Tag Archives: European Central Bank

Le Monde Diplomatique article on anti-social Europe

26 Aug

The English edition of Le Monde Diplomatique has published an article on the Eurozone crisis by one of The Current Moment editors.

Le Monde diplomatique
English edition
The article develops and expands on themes familiar to Current Moment readers: the anti-social origins of ‘Social Europe’; the way the present-day EU was built on the ruins of the post-war Keynesian consensus; the zero-sum competition between Eurozone members that exacerbated the asymmetries within the Eurozone; the preference of national governments in Europe for external rules and norms that serve to distance leaders from their own power and decisions. As the crisis develops, the EU’s anti-social roots are further institutionalized and political responsibility for the crisis is lost in the myriad of summits, committees and pacts that have accompanied it from the beginning.

A further look at ‘Social Europe’

17 Aug

Much is made about the virtues of ‘Social Europe’. Higher standards of living, broad and deep welfare support, lower working hours, a better work/life balance: these are just some of the advantages of living in Europe cited by commentators. Back in 2004, Jeremy Rifkin published The European Dream: a paean to Europe’s embrace of a more human and environmentally friendly sort of capitalism. In previous posts, we’ve been critical of the notion of ‘Social Europe’. There is a sense in which the rise of ‘Social Europe’ coincides with the rise of a distinctively anti-social society.

There are different aspects to this emergent anti-social Europe. One is the way in which Europe’s growth model rests upon the ability of national governments to contain wages. Wage moderation – and with it declining or stagnant levels of household disposable income – is thus the flipside to the “success stories” of countries like Germany and the Netherlands. A previous post cited the high levels of flexible employment in these bastions of ‘Social Europe’, in contrast to surprisingly lower levels of flexible employment in post-Thatcherite Britain. Here we can look at the figures for household disposable income. Though variations exist, there is a striking difference between the ability of core Eurozone countries to contain wage increases and the wage increases seen in the now crisis-ridden peripheral economies of Greece and Ireland. There is only so much these figures can tell us but they are at least part of the story of contemporary European political economy. The minimal increases in household disposable income in Germany are striking. Household income in the Netherlands fell in 2002 and 2003, falling 2.4% in 2003.

The ability of national governments in Europe to impose cuts on household incomes has become a determining factor in the European growth model. We see this today in the context of the Eurozone crisis where the negotiations between unions, employers and governments are critical to the resolution of the sovereign debt crisis. This is the case in Italy today: the European Central Bank recently wrote to the Italian government, stressing that its buying up of Italian bonds was based on a quid pro quo that would see the government in Rome push through its planned austerity budget. The Financial Times warned yesterday (16/08/11) that the success of these plans depended upon unions and professional associations acting “responsibly”. Susanna Camusso, leader of Italy’s largest union, the CGIL, has said she may recommend a general strike in opposition to the planned cuts. The ECB and the Italian government are pushing for a replacement of fixed national labour contracts with flexible company level contracts. Given the transformation of Italian corporatism into a mechanism for guaranteeing union compliance with government programs, and the history of successfully using Italy’s membership of European Monetary Union as a reason to moderate union demands, there is a good chance the CGIL will back the government’s plan. This might please the markets but it would be another step away from a properly social Europe.

Can the European Central Bank really save the Eurozone?

10 Aug

The Belgian economist, Paul de Grauwe, has been calling for some time for a comprehensive reform of the Eurozone’s institutions. Contagion, he argues, is inevitable in a currency union that lacks adequate political power. There is no way out of the Eurozone crisis other than more political union. It would appear de Grauwe has the ear of European Central Bank chief, Jean-Claude Trichet: over the weekend the ECB started buying up Spanish and Italian government bonds, at rates low than those being offered by the market. Another step towards the ECB acting as a lender of last resort.

De Grauwe’s account of the crisis is simple and compelling. He argues that government bond markets in a currency union like the Euro are “inherently fragile”. They are basically issuing debt in a currency the value of which they have no real control over. Greece, Spain, and Italy all issue their debt in Euros and yet they do not control the value of the Euro in the same way that the UK or Switzerland control the value of the Pound and the Swiss Franc. Governments in London and Bern can, in extremis, force their central banks to print more money. There will always, in theory, be enough money to pay back bondholders. In the Eurozone, there is no such guarantee as the ECB is not a lender of last resort. And this makes the Eurozone inherently fragile. In practice, the ECB has been buying bonds of crisis-struck member states but it has done so as an exception, not as the rule.

De Grauwe’s recommendation is then simply to give the ECB responsibility as lender of last resort in the government bond markets of Eurozone member states. This should put a stop to contagion, according to de Grauwe. But will it? Defaults have occurred in the past in countries that both issue their own currency and have control over their national central banks. Why should the Eurozone be any different?

De Grauwe’s analysis supposes that there is an institutional quick fix to the Eurozone’s problems. This is akin to suggestions made in the US, covered in the Current Moment, about resolving the debt burden via low interest rates and some easy money provided by the US Federal Reserve. Two problems stand out here. The first is that the problem the Eurozone faces is not an institutional one but it is the inability of some Eurozone member states to return to growth. Until national income in troubled Eurozone member states grows faster than state expenditure, or until a realistic prospect of this arrives onto the horizon, the debt crisis will continue. The European Central Bank, even as lender of last resort and notwithstanding the esteem with which central bankers are held today in macro-economic circles, cannot restore profitability to national economies of the Eurozone.

The second problem is a political one. De Grauwe has nothing to say about the political implications of transforming the ECB into a lender of last resort. Some are beginning to wonder about the democratic quality of these developments but generally it is considered an afterthought to a more pressing set of institutional questions. This repeats the patterns of the past: innovations at the EU level are subsequently presented to domestic populations as a fait accompli, to be given a stamp of approval by voters. Why this should work now, when previous efforts to do the same failed miserably, is anyone’s guess. The Eurozone’s debt crisis, if resolved, is likely to be followed by a political crisis as the EU scrambles to find legitimacy for its new powers.

The end of independence

11 Jul

The claim that the European Central Bank was independent of any political interference was always a little difficult to substantiate. Membership of its governing committee was rigidly tied to nationality even though members were expected to vote in the general European interest. Recently, French President Nicolas Sarkozy insisted that Italy retire one of its members in order to avoid there being two Italians – and no Frenchmen – within the upper echelons of the ECB. Neutral indeed. Nevertheless, the ECB’s creation was perhaps the best expression of the belief that short-termist and self-serving politicians need to keep their hands out of the monetarist policy pot. In the monetary policy jargon, this is all about ensuring that central banks can issue ‘credible commitments’ to the markets. So when they say they are going to be tough on inflation, everyone believes them.


Recent events have suggested that the ECB’s independence is being steadily mined by the ongoing Eurozone crisis. One reason is because of the faultlines exposed by the crisis, with the ECB being firmly located on one side of the growing gulf between creditor and debtor interests across Europe. The ECB, and particularly its out-going director, Jean-Claude Trichet, has consistently argued against anything that might look like default on the part of those countries signed up to an EU bail-out package. In so doing, the ECB has put itself forward as the leading defender of the private creditor interest in Europe. Neutral indeed. Most recently, the ECB declared its intention to raise Eurozone-wide interest rates 0.25%, from 1.25% to 1.5%. This is in order to quell inflation, the result of food and energy price-hikes, which some think will provoke higher wage claims in the Eurozone’s bigger economies. The response from Ireland, Greece and Portugal was immediate: does the ECB not realize that in raising rates it is making it even more difficult for these countries to repay their loans?


The second reason is more subtle but also more important. Whilst being officially a non-political body authorized to deal exclusively with Eurozone monetary policy, the ECB has been getting steadily more involved in fiscal policy, notably in providing cash-stricken Eurozone members with much needed liquidity. The ECB, like any central bank directed by political concerns, has been acting as lender of the last resort. It has for some time been keeping the Greek banking system afloat. To date, the ECB has provided about 100bn Euros in loans to Greek banks, in exchange for Greek government bonds classified as junk by the markets.


The official reason why Trichet declares himself so fervently against any default by Greece is that it will create “contagion” in the markets: if Greece defaults, will private investors not believe that Portugual and Ireland will also do the same? But there is another reason why a Greek default would be a problem for the ECB. It would force it explicitly out of its independence shell and into the terrain of political choice. With Greece in default, the ECB could abandon the country’s banking system by ending its loans. Or it could make its role in fiscal policy explicit, providing finance to governments shut out of international markets. This is a choice both Trichet and national governments would rather avoid as it would force them to reveal their cards about whether they support closer political union within the Eurozone. Whilst central bank heads and member states may disagree on this point, they all seem to agree that they’d rather not be forced to have a public debate about it. A Greek default would make that debate increasingly difficult to avoid.

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