Monday, June 11, 2012

Pain Is the Agenda: The Method in the ECB's Madness

Krugman is puzzled by the European Central Bank:
I’ve been hearing various attempts to explain the ECB’s utterly bizarre refusal to cut interest rates... The most popular story seems to be that the ECB wants to “hold politicians’ feet to the fire”, letting them know that they won’t get relief unless they do what’s necessary (whatever that is). This really doesn’t make any sense. If we’re talking about enforcing austerity and wage cuts in the periphery, how much more incentive do these economies need?
He is certainly right that if the goal is resolving the crisis, or even price stability, then refusing further rate cuts is mighty strange. But who says those are the goals? His final question is meant to be rhetorical, but it really isn't. Because the more austerity you want, the more enforcement you need.

I met someone the other day with a fairly senior position at the Greek tax authority; her salary had just been cut by 40 percent. When, outside of an apocalyptic crisis, do you see pay cuts like that? Which, for you or me or Paul Krugman, is an argument to End This Depression Now. But if you are someone who sees pay cuts as the goal, then it could be an argument for not quite yet.

It's a tenet of liberalism -- and a premise of the conversation Krugman is part of -- that there are conflicting opinions, but not conflicting interests. But sometimes, when people seem to keep doing things with the wrong outcome, it's because that's the outcome they actually want. Paranoid? Conspiracy theory? Maybe. On the other hand, here's Deutsches Bundsbank president Jens Weidmann:
Relieving stress in the sovereign bond markets eases imminent funding pain but blurs the signal to sovereigns about the precarious state of public finances and the urgent need to act. Macroeconomic imbalances and unsustainable public and private debt in some member states lie at the heart of the sovereign debt crisis. It may appeal to politicians to abstain from unpopular decisions and try to solve problems through monetary accommodation. However, it is up to monetary policymakers to fend off these pressures.
That seems pretty clear. From the perspective of the central banker, resolving the crisis too painlessly would be bad, because that would allow governments to "avoid unpopular decisions." And it's true: If there's something you really want governments to do, but you don't think they will make the necessary decisions except in a crisis, then it is perfectly rational to prolong the crisis until you see the right decisions being made.

So, what kind of decision are we talking about, exactly? Krugman professes bafflement -- "whatever that is" -- but it's not really such a mystery. Here's an editorial in the FT on the occasion of last summer's ECB intervention to support the market for Italy's public debt:
Structural reform is the quid pro quo for the European Central Bank’s purchases last week of Italian government bonds, an action that bought Italy breathing space by driving down yields. ... As the government belatedly recognises, boosting Italy’s growth prospects requires a liberalisation of rigid labour markets and a bracing dose of competition in the economy’s sheltered service sectors. This is where the unions and professional bodies must play their part. Susanna Camusso, leader of the CGIL, Italy’s biggest trade union, is threatening to call a general strike to block the proposed labour law reforms. She would be better advised to co-operate with the government and employers... The government’s austerity measures are sure to curtail economic growth in the short run. Only if long overdue structural reforms take root will the pain be worthwhile.
A couple of things worth noting here. First the explicit language of the quid pro quo -- the ECB was not just doing what was needed to stabilize the Italian bond market, but offering stabilization as a bargaining chip in order to achieve its other goals. If ECB was selling expansionary policy last year, why be surprised they're not giving it away for free today? Note also the suggestion that a sacrifice of short-term output is potentially worthwhile -- this isn't some flimflam about expansionary austerity, but an acknowledgement that expansion is being give up to achieve some other goal. And third, that other goal: Everything mentioned is labor market reform, it's all about concessions by labor (including professionals). No mention of more efficient public services, better regulation of the financial system, or anything like that.

The FT editorialist is accurately presenting the ECB's view. My old teacher Jerry Epstein has a good summary at TripleCrisis of the conditions for intervention; among other things, the ECB demanded "full liberalisation of local public services…. particularly… the provision of local services through large scale privatizations”; "reform [of] the collective wage bargaining system ... to tailor wages and working conditions to firms’ specific needs...”;  "thorough review of the rules regulating the hiring and dismissal of employees”; and cuts to private as well as public pensions, "making more stringent the eligibility criteria for seniority pensions" and raising the retirement age of women in the private sector. Privatization, weaker unions, more employer control over hiring and firing, skimpier pensions. This is well beyond what we normally think of as the remit of a central bank.

So what Krugman presents as a vague, speculative story about the ECB's motives -- that they want to hold politicians' feet to the fire -- is, on the contrary, exactly what they say they are doing.

It's true that the conditions imposed by the ECB on Italy and Greece were in the context of programs relating specifically to those countries' public debt, while here we are talking about a rate cut. But there's no fundamental difference -- cutting rates and buying bonds are two ways of describing the same basic policy. If there's conditions for one, we should expect conditions for the other, and in fact we find the same "quid pro quo" language is being used now as then.

Here's a banker in the FT:
The future of Europe will therefore be determined by the interests of the ECB. Self-preservation suggests that it will prevent complete collapse. If necessary, it will overrule Germany to do this, as the longer-term refinancing operations and government bond purchase programme suggest. But self-preservation and preventing collapse do not amount to genuine cyclical relief and policy stimulus. Indeed, the ECB appears to believe that in addition to price stability it has a mandate to impose structural reform. To this extent, cyclical pain is part of its agenda.
Again, there's nothing irrational about this. If you really believe that structural reform is vital, and that democratic governments won't carry it out except under the pressure of a crisis, then what would be irrational would be to relieve the crisis before the reforms are carried out. In this context, an "irrational" moralism can be an advantage. While one can take a hard line in negotiations and still be ready to blink if the costs of non-agreement get too high, it's best if the other side believes that you'll blow it all up if you don't get what you want.  Fiat justitia et pereat mundus, says Martin Wolf, is a dangerous motto. Yes; but it's a strong negotiating position.

But this invites a question: Why does the ECB regard labor market liberalization (aka structural reform) as part of its mandate? Or perhaps more precisely, when the ECB negotiates with national governments, on whose behalf is it negotiating?

The answer the ECB itself might give is, society as a whole. After all, this is the consensus view of central banks' role. Elected governments are subject to time inconsistency, or are captured by rent seekers, or just don't work, so an "independent" body is needed to take the long view. It's never been clear why this should apply only to monetary policy, and in fact there's a well-established liberal view that the independent central bank model should be extended to other areas of policy. Alan Blinder:
We have drawn the line in the wrong place, leaving too many policy decisions in the realm of politics and too few in the realm of technocracy. ... the argument for the Fed's independence applies just as forcefully to many other areas of government policy. Many policy decisions require complex technical judgments and have consequences that stretch into the distant future. Think of decisions on health policy (should we spend more on cancer or aids research?), tax policy (should we reduce taxes on capital gains?), or environmental policy (how should we cope with damage to the ozone layer?). Yet in such cases, elected politicians make the key decisions. Why should monetary policy be different? ... The justification for central bank independence is valid. Perhaps the model should be extended to other arenas. ... The tax system would surely be simpler, fairer, and more efficient if ... left to an independent technical body like the Federal Reserve rather than to congressional committees.
I'm sure there are plenty of people at the ECB who think along the same lines as the former Fed Vice-Chair. Indeed, that central banks want what's best for everyone is practically an axiom of modern economics. Still, it's funny, isn't it, that "structural reform" so consistently turns out to mean lower wages?

Martin Wolf's stuff on the European crisis has been essential. But it has one blind spot: The only conflicts he sees are between nations. What perplexes him is "the riddle of German self-interest." But maybe the answer to the riddle is that national interests are not the only ones in play.

It's hard not to think here of Perry Anderson's thesis, developed (alongside other themes) in The New Old World, that the EU project is fundamentally a response by European elites to their inability to roll back social democracy at the national level. The new supra-national institutions of the EU have allowed them to bypass political cultures that remain stubbornly (if incompletely) egalitarian and solidaristic. In Alain Supiot's summary:
In Anderson’s view, the European project has engendered neither a federation nor an intergovernmental organization; rather it is the most fully realized form of Hayek’s ultraliberal ‘catallaxy’. ... Like a secular version of faith in divine providence, belief in the spontaneous order of the markets entails a desire to protect it from the untimely interventions of people seeking ‘a just distribution’ which, according to Hayek, is nothing more than ‘an atavism, based on primordial emotions’. Hence the need to ‘dethrone the political’ by means of constitutional steps which create ‘a functioning market in which nobody can conclusively determine how well-off particular groups or individuals will be’. In other words, it is necessary to put the division of labour and the distribution of its fruits beyond the reach of the electorate. This is the dream that the European institutions have turned into a reality. Beneath the chaste veil of what is conventionally known as the EU’s ‘democratic deficit’ lies a denial of democracy.
Jerry Epstein puts it more bluntly. The ECB's insistence on structural reform "represents a cynical raw power calculus to destroy worker and citizen protections  without any real belief in the underlying neo-liberal economics they use to justify it." (If you prefer your political economy in audiovisual form, he has a video talking about this stuff.)

This kind of language makes people uncomfortable. Rather than acknowledge that the behavior of people in power could represent a particular interest -- let alone that of the top against the bottom, or capital against labor -- much better to throw your hands up and profess bafflement: their choices are "bizarre," a "riddle." This isn't, let's be clear, a personal failing. If you or I occupied the same kind of positions as Krugman or Wolf, we'd be subject to the same constraints. And I anyway don't want to find myself talking to no one but a handful of grumpy old Marxists.

But on the other hand, as Doug Henwood likes to quote our late friend Bob Fitch, "vulgar Marxism explains 90 percent of what happens in the world." And then, I keep looking back through FT articles on the crisis, and finding stuff like this:
The central bank has long called for eurozone economies to press ahead with structural reforms. That the ‘E’ in EMU, or Economic and Monetary Union, has not occurred is a complaint often voiced by ECB officials. On this score, the central bank has managed to win an important concession in forcing Italy to sign up to liberalising its economy. Some may see this as a pyrrhic victory for the damage that the bond purchases have done to the central bank’s independence. But there was a significant threat to stability if the central bank did not act. ...That Mr Trichet, always among the more politically savvy of central bankers, managed to get some concessions on structural reform was all that could be hoped for.
One has to wonder: What does it mean for the ECB to "win an important concession" from an elected government? Who is it winning the concession for? And if the problem with the ECB is just an ideological fixation on its inflation-fighting credibility, why would it be willing to sacrifice some of that credibility to advance this other goal?

It's hard to suppress a lingering suppression that central bankers are, after all, bankers. And then you think, isn't there an important sense in which finance embodies the interests of the capitalist class as a whole? (In an anodyne way, this is even sort of what its conventional capital-allocation function means) You wonder if the only reason Karl Marx called "the modern executive is a committee for managing the common affairs of the whole bourgeoisie," is that central banks didn't yet exist.

Imagine you're a European capitalist, or business owner if you prefer the sound of that. You look at the United States and see the promised land. Employment at will -- imagine, no laws limiting your ability to fire whoever you want. Private pensions, gone. Unions almost gone, strikes a thing of the past. Meanwhile, in 2002, 95 out of every 1,000 workers in the Euro area -- nearly ten percent -- was on strike at some point during the year. (In Spain, it was 270 out of every 1,000. In Italy, over 300.) And of course there's the vastly greater share of income going to your American peers. Look at it from their point of view: Why wouldn't they want what their American cousins have?

It seems to me that what would really be bizarre, would be if European capitalists did not see the crisis as a once-in-a-lifetime opportunity. They'd be crazy -- they'd be betraying their own interests -- if, given the ECB's suddenly increased power vis-a-vis national governments, they didn't insist that it extract all the concessions it can.

Isn't that what they're doing? Moreover, isn't it what they say they're doing? When the "Global Head of Market Economics" at the world's biggest bank says that the ECB should only cut rates "as part of a quid pro quo with governments agreeing to more far-reaching structural reform," what do you think he means?


  1. "Imagine you're a European capitalist, or business owner if you prefer the sound of that. You look at the United States and see the promised land. Employment at will -- imagine, no laws limiting your ability to fire whoever you want. Private pensions, gone. Unions almost gone, strikes a thing of the past."......I WOULDN'T CALL THAT A MODEL SOCIETY....AND WHY IS AMERICA SO INVOLVED WITH OTHER COUNTRIES..

    1. Well, neither would I. But we're trying to see it from the bosses' point of view.

    2. The bosses are stupid. This vision is also a vision where the workers are happy to see you murdered in your bed, and will occasionally do exactly that. Make the 99% unhappy enough and they are fertile ground for recruitment by would-be warlords, who don't give a damn about the welfare of financiers and are happy to kill the lazy slobs.

      But the financiers seem incapable of thinking long term; they lack the wisdom of the Whigs of the 1830s in England; they have not learned the lesson of the French Revolution.

  2. This is absolutely brilliant. And the irony, of course, is that lax regulation by the ECB and the rentier classes is what got the nations into the current crisis, which is now looking to make the same folk much stronger. And the whole European project has been foisted on the citizens under the guise of "Solidarity".

    Historians will look back at this period in wonder.

  3. "Historians will look back at this period in wonder."

    I doubt that. Like politicians, historians are paid by the victors.

    1. JW Mason, rsj, please tell us who pays you? And Neil, please be honest with us, on whose payroll are you?

      Don't you think web2.0 introduced somehow a structural break into the path of history and work of historians? Like in "it is all out there. Go and read it"

  4. Great piece!


    1) Pay cuts of 40% are fairly common at CXO-ish levels in crises and are better than being fired. No reason why you should consider them an apocalyptic crisis just because they happened to an individual who was working with the tax authority. I'm an Indian. I know several individuals who would not have their jobs with the tax authority if the tax authority was designed in even a remotely optimal way.

    2) A good test of the national interest vs class interest hypotheses is - what does the average non-capitalist German voter think? There's good reason to believe that he/she actually believes that the ECB has already gone too far. Merkel faces tremendous domestic heat for making even the small-ish concessions that she has until now.

    3) What about the competing hypothesis that central bank activism and low-ish interest rates that feed into asset prices is itself a sign of crony capitalist capture?

    4) What about the standard central bank argument of the fiscal authorities tightening their belts to create more room for monetary activism. Central bankers in countries where the capitalist class tends to be much closer to politicians than to central bankers (e.g India, again) make this argument all the time.

    1. (1) Yes, there are many better examples of austerity in Europe right now. I mentioned this one because I happened to hear about it first hand. But the larger point, which I don't think anyone denies, is that the cuts to public and private wages and to public services that are taking place in Greece, Italy, etc. would never happen outside a deep crisis.

      (2) You may be right, but I don't think this is decisive. A more relevant question is whether the pursuit of "German national interest" has benefited the bulk of people in Germany. Given the large role that wage repression has played in German current account surpluses, I think the answer is pretty clearly no.

      I don't think points three and four apply to Europe right now, at all.

    2. "A good test of the national interest vs class interest hypotheses is - what does the average non-capitalist German voter think? There's good reason to believe that he/she actually believes that the ECB has already gone too far. Merkel faces tremendous domestic heat for making even the small-ish concessions that she has until now. "

      Check out what the German press is telling ' the average non-capitalist German voter'.
      Sight unseen, I'll wager that it's (a) it's all *their* fault, (b) only 'reforms' will save the day, etc.

    3. "What about the standard central bank argument of the fiscal authorities tightening their belts to create more room for monetary activism. "

      That's just a variation on 'crowding out', and would only apply *before* a recession or collapse.

  5. Great post!
    I fully agree on the whole post, however I would like to add some personal observations from Italy:
    a) First of all, "neoliberal" policy began in Italy many years ago (in the 80es, with Craxi), and is pretty much the "common sense" in economic thinking here. Various parties try to defend various group interests on moral grounds, but only very extremist ones challenge the neoliberal economic theory. Thus many people, both politicians and common people, have this visiont that the ECB is "just but inhumane" or something like this.
    b) I agree on the idea that this is a class issue, not a nation issue, however if we speak about classes we have to speak of at least four groups:
    - proletarians, people whose earnings comes exclusively from sheer labor, with very few or no assets;
    - middle class, people whose earnings comes in similar parts from labor and from capital (including those workers with good wages who accumulated wealth in various forms). Most people see themselves as middle class.
    - Small enterpreneurs.
    - Big capital.
    The "austerity" politics are very good for big capital, horrible for proletarians, dubious for small business (since small business, at least here in northern Italy, lives by underpaying workers so is strongly anti-labor, but is beaten very bad py the recession: there has been a strong increase of the suicide rate of small enterpreneurs).
    However from the point of view of the "middle class", that actually represents most voters, "austerity" is mixed, since "non-austerity" would require policies that in essence are redistributive and would devalue their wealth (for example, big inflation). Many of those people however have unemployed relatives or risk their jobs themselves.
    Thus it is not so obvious that people, even in GIIPS, are so opposed to austerity, and it is not so obvious that this is an antidemocratic process. Monti, for example, is just going further on the road that previous governments were going on (Berlusconi: anti-labor, Prodi: lots of not very progressive taxes and "fiscal responsibility").
    The economic result of austerity however is to push people from self perceived middle class to self perceived proletarians, so this is producing a radicalization of politics (as elsewhere in Europe).
    The interesting point in this is that governments of GIIPSs never had an assertive approach to the ECB, however this might change in future years (think to Syriza in Greece) and I'm not that sure that the ECB really has all the political power it think it has.

    "A good test of the national interest vs class interest hypotheses is - what does the average non-capitalist German voter think?"
    I don't think that this is a good test of the hypothesis because, as I said before, most workers in the EU are not really proletarian but middle class, so they really have also some "capitalist" interests. It is true that, if policy doesn't change, they will also be "proletarianized", but this will only happen very late in the game.
    Also nationalism plays a very nasty role in this, so that Germans are likely to believe the worst stereotypes of the Greeks nd Greeks of the Germans and so on; however it seems to me that it is more a cultural smokescreen that prevents people to think to the real issues than a real "national interest" problem.

    1. RL-

      This is all very interesting. Does it change the overall story in any important way, do you think?

    2. I think that the policies that are usually proposed as the "sane leftish" solutions to the European crisis would be, in practice, much more extremist than their proponents realize, and thus only rather extremist parties would really pursue them. Some days ago i read the program of Syriza and it surprosed me: it actually resembles Marx's manifesto. I wonder how many leftish guys would feel comfortable with it (I like it a lot).

  6. Random Lurker - I'm not sure austerity is unambiguously good for anyone, except a pure rentier (ie living off interest from deposits or bonds).

    I agree that in increasing unemployment, austerity helps to support income inequality (it drives up the key rentier KPI: the Gini Index!), but austerity also indubitably lowers real GDP relative to the counterfactual. This is a negative for everyone who actually earns income. I count myself well inside the 1% but I still think austerity is a terrible idea.

    1. Anders-

      You have to distinguish short-term and long-term interests. The immediate effects of deep recessions and austerity are bad for everyone but rentiers. But in the long run it is (or can be) beneficial to the broad capitalist class -- i.e. everyone for whom wages are primarily a cost rather than a source of income -- by allowing a rolling back of wages and working-class power more broadly. The Volcker shock in the US is a very clear example of this.

    2. Actually, it is important to differentiate between "rentiers" and "bankers" (who are, at best, a subset of "rentiers"). Rentiers demand maximization of rent on their "assets". Bankers demand maximization of rent on all money (including the "assets" of other non-bank rentiers). Central banks are, in many ways, the enforcement arm of that objective. Their other apparent contribution to banker rent-seeking is the extra-legal guarantee of liquidity/solvency no matter how egregious banker bad-behavior or bad-luck turns out to have been.

    3. un

      you fail to grasp the signifigance of leverage
      for an outfit with near limitless credit
      which any "too big to fail"
      hi fi operations amounts to

      then the motives become the motives
      of the banks executive suite
      if there's enough other peoples money to borrow at
      a lower rate then the rate you can place the capital out at ....

      inflation ?

      not intrinsically a bad

      declining gross profits?
      again not necessarily a bad

      if you run a big enough hi fi op

    4. @JW Mason

      It seems epistemically problematic to suppose assess whether the broad capitalist class is better off for the Volcker recession: what if RGDP would otherwise have been much higher, sufficiently so to offset the lower Gini index under such a scenario?

      Perhaps the issue is that human nature - with capitalists representing its purest incarnation - is more focussed on distributional concerns than on overall growth. Perhaps a capitalist will always choose higher income inequality (as long as she benefits from it) over a more equal scenario where she has higher real income for herself.

      This would mean that my own inclination towards maximising real income in 10 years' time - which to me seems more likely under a more equal, social democratic economic framework with lower unemployment etc - is simply anomalous.

  7. Random Lurker: to be clearer perhaps, it would probably be rational for entrepreneurs to oppose austerity too.

  8. Also worth mentioning in this context is Richard Werner's work on the Japanese crisis. He collated plenty of examples of BoJ officials saying similar things in the 90s - too early a recovery would take away the incentive for structural reforms. I read his 'New Paradigm in Macroeconomics' a couple of years ago; none of this in Europe comes as a surprise.

  9. @Ritwik
    "A good test of the national interest vs class interest hypotheses is - what does the average non-capitalist German voter think?"

    One must be careful here, because the "average German voter" (if there is such a thing) is quite often drawing wrong conclusions from the German experience of the last 10-15 years. These were characterised by a string of structural reforms, a flat real median wage despite continuing productivity improvements, and endless exhortations to accept austerity for the sake of "competitiveness". To the extent that Germans feel that they are now in a good position (with respect to unemployment etc), they attribute this to these painful years in a moralistic sense. After all, this is how these policies were sold to the population in the first place. They don't understand that the same approach must fail if all Eurozone countries try it at the same time.

    On the other hand, what is often missed in foreign news reports is that as a consequence inequality within Germany has risen and a large fraction (probably the majority) of the population does not feel in a strong and secure position economically. The combination is what makes it harder to garner support for "generous" help for "spendthrift" countries (and is why all the attendant stereotypes find traction).

    1. Exactly right.

      Going back for a moment to the Krugman, what-'s-best-for-everyone level of argument, I think the the Keynesians have weakened their case by emphasizing relative prices as the solution to EU imbalances, which makes it sound like a zero-sum game and implies inflation in Germany. If they would say -- correctly IMO -- that the most reliable way to move Europe toward current account balance is faster income growth in Germany, it might be an easier sell.

      But yes, the attitudes of ordinary Germans must be heavily shaped by the fact that they have not benefited -- in fact have lost out -- from Germany's successful pursuit of its "national" self-interest.

    2. Yes, trying to sell inflation in Germany is a non-starter for obvious reasons. (Though Helmut Schmidt managed to cope, and had a few slogans one could dust off.) I think you're right that faster income growth is the way to sell it (along the lines of "you've earned it"), paired with the idea of presenting EU-wide stimulus as a "Marshall plan".

      But. You can't sell pure bank bailouts as a Marshall plan. It will be asked "where's the money going to come from?" (hard to give a one-line answer to that one). And for income growth the response will be "what, and give up all that hard-won competitiveness?".

      The main stumbling block seems to me to be that policies that would be sensible have simply become unthinkable to the political mainstream across the EU, due to the general climate over the past 20-30 years (the entire working life of many in power).

  10. @Anders
    "it would probably be rational for entrepreneurs to oppose austerity too"

    I understand this, however it depends on what the "non-austerity" policies are. In my opinion there would be 2 different possibilities:
    1) The EU as a whole tries a sort of "new deal" by printing a lot of money and, crucially, channelling the money into wages. This requires a generally pro-union policy, or maybe a "lower than nairu unemployment", since the rises in wages only can happen if workers have a stronger negotiating position. I don't see enterpreneurs like it for their own self interest.
    2) The EU as a whole prints a lot of money but doesn't try to channel it into wages, in a sort of trickle down approach. This is more or less the approach of Confindustria, the "Italian employers' federation", which asks for "funds for growth" stimulus and for "flexibility" in the labor market. In pratice it means austerity for workers, stimulus for businesses. I doubt that it can work from an economic standpoint, and anyway it needs the rethoric of austerity to be implemented, so is somehow contradictory.

  11. @Random Lurker -

    What about the ECB agreeing to enforce explicit yield ceilings on government bonds to ensure fiscal sustainability, allowing austerity to be put on hold until inflation suggests it is needed?

    I'm not saying this is immediately likely, but I do think entrepreneurs should get behind this idea as it is really the best way to maximise real GDP in 5 years' time.

    1. The problem is that Italy has a debt of 120% of gdp, so even 2% interest on bonds means that nominal gdp has to grow 2.4% a year to keep debt stable. If debt grows the problem worsens. I don't see how this nominal growth can be achieved without inflation in wages. the same goes for countries that have high private debt. In short imho the problem is too much total debt in proportion to total wages, since interest on debt is ultimately paid from wages.

    2. @Random Lurker - I agree with your maths, but why are you looking at 2% as the interest rate on bonds? Why not 0.2%?

      Once people get over the silly idea of "financial repression" and get used to the idea that risk-free assets may never yield a positive real return, I can see this idea being tolerated.

      If the private sector finds 0.2% unappetising then perhaps it may prefer to spend more on consumption and/or fixed capital formation instead - which would obviously improve the primary budget balance by the same amount, helping the maths even further.

    3. "risk-free assets may never yield a positive real return"
      Then why not a 0% interest? I suppose that he only way the ECB has to enforce explicit yield ceilings on Italian bonds is to automatically buy any Italian bond that exceeds the ceiling, by "printing" money. A low ceiling means printing lots of money, that might turn out either as inflation or some asset bubble I suppose.
      The point imho is that there are solutions, but they either pass through the "upward pressure on wages" stage or are quite ineffective (I could be wrong obviously).

    4. @Random Lurker

      0% interest could indeed work, if required to stabilise debt/GDP. The necessary condition for it though is not necessarily printing, but _credibly threatening to print_. The actual printing required might be very low. Why would a bank, in particular, sell their bonds yielding 0.1% to the central bank for reserve balances which yield 0%?

      It is true that some uprinting might result from the policy of yield ceilings. But why should this be inflationary? You need a good account of what inflation is. Only unreconstructed quantity theorists should believe that more money = higher inflation. The more subtle view looks at price-setting and wage-setting as a function of the market power of various market participants (including workers), reflecting niche/monopolistic positions, as well as aggregate demand and supply.

      Replacing the private sector's bonds with bank reserves or deposit balances increases liquidity in the economy, but there is no credible transmission mechanism from liquidity to aggregate demand. This is why QE has not caused inflation. To the extent QE caused asset bubbles, these seem more driven by sentiment than by actual liquidity - and they have since subsided anyway.

    5. Sorry for the very late reply.

      I don't have a clear answer from your point, however my gut feeling is that, ultimately, interest on debt is paid from from the money that is used for consumption (not from capital investiment), and that money is mostly composed by wages. Thus, while it is possible to rais demand through keynesian stimula of sorts temporaneously, this won't be enough to put the economy on a solid footing unless this stimulus trickles to wages and rises nominal wages (inflation).

      By wages I mean wages in the whole EU (also German wages, so that it is easier for GIIPS countries to export), but since the immediate crises in the GIIPS the first problem is to stabilize and possibly increase wages in GIIPS.

  12. I don't think the problem is (primarily) the lack of technical solutions. Personally I like Varoufakis' "Modest Proposal" but there are lots of are lots of things the institutions of Europe could do with their existing tools. The problem is they are unwilling to use those tools, and the question is, why?

    Remember, the starting point of this post is the ECB's decision not to lower rates. I don't think this can plausibly be explained by any kind of realistic fear of inflation. So one then either throws up one's hands in bafflement, or blames ideologies, or looks for some other rational motivation. My point is that if you choose door number three you don't have to speculate very much, the arguments for withholding expansionary policy to compel structural reform (i.e. rollbacks of the welfare state and reduced labor power in the workplace) have been made quite explicitly.

    1. @JW - your argument is compelling, but I'm not convinced the ECB doesn't simply view inflationary risks as massively asymmetrical: the Weimar outcome of 1923 is both around the corner, and worse than anything Greece might be going through.

      This - slightly more benign - belief by the ECB would serve equally well to explain their destructive policies.

  13. I can only assume that you don't live in Europe and got all your views of things like this from the press.

    Europe is old, corrupt and scelorotic. Rigit labour market conditions that only favour cronyism is only one of the too many problems. Whatever the motives of the ECB or the bankers, if labour market reforms can be forced upon those countries because of this crisis, it is only a good thing.

    Before you want to put on that Marxist hat, No, I am not a capitalist, but a mere 'professional'. And because I live here and work here, I can still see the light.


  14. Sigh... why would 0.5% interest rates save something that wasn't viable at (already ultra-low) 1%?

    1. @Gloeschi - the debt/GDP ratio is stabilised based on the interest rate being no greater than the following:

      rate <= NGDP growth + primary budget balance x ( 1 + NGDP growth ) / start of period debt/GDP

      With start of period debt/GDP of 100%, a small changes in blended rates can be critical to helping debt/GDP stabilise as opposed to growing geometrically.

  15. Anders, I think Gloeschi makes a fair point. There's a very small set of NGDP growths for every PBB value (or vice versa) that tips the scale in favour of your equation at 0.5% but not at 1%.

    1. @Ritwik - it sounds like you've played with the numbers in excel like I have. But there are some critical differences at 150% starting debt/GDP. Getting a 0.5% additional "space" on your primary balance is I think worth imposing ceilings for.

  16. haven't read most of the comments

    but this thesis

    the fiscal crisis of club med used as a pretext for
    restructuring national job markets and transfer systems ie safety nets
    seems too obvious to be over looked
    except by those too blinded by dreams of class harmonics
    to see the actual zero sum like struggle
    aspects of social reality

  17. "This kind of language makes people uncomfortable. "

    why ?

    "Rather than acknowledge that the behavior of people in power could represent a particular interest ...much better to throw your hands up and profess bafflement: their choices are "bizarre," a "riddle."

    don't most job class people
    the state and its various semi autonomous arms
    are some kind of racket or conglomeration of rackets ?

    so why be bashful

    " This isn't, let's be clear, a personal failing."

    of course it is !!

    "If you or I occupied the same kind of positions as Krugman or Wolf, we'd be subject to the same constraints."

    no doubt true in my case
    and yet we'd be equally culpable

    "And I anyway don't want to find myself talking to no one but a handful of grumpy old Marxists."

    excellent point indeed

    but where was the rhetoric
    of the left new dealers
    self isolating ?

    marxists --- and i'm one---
    need to avoid idiotic displays of jargon
    not overt class analysis

    i'm sure you agree

  18. Really good post. Makes me kick myself for not getting to the same conclusion earlier.

    Stepping back, it's hard not to see this as part of a larger story, accompanied by the rise of inflation hawkery, adoption of the "natural" rate of unemployment thesis, and glorification of our social betters in independent central banks and banks generally: a generation-long assault on social democracy and the working class.

  19. "...says that the ECB should only cut rates "as part of a quid pro quo with governments agreeing to more far-reaching structural reform," what do you think he means?"

    I think it has nothing to do with your "social democracy". What they want is responsible, well functioning, and yes, business friendly governments.

    But "business friendly" is not the opposite of "social democracy", or else they would've been attacking Sweden, Denmark, and Norway. And, for that matter, Germany.

    It doesn't mean (or doesn't have to mean, anyway) "low wages", or "low income taxes", or "reduced public spending", any of these things. What it does (or should, anyway) mean is less corruption, more accountability. If you keep bailing out dysfunctional governments, they'll only get more dysfunctional. Damn right they need structural reforms.

    And when you equate your "social democracy" with corruption, lack of accountability, and berlusconismo, you are not doing it any favors.

    1. It doesn't mean (or doesn't have to mean, anyway) "low wages", or "low income taxes", or "reduced public spending", any of these things. What it does (or should, anyway) mean is less corruption, more accountability. If you keep bailing out dysfunctional governments, they'll only get more dysfunctional. Damn right they need structural reforms.

      A lot of work is being done by those parentheticals, comrade. Maybe the bourgeoisie should want well-functiong government. What they -- or at least their agents in the ECB -- are actually demanding, is lower wages and a truncated welfare state.

    2. Of course neither Sweden, Denmark, or Norway are eurozone countries so the ecb is pretty powerless over them. German is in some respects an admirable society but its success has been built on pretty vicious wage repression (
      not exactly what we would classically term social democracy.

    3. Its also notable that one of the few concrete proposals(beyond quantitative spend limits etc) that the the so called trioka tried to impose upon my country(Ireland) was a cut in the minimum wage. Ireland has some of the most over payed professional, civil servants etc. But the thing that the Europeans insist on is a cut to the minimum wage.

  20. This post is completely right. I'm kind of fascinated with Weidmann, because he's this obscure technocrat, yet he's clearly one of the key decision-makers for the ECB's stance. I think that after the whole thing goes down the crapper that historians will paint him as one of the major villains of the era.

    1. In a rare instance for me, I thought of more nice things to say. What I like about this post is that it concentrates on the key actor, the ECB. Most discussions get bogged down in nationalist issues like "hard-working Germans bailing out lazy Greeks," or "mean Germans forcing the Greeks to starve." The political issues of what fiscal policies to take are thorny, but they're also besides the point. The ECB deliberately raised rates in the middle of a recession, _even though_ a sovereign debt crisis was a predictable outcome. This isn't a question of not responding to a crisis -- this is a question of deliberately provoking one. The ECB is the villain here, not "the Greeks" or "the Germans".

  21. Well, the way I see it, welfare states there have never been organic anyway; just a bribe to prevent them from behaving badly. From turning communist, mostly, and now it's just a 'cold war relic', as they say. Regardless of what motivations of the ECB are, I don't think those welfare states are worth preserving. Let them find their own way, create their own destiny. And if they have to quit Euro, hey, so what.

  22. I am officially fucking scared again

    Great, lucid and terrifyingly understated post

  23. I intended to write you a mash note telling you how much I appreciated this post, and then got busy with other things.

    That Paul Krugman and others on the neoliberal "left" choose a narrative trope, in which the technocrats are somehow inexplicably stupid, instead of disciplinarians, attempting to enforce a new plutocratic order, seems like a remarkably important distraction. Many well-intended people take their cues from Krugman (or DeLong or Thoma, etc.), including myself, but it just isn't working. As far as we have come, in waking up, first, to movement conservatism and, more recently, neoliberalism, we've got a long ways to go.

  24. European Elites And Debt Crisis

  25. Well said, even if I said it years ago!

    All my comments on were erased without warning ..... too close to the bone, perhaps?

    Ireland received permission from the EU to make a massive subsidy to its banks! Savers were guaranteed a 25% return on total savings made over a 5 year period, in banks! Boom! No wonder debt expanded at 30% pa, after it went through the multiplier!


    1. No doubt you did say it first -- I make no claims to originality.

  26. Just bear, sorry, BEAR, in mind that we are so much wealthier now than in the thirties? This is not as cruel a policy as it seems. The Anglo-Saxon disease, the banking/Stock Exchange weapon, has to be nullified some way. Trostkyite policies are appropriate?

    USA entered Depression in 1999, Japan in 1989. So did Europeans think they were immune? So urbane, so stupid!


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