over playing their hand in trying to establish a democracy in Ukraine. Did they really think Putin would let the overthrow of Ukraine government that was friendly to Russia economic interests become a future EU partner (with NATO incl.). Putin has actually shown a lot of restraint in dealing with new Ukraine gov. He is not about to let them crush Ukraine rebel movement. Putin could easily sent in enough troops to defeat Ukraine forces within say a week of fighting.

      I wonder about the sanctions really being enforced or will US and EU governments look the other way. And maybe five yrs hence come back and demand fines for not complying.

    • The EU and eurozone have been spectacular failures. They have delivered nothing, not even the minimum and the expected.

      “The eurosceptics were spectacularly right on all of these issues but we actually were too ready to concede that the single currency would, on the margins at least, boost intra-eurozone trade. It did no such thing. The euro has been entirely and unremittingly catastrophic. It has been bad, with no upside. The benefits of a stable, low-inflation currency on countries such as Greece have been outweighed by the massive costs imposed.”


    • OK, it has not been bad to everybody! – Bankers, politicians that would have never been voted into Office in their home Country have a Job as EU- something and owners of German Export companies did well too!

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