Auerback: The ECB is the New “United States of Europe”

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By Marshall Auerback, a portfolio strategist and fund manager

Wolfgang Munchnau is right. Only a closer union can save the euro. In the longer term, it will be necessary to put in place a permanent fiscal arrangement through which the central euro zone authorities distribute funds to be used by member nations. Ideally this should be in the hands of the equivalent to a national treasury responsible to an elected body of representatives—in this case, the European Parliament.

But politically, this is a non-starter, particularly in today’s environment. Germany in particular would only accede to a “United States of Europe” run on German lines, in effect making the euro zone a “United States of Germany” or, at the very least, a European Union with strongly German characteristics.

Enter the European Central Bank: With little fanfare, the ECB has been responding to the EMU’s solvency mess by conducting large-scale bond purchases in the secondary market (which, unlike direct purchases of government debt, is not contrary to the Treaty of Maastricht rules) for the debt of the EMU nations. As Bill Mitchell has noted, it is remarkable how little press coverage this has generated, but despite saying there would be neither be bailouts, nor unsterilized bond purchases, the ECB is now buying huge amounts of PIIGS debt to ensure the funding crisis in the EMU is contained. Given that this substantially reduces the insolvency risk, this is probably a wise policy, although it does little to address the underlying design flaws in the system which we have discussed before.

But there are fundamentally anti-democratic overtones in the action. Perhaps financial coup d’etat is too strong a characterisation, but there is no question that ECB is now by far and away the most powerful institution without peer in the EMU. As Mitchell argues, “they stand between the system collapsing or muddling through. And they can force austerity onto citizens throughout the member nations but never face the judgement of the voters.”

Which is why we think that questions about the success of the ECB’s alleged sterilisation policy is besides the point: the ECB is finally responding to the euro zone’s potential solvency mess by conducting large-scale bond purchases in the secondary market (which, unlike direct purchases of government debt, is not contrary to the Treaty of Maastricht rules) for the debt of the EMU nations.

The Eurocrats, who have always found democracy to be antithetical to “sound economics” and “good policy”, now have the opportunity of using this crisis to ram through their vision of Europe, which is fundamentally anti-labour and pro capital.

In economic terms, this action is the same as Warren Mosler’s proposed revenue sharing proposal, although it is not done on a per capita basis, and is potentially rife with moral hazard, since it can theoretically mean that the biggest spenders – who will issue the most government bonds, which can then be bought by the ECB in the secondary market – are rewarded However, the ECB can eliminate this moral hazard problem simply by indicating to miscreant countries that it will refuse to buy their debt in the secondary markets if it does not continue to adhere to “responsible” fiscal policy. By embracing this quasi-fiscal role, the ECB in effect becomes the “United States of Europe”. The ‘distributions’ the ECB will make will be via buying enough national government debt in the secondary markets to keep the national governments solvent and able to fund their deficits, at least in the short term markets.

The reality, then, is that the ECB has become the political arbiter for fiscal decisions made by each of the euro zone national governments. If the ECB determines that any member nation is not complying to their liking, they will start threatening to stop buying their debt, thereby isolating them from the ECB credit umbrella, while allowing the remaining nations to remain solvent. And soon the bureaucrats who run the ECB will realise that the non-sterlisation of the bonds doesn’t create inflationary pressures and they will keep doing it, as they will find it to be a very powerful tool to keep national government spending plans which they don’t like in check. ECB spending on anything is not (operationally) revenue constrained as the member nations are, so this policy is nominally sustainable, even if fundamentally undemocratic.

The austerity measures which will be enforced (and thereby secure the tacit backing of Germany) will result in lower growth, and maybe even negative growth, but the solvency issue is gone as long as this policy is followed. With the ECB in effect backstopping the bonds of the national governments, it facilitates the latter’s ability to secure funding again in the market place via renewed bond issuance.

With currency stability developing and inflation ultimately a function of fiscal balance, the fundamental forces in place that drove the euro substantially higher against the US the dollar earlier this year might reassert themselves as private portfolio preferences shift back toward the euro, especially as the mechanism to remove the default risk that drove the portfolio shifts that weakened the euro is now in place. Dollar aversion could well be heightened by renewed fears of a double-dip recession in the US.

If we were to hazard a guess, we would suggest that euro denominated risk assets would outperform US assets for the balance of this year. Another possible investment outcome in the short term is a potential fall in the price of gold (the positive price action until recently has hitherto acted as something akin to “euro vaporisation insurance risk”) As the perceived euro insolvency/evaporation risk diminishes, gold holders who bought on this basis could well shift their money back into euros.

Power, then, has shifted inexorably to the ECB, presumably under substantial influence of the national government finance ministers (ECOFIN), as the ECB directly or indirectly moves to fund the entire banking system and national government. deficits. This is an institutional structure that is fully sustainable financially, with the economic outcome a function the size of the national government. deficits they allow. There has been increasing evidence in the last few weeks or so that suggest that the public deficits across the EU are propping up demand just enough to stop a depression scenario. Growth in Europe though extremely weak is positive, exports are picking up (for now), and there is some evidence that the falling euro will continue to help the external sector.

But the actions of the ECB are neither politically desirable, nor sustainable over the longer term. The conflict will remain the money interests in Europe who put currency strength as a priority, versus the exporters who favor currency weakness. The consensus will be that unions and wages in general must be controlled, which will create ongoing social turmoil. That’s not a great environment, especially in the “new normal” of subpar returns on financial assets.

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  1. Diego Méndez

    I think the United States of Europe is still viable (though improbable).

    These days I’ve remembered a History lesson I was taught a long time ago: in the early 18th century, the Spanish head of government started very anti-French international policies.

    The end result? The French pressured on Spanish key people, and the Spanish head of government was replaced.

    That may be about to happen in Germany. Merkel has enacted policies that go against most European nations, the United States, China, the world economy and even Germany in the long term.

    International pressure is already being felt (through German newspapers, policitians and trade unions). The end result may be Merkel being ousted sooner than most expect, and clear policies for European-level Keynesianism.

  2. Toby

    “Power, then, has shifted inexorably to the ECB”

    Power has always resided with those who control the money. That power is increasingly concentrated to large institutions and corporations is an inevitable outcome of the current paradigm, which assumes competition, and only competition, drives life. Money, for example, has been designed, in part, with this in mind. Institutional and corporate winners of the human world secure their positions, and, over time, if the winners are particularly successful, they get to stifle competition and preserve whatever status quo best serves them. Only a radical reassessment of what life is and how society might sustainably and cooperatively work can change this dynamic.

  3. /L

    “In the longer term, it will be necessary to put in place a permanent fiscal arrangement through which the central euro zone authorities distribute funds to be used by member nations.

    Ideally this should be in the hands of the equivalent to a national treasury responsible to an elected body of representatives—in this case, the European Parliament”.

    To place these immense powers in the hands of the ECB that is responsible to no one was a huge mistake to place similar fiscal powers in the eurocrats hands would be like throwing gasoline to put out a fire. The euro parliament is a pseudo parliament,

    There model is Ireland and Latvia, one can only image how the global crisis have unfolded in Europe if the eurocrats had been in total control.

    There is no cross border democracy in Europe, the countries is separate cultural entities. 500 million inhabitants, s7 countries and 23 different official languages. The Greeks don’t even have the same alphabet as the rest.

    A classical strategy of divide et imperia. Lets say Sweden, we are 1,8 % of the population in EU, we have 7 parties in our parliament, two big that the rest is incorporated in via block politics. So what an popular opposition against the eurocrats realistic best can muster in an EU parliament election is what’s representing 0,75 % of the elected power in the parliament. There is no way that the people can join forces and send a solid message in a parliament election. And there is very real cultural and language barrier for popular cross border democracy.

    Now that’s just the phony EU parliament where between 30-40 % of the population masters to vote, it’s anyhow a trash can for former somebody’s that you no longer have use for in the national politics. To get elected to the EU parliament is jack-pot, EU don’t spare any expenses to turn these to new born EU-proselytes, even the most sinister EU critic get soft after awhile immensed in the lavish EU grease. Austerity is an unknown concept in Brussels.

  4. gordon

    “The Eurocrats, who have always found democracy to be antithetical to “sound economics” and “good policy”, now have the opportunity of using this crisis to ram through their vision of Europe, which is fundamentally anti-labour and pro capital”.

    What is really going on here is speculation about what is driving “Austerianism”. If Prof. Krugman is right (and he looks right to me), there is no economic rationale for it. But there must be some explanation – things happen for reasons, even for non-economic reasons. So various people now including Mr Auerback have come up with various explanations. A plot against the working class is actually one of the more common ones.

    And it may well be the right one. I don’t know.

  5. anon

    “In economic terms, this action is the same as Warren Mosler’s proposed revenue sharing proposal, although it is not done on a per capita basis”

    I don’t think so.

    First, I could never find an explanation anywhere for what Mosler proposed for ECB balance sheet mechanics in order to implement his idea. In order to credit national government bank balances, seems to me you have to either buy bonds directly from the national governments, or credit their accounts by debiting the ECB capital account. Mosler specified neither, that I could find.

    Second, this is not a pure fiscal proposal. In freeing up capacity for new deficit flows, it also frees up bank capital with its secondary market strategy. Mosler’s proposal didn’t do that. It was pure incremental fiscal.

    1. Matt Franko


      The accounting record is SECONDARY to the policy. The important thing was to provide the balances to avoid the chaos of a default, how you account for it is relatively meaningless. They have figured out an under the radar way to do this iaw this same basic idea that Warren had months ago.


        1. Matt Franko

          Yes they of course would do it in a way that provided the usual “tipping fee” to the banks.

          Youre right Warrens idea didnt include that.


      1. anon

        and he never recommended secondary market bond purchases

        that’s a lot more than accounting

  6. anon


    Europe is now officially closer in spirit to the MMT “no bonds” proposal than is the United States.

  7. joebhed

    Gotta agree with anon on the Mosler connection.
    Warren said repeatedly there should be a $Trillion per capita distribution, without any debt being issued.
    That would be what we call debt-free money, something Bill and Warren have both promoted as within the rights of monetary ‘sovereigns”, which must be how Warren sees the EuroParliament-ECB structure, for all practical purposes.
    What I love about all this crisis-management-based monetary policy is that EVERYONE is making it up as we go along.
    To me, this portends a completely failed global money structure, the solution for which is NOT the additional cover of the more centralized, less democratic SDR of global monetary domination.
    But like Marshall says, where is the press on these non-scheduled monetary fixes?

  8. i on the ball patriot

    There is nothing new about the ECB at all, characterizing its behavior with nation state names, which are now meaningless decoys, is old box thinking.

    Free markets, capitalism, democracy, private property, the rule of law, etc., all stand now as co-opted scams and only serve in the same capacity as nation states — hijacked DECOYS! Give me a soccer team and fuck me up the ass!

    The ECB is part of the global consortium of wealthy ruling elite gangster; central banks, corporations, military machines, and media, which now macro orchestrates propaganda (that is why you say; “it is remarkable how little press coverage this has generated”).

    ECB equals — anti masses and pro wealthy ruling gangster elite.

    We are talking fundamentally fascist overtones here, especially with the red lining of nation states for subservience.

    When the fuck are you all going to wake up to the fact that this is a well planned and well orchestrated take down of the global middle class and masses. It is all about drastically reducing unsustainable global consumption and thinning the herd as required to meet that goal. It is the Full Spectrum Dominance final solution — a ruler and ruled world with the masses in a self decimating perpetual conflict with each other. Look in the mirror that means YOU!

    You are dealing with elite parasitic scum here! Get perceptive fast and express yourselves accordingly or you will eat shit and die a slow miserable death.

    Greece is the hope of the world!

    May they jingle mail and jam the keys of oppression down the throats and out the asses of these elite parasitic scum!

    Deception is the strongest political force on the planet.

      1. i on the ball patriot

        Hats off to Rodney Stitch — love those old Navy fly boys!!! — a perceptive and great human being!

        For those who doubt Rodney’s take on the depth of the corruption here’s a good current read …


        “They found 128 black suitcases, packed with 5.7 tons of cocaine, valued at $100 million. The stash was supposed to have been delivered from Caracas to drug traffickers in Toluca, near Mexico City, Mexican prosecutors later found. Law enforcement officials also discovered something else.

        The smugglers had bought the DC-9 with laundered funds they transferred through two of the biggest banks in the U.S.: Wachovia Corp. and Bank of America Corp., Bloomberg Markets magazine reports in its August 2010 issue.

        This was no isolated incident. Wachovia, it turns out, had made a habit of helping move money for Mexican drug smugglers. Wells Fargo & Co., which bought Wachovia in 2008, has admitted in court that its unit failed to monitor and report suspected money laundering by narcotics traffickers — including the cash used to buy four planes that shipped a total of 22 tons of cocaine.”

        Deception is the strongest political force on the planet.

  9. Richard Kline

    . . . This is a problem? Sounds to me more like most of a solution. The market thinks little sheep country make good eating; the shepherd puts them in a pen. Who’s got a problem now?

    Anti-democratic? Yes. Those proles have dragged their feet on making _common_ institutions functional and engaging with them. The Euro Parliament is a sideshow because those democrats with a small ‘d’ had hidden under their beds and gone bluefaced holding their breath against the future. The power was always with ‘the center’ of which the ECB is the money-center, because the rest have pulled apart on their own rather than pulled together. Democracy with a big ‘D’ will be when those proles show up in Strasburg and take policymaking by the scruff of the neck in their own interest. If those many don’t want austerity (or if they do) they’ll have to face off with each other and dicker out a solution they prefer. No solution is not an option this time. The ground’s moved under (some of) the public’s feet because the public are just standing around on this one.

    In the meantime, the Euro Way proceeds as before, many speeches, than a few well-placed push a button in the quietly constructed control room, and the future turns cog in wheel. And no ‘euro collapse’ means no EU collapse means no ‘break all treaties and devalue to prove someone else’s defective point’ happens either. Just as a point of information.

  10. charles

    Your analysis is very unteresting but I think you should distinguish between the unsteady position of Trichet, who
    had to swallow the European Stability Mechanism and the
    sovereign-bond purchase program, in circumstances he described at length in the tone of H.Paulson, and then his
    position of late as sheeps’s herder on fiscal issues, and then offset those against the mission of the ECB, running extra-ordinary measures since the beginning of the financial crisis, and de facto having become the lender of last resort to the European banking system.
    Now, concurring with W.Múnchau’a analysis, it would be a dramatic outcome if the ECB remained the symbol of the United States of Europe. First the sovereign bonds’s purchasing has been relatively small in scale, 4 to 5 billion euros weekly, and rightly attacked for being possibly a cover-up to get some banks ‘off the hook’, the purchasing concentrated Greek, Spanish and Portuguese bonds,
    and, secondly, in the likely event there were to be a debt restructuring program in one or more of those countries, the ECB would have to be re-capitalized.

  11. Hubert

    Agree 100% with Auerbacks diagnosis.
    Disagree 100% with his (and Munchau´s) described “cure”.
    Within less then 10 years some nation states will rebell, probably but not nessecarily, those who pay the bill. So the “Solution” will only work with a military and police force willing to push through. It will be a mess anyhow.
    How can anybody who has lived or travelled through Europe expects a Central Government to function here ? I have been reading Auerback for 10 yers and hold him in high regard – but here he must have lost his senses.
    Or is it implicit Anglo-Saxon strategy to ruin its half-sister, the EU ?
    I personally, living in the biggest “to-be-milked-country”, would- if then still allowed – move my family out. Sidney or Switzerland might work for me….

  12. pebird

    If nothing else, the fact that Mosler provided an analysis from following news events:

    and made a call that within DAYS was validated (no clue in the mainstream business press) should at least give some pause to the critics of MMT. The supporting analysis by Mitchell and Auerback provides more background to those interested in the why and how.

    We can argue about the long-term impact, but here is evidence that the MMT principles can help understand what is happening politically and economically in more or less real time.

    We should respect that.

  13. Friedman's Ghost

    Huh, I would think the Europeans would have no problem with a centralized authority and central planning given their track record of socialization.

  14. JLR

    The problem with the idea of the ECB being the new sovereign in Europe is the idea that the ECB really could let a county in the EU default without massive and unpredictable consequences for itself and Europe as a whole. The status quo is now a high-stakes game of chicken: if the ECB says to a nation “we will no longer backstop your bonds because we don’t like your policies” then the nation may just respond “OK, well then we default.” Bank capital implodes, the Euro likely heads south, and funding requirements across the EU get repriced for additional credit risk. And the ECB has to help clean up the mess.

    The ECB simply does not have the power that you imply in this post — undpredictable and external considerations are significant factors governing their range of actions.


  15. Marshall Auerback


    Thanks for the kind words. We can agree to disagree on the prescription, but from my time of living in Europe, I get the sense that there is a shift in generational thinking. Many Germans, Frenchmen, Italians, etc., now identify themselves first as Europeans. The national differences are still there, but not nearly as pronounced as they were, say, in the 1950s or 1960s. So I do think the political evolution will move in this direction, even if you find it undesirable (but I wouldn’t dissuade you from moving to Sydney – it’s a beautiful city!). Of course, when things calm down in a few years, the Germans might well decide, “This isn’t what we signed up for” and elect to leave. This would take significant negotiations and, like a divorce, could prove very expensive for all parties, no matter how amicable. So I don’t think I am being delusional, but in any case, my short term point suggests that the ECB’s actions have rendered this point moot. Additionally, it is now increasingly clear why the role of the ECB in regard to funding the “Euro TARP” (EFSF) was deliberately vague. They clearly did not want to highlight their role in creating new euros to fund the EMU’s potential solvency crisis, as it might have shocked the markets and created a new downward spiral in the euro. But I think they will functionally create as many euros as required to prevent solvency from becoming an issue (you might get some restructuring from Greece, but you can probably mitigate the contagion effect if the ECB keeps buying the bonds of the other PIGS). The beauty of this approach from their perspective is that if it does become inflationary, they can immediately respond to it, particularly as the funding requirements seem to emerge every 90 days or so. It’s Machiavellian in its genius, but certainly not consistent with a truly democratic United States of Europe. Of course, I don’t think that’s ever been an issue for the EU. It’s government by technocracy. Political decisions arrived at democratically which give the “wrong answer” (such as Ireland’s rejection of the Treaty of Lisbon) are conveniently ignored until the “right answer” is arrived at. So in many respects, the ECB’s actions are perfectly consistent with this technocratic culture.

    1. charles

      It seems to me you are underestimating the damage, say a Greek debt default / rescheduling, foreseen by many, could produce on the banking system in Europe. The ‘dam’ buil’for Greece in conjunction with the IMF, which Trichet strongly opposed in the first place, was uncorrectly estimated ( and W.Münchau,M.Wolf and S.Johnson have provided insightful analysises ) -why do you think the Greek are desesperate to get access to the financiai markets, in spite of their ‘gate
      fenced’ situation ?

      On the other ‘dam’, I would recommend the reading of
      Charles Wyplosz: European Stabilisation Mechanism: Promises, realities and principles
      European Stabilisation Mechanism: what more needs to be done
      by Daniel Gros and Thomas Mayer

    2. Hubert

      again I could not agree more. It is the way the ECB will take and the Bundesbank guys can growl and hyperventilate – it will not change the course. You seem to like that approach, I as a German taxpayer and saver do not.
      But personal interest, at least here, is not my point.
      My point is: and then what? Euroland will in effect trash its currency by buying the weakest links, not across the board all bonds proportionally (what would be somewhat more acceptable).
      First this is a crime against hard-earned savings.
      But second, and worse, it is a mistake: any attempt to over-centralize Europe will not end peacefully. Yes EURO-Divorce now will be messy. But a divorce later will cause much worse blood.
      The EU can coexist with different currencies – it has already proven that. A quick rupture (Greece or Germany out) would clear things up somewhat. It is preferable to the EU-Superstate where people will either cheat or stop working.
      For it to “work” the EU needs to drastically reduce individual freedom because first our capital will flee and later persons will flee or just drop out of the productive process. One can survive in Europe relatively well without working. I would not give this process longer then 10-20 years.

  16. michel

    “The Eurocrats, who have always found democracy to be antithetical to “sound economics” and “good policy”, now have the opportunity of using this crisis to ram through their vision of Europe, which is fundamentally anti-labour and pro capital.”

    Once again this is just name calling and does not illuminate the situation at all. Ask what would an anti capital and pro Labour vision look like? No clearer than what is meant by its opposite. This is just Marxist rhetoric with no clear meaning.

    Europe, and that includes the UK, is waking up to see that its countries have borrowed huge amounts of money, and not just from each other or themselves, in order to pay armies of civil servants to do nothing at all, or to engage in activities inimical to prosperity. Europe, and this means particularly the UK, has been through one period, pre-Thatcher, with out-of-control unions. The result was small minded, self destructive looting and sabotage.

    What is happening now has nothing to do with austerity so called. It is not pro or anti labor or capital, as if those terms meant anything nowadays. It is two things, which are quite separable. One is the realization that the state sector has to stop doing idiotic and unjustifiable things that make everyone worse off.

    The other is that they cannot fund these things or even sensible things out of debt, because it will lead to interest payments taking up too high a proportion of tax revenues to be reasonable. These interest payments will in fact end up subverting the ability of the state to offer social services to those in genuine need.

    Britain has been here before, pre-Thatcher. It does not work. No-one wants to go there again. This in the end was what forced the Liberals to go into coalition.

    Whatever you think of the desirability of deficits, the deleterious government programs need to be stopped. The welfare budget must be reformed. This is not austerism or whatever, its just sensible politics.

  17. Hugh

    Isn’t this just a European version of extend and pretend, less about propping up debtor countries and more about propping up the banks in the creditor countries?

    1. gordon

      I read somewhere (a couple of times, actually, but I can’t remember where) how US banks are making a good thing out of gobbling up the Federal Reserve’s QE money which is free and lending it to the US Federal Govt. at about 3%. Holding all those Govt. bonds makes the banks look more stable, which they really want to do at the moment, but the downside is that the money never goes near Main St.

      You could say that the ECB is doing the same thing for banks which (in Europe) are exposed to dodgy sovereign debt as well as dodgy private CDOs.

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