Friday lay day

Its my Friday Lay Day blog, which means I don’t really write one. I am working on an Modern Monetary Theory (MMT) volume for my publisher, Edward Elgar, which will document, to date, the key literature that I consider to be foundational to the development of what we now call MMT. I am putting the literature together and writing an extended introduction explaining how each contribution fits into the jigsaw. I am starting with Marx (of-course)! But today, I also take a moment to briefly reflect on an article that apppeared in the German Der Spiegel (September 3, 2014) – France and Friends: Merkel Increasingly Isolated on Austerity. I will follow up on this next week in more detail. The reflection is really just a segue for one of my favourite songs … The Der Spiegel article was written before the ECB’s – Decision – (September 4, 2014) to cut interest rates further (10 basis points) and “to start purchasing non-financial private sector assets” as a renewed attempt to avoid the approaching deflation and likelihood of a triple-dip recession. I will consider that decision in detail next week.

Der Spiegel anticipated this decision and argued that it was a sign that the central bank was moving away from the hard-line German austerity position, which continues to cripple Europe.

This is in the context of the recent ructions in France, where the economy Minister quit after renouncing the austerity stance of the government and calling for the Stability and Growth Pact to be renegotiated and rendered more flexible.

The French economy is now in free fall and the Franco-German tensions are very high again. Merkel was evasive when Der Spiegel asked her whether she was empathetic to France’s plight. She basically accused it of avoiding structural changes. Of-course, the plight of France has little to do with structural matters – it is all down to killing total spending in the economy as a result of the imposed fiscal austerity.

Der Spiegel rightly points out that the current flare up in Franco-German tension:

… focuses on the question that has divided Europe since the beginning of the euro crisis … The Chancellery in Berlin has demanded that EU countries in crisis undertake far-reaching structural reforms coupled with biting austerity programs. Paris, meanwhile, has been the voice of those asking that the stability pact be made more flexible to make room for economic stimulus, with reforms coming later, if at all.

In fact, the issue has been at the heart of the struggles to create the EMU since it was first thought to be desirable. The French have always had a mind for using state policy capacity to reduce unemployment while the Germans have known they could run tight domestic policies and keep unemployment relatively low by exporting the austerity to other nations.

As I have said many times – the twain was never going to meet and the German approach cannot be a template for stable growth across Europe.

Der Spiegel notes that the SGP-austerity consensus is starting to crack. The French concerns are also reflected in the position taken by the Italian Prime Minister, who wants more SGP flexibility. External forces like the IMF and the US Government are also putting pressure on the European Commission to be more flexible.

The French are heading towards a 2003 violation which caused havoc back then when both Germany and France fell foul of the Excessive Deficit Mechanism. With both in trouble, the political process bent and the SGP was renegotiated. France is back in that position again and it is clear that the Commission is heading for a showdown, which I predict it will lose.

Der Spiegel says that:

Should Germany support EU infringement proceedings against its most important partner in Europe and deliver yet another humiliating blow to Hollande? Or would it be better to continue interpreting the rules generously for France? Such a course, however, would lend credence to accusations that only smaller member states are required to conform to the budget deficit rules.

Germany’s Foreign Ministry is in favor of treating France with kid gloves. “The high degree of anxiety in the Chancellery relating to everything that is an alleged renunciation of austerity is not very helpful,” an official there said. “We have to give the French room to breathe.” The official said that it is inconceivable that France, proud as it is, would accept the monetary penalties that would result from such an EU proceeding.

That has been the problem all along. The rules are unenforceable unless the violating Member State is small and without political influence. They will bend to France because of its size. The best thing for France is to tear the SGP up and exit. Italy would be well advised to provide their considerable support to breaking up the whole show.

The French government is so precariously poised (small majority) and the realists in the Socialist Party who know the damage that austerity is causing will likely block the attempts by Hollande to toe the German line.

Der Spiegel quotes a German politician from Merkel’s Christian Democrats as saying:

For France, it’s not five minutes to midnight, it is midnight.

Which was a reference to the German view that the French Socialists had one last chance to bite the bullet or face political oblivion.

But Hollande would be politically better off if he redirected his policies towards growth and reducing unemployment. The factory closures and joblessness is caustic for him.

Anyway, for the Eurozone it is well past midnight – and we know what happens then …

After midnight – what happens then?

Here is the great JJ Cale as the guest of Eric Clapton at the – 2004 Crossroads Guitar Festival in Dallas, Texas (June 4, 2004).

Turn it up loud.

Saturday Quiz

The Saturday Quiz will be back again tomorrow. It will be of an appropriate order of difficulty (-:

That is enough for today!

(c) Copyright 2014 Bill Mitchell. All Rights Reserved.