Marshall Auerback: The ECB v. Germany

By Marshall Auerback, a portfolio strategist and hedge fund manager

I’ve been in Amsterdam and met some people very well connected with the ECB. The topic de jour is the apparent split between the Germans and the ECB, especially in light of the resignation of Jürgen Stark last week from the ECB executive board. This has been a move hailed as a German protest of the errant ways of the ECB, andStark is now touting his conservative ideas around Europe in a hope to undermine the central bank’s current interventions. That’s the public line.

But the people to whom I’ve spoken here contend that Stark’s resignation does reflect the reality that the Germans are losing out as far as the ECB goes. The profound objections to what the ECB is becoming on the part of Germany is also accompanied by a realisation that it is the only supranational game in town and has little choice but to take on this quasi-fiscal function that it is now undertaking.

Stark (and Weber before him) had no desire to associate themselves with this but the resignation reflects the view that they were powerless to stop it.Most of the ‘blame the Mediterranean profligates rhetoric we’ve been hearing has been diversionary, to draw local attention away from the fact that Germany’s hardcore Bundesbankers are losing this battle. .

The pan-Europeanists are the ones who will support a coordinated response to financial issues, not coincidentally because this will be the only way to retain existing benefit levels once some sovereigns and the banks exposed to them go soft.

Stark’s replacement, Asmussen, is an SPD guy and even though he makes all of the same hawkish noises, he’s not as hard-line as Stark. It was also indicated to me that if Germany were to go for the Hans Olaf Henkel proposal of a DM bloc (to which I alluded in an earlier post), it would screw the French totally and they won’t stand for it.

Much of the German hard-line, then, is domestic posturing. Even Finance Minister Wolfgang Schauble (who always makes it a point to repeat the party line in public) quietly acknowledges that Germany will have to recant in the end. In a recent speech in Brussels, Schauble gave the chat in German and included the usual rants about the lazy Greeks, profligate Irish, etc., but right at the end of his speech, switched to Italian and quoted Galileo’s “Eppur si muove” (and yet it moves) which was said to have been uttered by the Italian scientist after being forced to recant in 1633 before the Inquisition, his belief that the Earth moves around the Sun. In effect, Schauble was effectively undercutting the public message of Germany and acknowledging the political reality that Germany would have no choice but to go along with what the ECB was doing or the euro itself would blow up.

The question arises as to what form this quasi-fiscal role on the part of the ECB will take going forward. Warren Mosler has come up with the idea of “revenue sharing” proposal on the part of the European Central Bank, and this strikes me as the most technically feasible proposal, as well as one that will be consistent with the recent strictures set out in Germany’s Constitutional Court decision brought two weeks ago.

The proposal is for the ECB to distribute trillions of euros annually to the national governments on a per capita basis. The per capita criteria means that it is neither a targeted bailout nor a reward for bad behavior. This distribution would immediately adjust national government debt ratios downward which eases credit fears without triggering additional national government spending. This serves to dramatically ease credit tensions and thereby foster normal functioning of the credit markets for the national government debt issues.

The trillions of euros distribution would not add to aggregate demand or inflation, as member nation spending and tax policy are in any case restricted by the Maastricht criteria. Furthermore, making this distribution an annual event greatly enhances enforcement of EU rules, as the penalty for non compliance can be the withholding of annual payments. This is vastly more effective than the current arrangement of fines and penalties for non compliance, which have proven themselves unenforceable as a practical matter.

Yes, it means that the ECB loses some of its “profitability” because it pays interest on reserves at the national central banks. In any case, as a short term measure, the ECB can easily manufacture ‘profits’ if it continues to buy the bonds of these distressed PIIGS and then doesn’t allow them to default, although clearly this program would stop once the revenue sharing begins.

There are no operational obstacles to the crediting of the accounts of the national governments by the ECB. What would likely be required is approval by the finance ministers. I see no reason why any would object, as this proposal serves to both reduce national debt levels of all member nations and at the same time tighten the control of the European Union over national government finances.

This looks legal to me, and still the obvious/best solution?

It also helps with their problem of enforcing the growth and stability pact which, whatever one thinks of the questionable economics underlying it, was the only way that the concept of the euro could have been sold politically in Germany. Arguably, the revenue sharing proposal would enhance the SGP and thereby help to entrench Germany’s “stability” culture in the euro zone.

I suspect that the Germans might ultimately find the revenue sharing proposal more palatable on a number of grounds. As I indicated, it doesn’t violate the “no bailout” rule (in fact, Germany is the biggest recipient of the funds if it’s done on a per capita basis). Even if you said the money credited to the national central banks could only be used to retire existing public debt (which I think is the only way you could sell it politically in Germany), you would deal effectively with the national solvency issue.

Think of it like a rights issue for a heavily indebted company: Company X has a debt to equity ratio of 200% and the markets won’t fund it because of perceived solvency concerns. Somehow, said Company X launches a 1 for 1 rights issue and gets the debt to equity down to 100%. Market concerns about bankruptcy are alleviated and the capital markets open up to the company again. Likewise if you do the revenue sharing. You don’t solve the problem of aggregate demand, but you reduce the solvency concerns and reopen the capital markets to the euro zone countries again.

And the other way you sell it to the German public is that (as Wolfgang Munchau of the FT has rightly argued), it makes the SGP more credible and enforceable because now you are providing a mechanism to ensure compliance. Rather than fining a miscreant company (try getting an EU official to go to Athens to collect a fine today for violating the SGP; he’d be lucky to get out alive), you withhold funds.

Credit the national central bank accounts to a sufficient degree to bring the ratios down to, say, 60% levels required by the SGP and then enforce it rigorously. Yes, there is no economic logic to the SGP, but it’s the only way you’d ever get the Germans to agree to this proposal and, in any case, a 3% deficit in a normalised economic environment does give you some growth. You could still cut off the “profligates” such as Greece if you thought they weren’t complying or enforcing desired “structural reforms”, but eliminate the contagion risk by continuing to credit other countries (and let’s be honest: other than the die-hard Hellenist romantics, nobody in the euro zone could care less what happens to Greece except insofar as it creates contagion threats for other members of the euro zone).

To repeat: the revenue sharing proposal would be non-inflationary. What’s inflationary with regard to monetary and fiscal policy is actual spending. These distributions would not alter the annual actual government spending and taxing as demanded by the austerity measures and ongoing growth and stability pact. They simply address the solvency issue, which has effectively cut the PIIGS off from market funding (because the markets believe they are insolvent).

Under the proposal, member nations remain bound to their current spending and taxing imperatives. Bonds get retired and replaced with reserves, which we know does not lead to inflation either because reserves aren’t lent out.

The problem with the European Financial Stability Fund (EFSF( solution is that the EFSF only has a limited life and the German Constitutional Court decision means that you cannot replace it with a permanent mechanism, such as the proposed ESM

And the EFSF is a dishonest fig leaf, since all of the money ultimately comes from the ECB anyway, as the sole creator of euros. The ECB is probably ill-suited to conduct quasi-fiscal operations over the longer term, but it’s the only game in town now. Everybody now recognizes that fact. At least the operations under the revenue sharing proposal are conducted with a clear set of consistent rules, rather than the discretionary, non-transparent manner in which the ECB is conducting its bond buying operations right now. It’s an effective interim mechanism (which won’t violate the German Constitutional Court), but provides the euro zone time to develop a fully fledged fiscal union with debt issuance power, which is ultimately what is required.

Yes, this idea seems radical, but two years ago, so too did the idea of buying sovereign debt in the secondary markets by the ECB. During the panic of May 2010, the ECB bought €16.5 billion the first week, €10 billion the second, and €8.5 billion, €6.50 billion, €4 billion, and €4 billion for each successive week, ending with €1 billion for its last real week of activity on 9 July 2010 for a total of €54.5 billion seven weeks of operation.

Since the week of 4 August, it purchased €22 billion the first week, followed by €14.3 billion, €6.6 billion, €13.3 billion, €13.9 billion and €9.8 billion last week for a total of nearly €80 billion in six weeks. This represents about €13.3 billion per week, i.e. over 71% higher than the weekly purchases begun in May 2010, as Erwan Mahe, the author of “Thaler’s Corner, has recently highlighted in his research.

Longer term, you clearly will need a fiscal union of sorts.

Let’s take my country, Canada, for a moment. Imagine that the two largest Canadian provinces, Ontario and Quebec, were independent countries. If this were the case, their debt burdens would consist of their existing debts plus their respective shares of the federal debt (about 23% for Quebec and about 40% for Ontario). Their capacity to repay those debts would be determined by their respective tax bases – i.e. each province’s nominal GDP.

How would those debt burdens look? Answer: probably not very good. In fact, as the Canadian brokerage house Brockhouse Cooper has pointed out,

Ontario and Quebec would each be more indebted than Spain (albeit slightly less than Portugal). This reflects the significant social spending responsibilities of the Canadian provinces, which are responsible for healthcare and education – the two largest government expenditure items in Canada. Naturally, these spending commitments are funded via fiscal deficits and debt issuance.

Quebec and Ontario are also somewhat similar to Spain and Portugal in that they do not control the currency in which they issue debt (the Canadian dollar, controlled by the Bank of Canada – a central bank that is, in turn, controlled by the federal government). So, given the poor fiscal fundamentals and inability to print money, surely bonds issued by Ontario and Quebec should trade in line with bonds issued by Spain and Portugal? Wrong – yields on 10-year Ontario and Quebec bonds are significantly lower than yields on Spanish or Portuguese bonds.”

So, why are Canadian provinces getting away with high debt loads and the inability to print money? Because of fiscal federalism and the pooling of risk within the Canadian monetary union. There is an implicit understanding that the federal government will rescue any Canadian province that runs into trouble in the bond market, which provides a strong indication that the monetary union is also complemented by a robust fiscal union.

If Europe did opt for this solution, the creditworthiness of each country would be aggregated into that of the broader Eurozone. This would be credit-positive for the entire region, since the overall debt burden of the Eurozone is not much higher than that of the United Kingdom or the United States. The joint-and-several guarantee, coupled with robust fiscal rules, would make Eurobonds more or less similar to the bonds issued by the most creditworthy entities within Europe.

But that’s a multi-year project. In the meantime, you need a credible plan to address the immediate market concerns of growing national insolvency perceptions in the euro zone (which are gradually spreading to the core). The ECB has to be the entity that leads this effort, much as it hates the idea and much as the Germans likely despise it. That’s the real story behind the Stark resignation and the public fury now featuring so prominently in the German press and parliament.

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  1. Dave of Maryland

    I did not understand this at all. The ECB will print money & hand it out to member countries so they can retire debt and maintain lavish banker salaries. Under threat of the entire system crashing down. Is that it? Sounds like common sense.

    If so, I’m all in favor. But why not share with the peons at the bottom of the heap? What’s in it for them? Print money. Give it away. How can that be inflationary when the peons have got no money?

    1. F. Beard

      If so, I’m all in favor. But why not share with the peons at the bottom of the heap? Dave of Maryland

      Exactly! The entire system, including the banks, could be bailed out from the bottom up.

      1. F. Beard

        If you give the money to the peons, then you get inflation. LucyLulu

        That would depend on how it was done. If further credit creation was forbidden then the bailout checks could be metered to just replace existing credit as it was paid off. Since the overall money supply (base money + credit) would not change then the risk of price inflation would not be serious.

        1. Dave of Maryland

          Bankers’ salaries have been inflating for years. Doesn’t their inflation count as inflation?

      2. joebhed

        “”If you give the money to the peons, then you get inflation.””
        And, not at all.

        In defining inflation for his book on The Theory of Money and Credit, noted Austrian monetary economist Ludvig von Mises uses this theoretical construct.(p.126)

        “In theoretica­l investigat­ion, there is only one meaning that can rationally be attached to the expression INFLATION(­ital.) : an increase in the quantity of money (in the broader sense of the term so as to include fiduciary media as well), that is not offset by a correspond­ing increase in the need for money, so that a fall in the objective exchange value of money must occur.”

        So, the only way to have money creation cause inflation – that fall in the objective value of the money – is to create the money in excess of the potential growth of the national economy.

        Surely, you know that present economic conditions render that impossible, unless you gave those peons some too-many $Trillions.

    2. Nathanael

      Agreed, Dave.

      This would actually work. Why not hand it to the peons?….
      ….well, the member countries can do that (after they use it to pay off any outstanding debts), so it’s not out of the question!

  2. Dings


    two things. First, I am not an economist, but usually able to follow the line of argument in this blog. But this time I am confused. Who is going to distribute what to what effect? Central bank profits of a few billion Euros per year to solve the solvency crisis? Second: If the author does not want his brilliant idea of whatever it is to be recognized as what it is by the German public, he should probably not post it online.

    1. theta

      Regarding your second question, no need to worry. The German public doesn’t read economics/financial analysis. Even if they did, they would still not understand it, otherwise they wouldn’t be so fixated still in their irrational fear of inflation when actual deflation is all over us.

      1. Manipulism

        You are wrong.
        They do read this stuff.
        Why do you think they do not read financials?
        Oh yeah, only mericans know what to do.

        1. Ray

          Having lived and worked in both countries I have noted a very distinct difference in their knowledge of financial news, events and understanding. The US is far more sophisticated and knowledgeable. To some extent this knowledge represents the edge the USA fell over. The simplicity of the German public results in safe, predictable actions which reflect their growing prosperity.

    2. Nathanael

      Under this proposal, the ECB is simply going to print money and hand it to all the member countries. This accomplishes the necessary goal — the member countries’ “debts” can be paid off, and they don’t have to raise taxes or cut spending to do so.

      Governments which control their own currency, like Switzerland, could just print money to solve the problem (as Switzerland did).

  3. craazyman

    kind of weird to think all this can be cured by a tilt in the direction of Pilot Wave imagination.

    Anyone can see the ECB’s “money” is just bits and bytes on a spreadsheet, not even real except in the imagination, and yet it’s real and it would no doubt have a real impact on the methods of social cooperation.

    so what is it? hard to say, but it’s sure not what they say it is. Not much is really, unless you really nail it. ha ha

  4. quark

    Who pays…the taxpayer pays and who bears the weight will be determined by the politicians. You cannot simply destroy debt without affecting someones anticipated income stream. So a hole appears in a pensioners distribution or anyone elses expected income stream. This type of analysis makes broad assumptions on how individuals r willing to continue waiver of moral hazard and to big to fail mentality as they see wealthy private citizens and politicians avoid sacrifice while the majority forced to absorb austerity measures.

    1. F. Beard

      You cannot simply destroy debt without affecting someones anticipated income stream. quark

      But the entire population, including savers, could be equally bailed out with equal value money if the bailout was combined with a ban on further credit creation and if the bailout checks were metered to just replace existing credit as it was paid off.

      All we have to do is give up fractional (fictional) reserve lending. Too much to ask? Monkey won’t let go of the cookie that traps his hand in the cookie jar?

      1. Dave of Maryland

        Give up frational, my foot!

        Just make the fraction smaller and apply it to everything. Ten to the negative 15. Small enough?

        The ECB cannot simply create money without the bankers taking it as a windfall and sucking in as much as humanly possible. That’s their whole reason for existing. So once it’s admitted that we can simply create money out of thin air, how can you stop it, and why would you want to?

        Just because the Germans had a bad time 90 years ago makes them fussy? They were in a different situation. They had just come out of a war. We fail to fix this, we’re headed for war.

  5. don

    Mr. Auerback,

    You are tireless in your search for technocratic solutions.

    Distilling down this convoluted complexity, the simple solution: the Europe Bank just buys all the paper. Of course, nothing in reality really happens, except the ECB purchases the debt, thereby rendering it harmless. So in reality this is one big realistic change. Someone in the ECB offices labors over a computer keyboard, thus producing numbers on a computer screen. That’s all there is to it!

    Perhaps even that is not necessary, to quote an Italian professor (in today’s Telegraph): “They would not have to buy the debt. The promise would be enough,” he said. Today, I think, its called managing expectations.

    Its a wonderful world, as phantasy and reality become more inverted by the day, making this complex world simple.

    1. Dave of Maryland

      That’s like the exchange Bogie has in Maltese Falcon. Not enough that you have a gun. You have to use it. Promises and threats won’t work. And if I know you can’t, then the gun is no good.

      So once the ECB renders existing debt harmless, that’s a green light to create acres more of it. You might as well burn the lifeboats, open the seacocks and let the ship sink all the faster.

    2. Nathanael

      The money-printing would have the effect of improving the position of debtors and reducing the position of creditors — forcing the creditors to invest in *actual businesses* in order to make money with their money.

      It’s an unmitigated good under the current situation, with high unemployment.

  6. Steve

    “The trillions of euros distribution would not add to aggregate demand or inflation, as member nation spending and tax policy are in any case restricted by the Maastricht criteria.”

    I have some questions:

    1. Can the reserve money be used to bail out banks, like French banks, besides sovereign states? If not, can sovereign states, like France issues unlimited guarantee to protect French banks? (just a promise, does not mean it will necessarily add to spending)

    2. Assume ECB will have the ultimate authority to punish which country does not comply the Maastricht criteria, would that raise further questions concerning ECB’s undemocratic nature?

    3. Would it dramatically change the price of Euro, even though there may be no inflation under no new spending, when there is an increase supply of Euro on the book?

    1. Jim Haygood

      I’ll answer No. 3!

      If this crackpot plan were to be implemented, the euro would sink like a stone.

      Want gold to sell for 10,000 euros? Go ahead, have the ECB try to print Europe’s way out of debt.

      This notion is a deluded fairy tale.

  7. Albert W

    Marshall, did you get the feeling officials understand the depth and severity of the crisis? They have been behind the curve for a long time now, are they finally starting to catch on?

    Do they understand how limited their options are?

  8. Jim Haygood

    ‘To repeat: the revenue sharing proposal would be non-inflationary. What’s inflationary with regard to monetary and fiscal policy is actual spending. These distributions would not alter the annual actual government spending and taxing as demanded by the austerity measures and ongoing growth and stability pact.’

    This is profoundly wrong. To reduce debt ratios, debt must be replied by purchasing it back from the public, or by paying off the principal at maturity. Either way, newly printed spendable money is distributed to the public, in place of the sovereign bonds they held before.

    Some of this surge of new deposits may be reinvested, but some surely will be spent, with inflationary effect.

    The analysis is wrong because it doesn’t get the double-entry bookkeeping right.

    Never mind, though. Europeans may be a little strange, but they definitely are not loony-tunes enough to turn the ECB into a destructive engine of wholesale currency debasement.

    1. Nathanael

      It won’t be inflationary, even though it would be inflationary in normal circumstances. Specifically, it won’t be inflationary until near-full employment is reached.

      You have failed to understand the liquidity trap. Go back to “liquidity trap 101” and read your Krugman.

  9. Glen

    Any talk about a Swedish solution? Winding down the zombie banks? Wiping out the bad debt?

    Till then it’s all just kicking the can down the road hoping somebody else (China or the US) blows up first.

    1. Steve

      They have thought about that last year. Belgium suggested to create an “European Debt Agency” like a bad bank. And the idea was transformed to be “Eurobond” as Eurobond is much more flexible.

      Another way is EFSF, it could be like European Debt Agency if it is allowed to use the money for banks bailout. But so far there are only 5 countries pass the necessary laws in their own countries to create it, out of 17. Slovakia said they would not vote for it until December.

    2. SidFinster

      That would require a much bigger sack and more will to stand up to the banks than any Europolitician has.

  10. zebulon

    there’s a reason the germans are not allowed to have their own military. if they fail to back the ecb and resort to riots, and the german police cannot contain the riots, the american military will back up the german police to silence the germans.

    it happened sort of like this 67 years ago except back then the germans had a fighting chance. now they have almost no military.
    oh yea , not fair huh? well, once america is finished reminding the germans of what soviet rule was like , and what it IS like right now for russias neighbors. they (the mainstream in germany) will think twice about allowing the riots and public opinion to get out of their grasp.

    the alternative, which is reasonable, is a full german revolution and forced liquidation of german central banks. that would be a sweet ride.

    1. Nathanael

      Yeah, but so what? This seignorage is being used for three purposes:
      (1) eliminate “government debt”, which is causing some of the problems. “Government debt” is nominal, so real value of seignorage is irrelevant, only nominal value matters.
      (2) Drop the value of the currency to promote exports. In this case, it works whether or not there’s a real value to it — better, indeed, if there isn’t!
      (3) Inflate the currency to get the rich to invest in actual things. Again, this works better if there isn’t a real value in the seignorage.

      Given that the euro is on the verge of being abandoned, the risk of hyperinflationary currency collapse and therefore abandonment is irrelevant — as abandonment of the currency is the status quo option!

  11. tiebie66

    Isn’t the whole reason d’etre of economics the need to reconcile unlimited demands for resources with the limited availability of resources? Should this problem not exercise our minds far more than figuring out how to allow Ontario and Quebec (figuratively speaking) to carry more debt than they can service individually?

    “The proposal is for the ECB to distribute trillions of euros annually to the national governments on a per capita basis”. How would this address the problem of resource scarcity? It may, but this is not mentioned in the article; instead, it seems to lead elsewhere.

    “Even if you said the money credited to the national central banks could only be used to retire existing public debt …” Is this the ultimate aim of the proposal? Some countries must have a greater combined public and private debt on a per capita basis than others, so the distribution of trillions of euros annually must benefit some more than others despite the appearance of even handedness. Who stands to benefit most from this proposal? Somebody’s debt (the banks’?), really must be hurting badly for this idea to come floating down the ether. No?

  12. Jf

    1. Revenue sharing implies revenue. Sending money sans revenue is just money printing however you name it.
    2. This gives every central bank in the world the green light to monetize. Why wouldnt you? Its a race to the bottom in terms of currencies and hard asset valuations at this point.
    3. Would the skeptical countries like slovakia sign off on this? Would the german people, forget their politicians, take this without their own set of protests?
    4. Doesnt this idea float moral hazard to new heights?

  13. Hugh

    What would the Germans do with their share? Convert it to euro coins and open up a legoland-like theme park made up of them? Greece could take its share and send it to the German banks. Italy and Spain could send theirs to French banks. Ireland could send some to German banks and convert the rest to pounds to send to UK banks.

    The banks, you know the institutions that made all these bad lending decisions, do fine out of this. Everyone else not so much.

    How does this change the bad practices and moral hazard of the northern banks?

    How does it change Germany’s mercantilist trade policies?

    How does this remove Europe’s kleptocrats from power?

    To call this proposal loopy seems far too tame and understated a description. Why does this seem another perfect example of why MMT, despite having some real strengths, gets and deserves such a bad name?

    1. attempter

      This, like Auerback’s “jobs program” which would scrupulously avoid paying anything above minimum wage or in any other way interfere with private sector prerogatives, is an example of how MMT, in theory a useful criticism, is used by most of its current exponents merely to wrap the same old fraudulent pseudo-reforms in a seemingly new, attractive package. In their hands it’s another astroturf.

      Smae here – it comes through loud and clear that the goal is to preserve debt as such, continue zombie “growth” and globalization, do whatever possible to prop up untenable “federal” structures like the Eurozone. Same old crap – so who needs MMT from them? In their hands it’s worse than worthless. We can get the same anodyne stuff from the NYT op-ed page without the fraud that it’s from a “new” perspective.

    2. Linus Huber

      Of course, the idea is to find a way to transfer the losses of banks to the population and they will find a way. They will use some extraordinary name for it and will explain that everyone benefits from it. It is corruption at its worst.

      Once the markets really dive and desparation spreads, the people will realize who is to blame. Until now the banks cleverly employed the politician to do their bidding and all eyes are again on the politicians instead of on the banks who created this mess.

      As long as the bankers can continue their scheme of looting the system, the game will go on.

  14. TC

    This article makes the mistake of assuming the EMU was intended to facilitate economic growth and prosperity, rather than serve as a battering ram for fostering chaos, division, cultural devolution and accelerating rates of death and destruction on the European continent and across the globe. If you instead begin your analysis with the correct assumption, then those blatantly fascist policies which the EMU has been inclined toward in addressing the aftermath of 2008’s collapse of the trans-Atlantic Ponzi scheme make perfect sense. Thus, this article’s “solution” all to likely is a non-starter, unless, of course, it could serve neo-liberal, imperialist objectives the likes of which appear to be aiming for a more feudal arrangement imposed on a dramatically depopulated world.

    1. Nathanael

      Being a pessimist, I am tempted to agree with you entirely.

      It does seem unlikely that the ECB, controlled full tilt by “the money interests”, would ever abandon its hard-money policies in favor of money-printing.

  15. SH

    I say cheat on the cartel. France comes out with an unusually large bond offering out of the blue, takes the money and the rate hit and then reacaptilizes their banks first, before any agreements, and then gets on board with this plan. That’s what I would do.

  16. Diego Méndez

    On Europe: the problem is lack of democracy, lack of accountability and conflicting views on the problem.

    The ECB may buy all the bonds it wants, but how would you solve the real problem, i.e. lack of competitiveness in Southern Europe and lack of internal demand in Germany?

    Southern Europe has no incentive to reform itself, and to the extent it has an incentive (the ECB not buying bonds), there is a danger to the eurozone. And Germany has no incentive whatsoever to balance trade inside the eurozone.

    On Canada: you say “There is an implicit understanding that the federal government will rescue any Canadian province that runs into trouble”. Well, that was the implicit understanding in the eurozone, too. Anyone outside Germany thought Germany was irreversibly commited to the euro; they were wrong, and that was the beginning of this all. Why wouldn’t it happen to Canadian provinces? We haven’t seen the end of this story.

  17. reslez

    This is like giving Frankenstein plastic surgery. Maybe it allows the EMU to stagger along a while longer — but what’s the point? The result is agony for the masses and validation of bankster looting. The Maastricht criteria have zero empirical basis anyway. 3% GDP is awfully low for some countries and may be awfully high for others. Instead of constructing some quasi-illegal way to save Germany in spite of herself let’s put the monster to rest.

    “Nobody cares about Greece”? Replace one word with “the working classes” and you have it right.

  18. Richard Kline

    So Marshall, you know that we have a common view on the developments of ECB policy in the vein you express here. (And common verbiage. : ) S’alright.) What I find of renewed interest is that you are getting confirmation of some of this from ECB-watchers now.

    It is politically unteneble [as well as in violation of traty] for Country A in the EMU to lend/give money to Country B. So it has been necessary for ‘the center’ to take over this function. That is a certainty, and the ECB is not only the best candidate, as the one who can invent as many euros as necessary, but the _only_ candidate. The present EFSF gizmo was a clumsy and unworkable scheme that the markets were going to tear apart in short order. If ‘weighted disbursement,’ i.e. revenue sharing goes down politically, well and good.

    Something I would stress here is that calling the immediate pinch a sovereign debt ‘crisis’ is a bit of a misnomer. Most of the EU governements are _not_ severely indebted relative to their GDP, and the ones that are are comparatively small: Greece, Ireland, Portugal, count in Iceland if you want. Frankly, it is well within the capacity of an EMU-wide funding authority to counter-balance their total debt. Yes, _private_ debt in Spain and France is very large—but that is an issue for the bank regulators and the bond holders, not for the sovereign capital marktes really. The middling problems are the worrisome ones: Italy and the UK (which however is not in the EMU). My point is that the sovereign debt problem can readily be resolved by a funding mechanism of the center if action occurs now. And my view is as yours, that the overall debt-rating of the EU as a whole would come out as well or better than the present situation, with considerable economic upside.

    MA: “So, why are Canadian provinces getting away with high debt loads and the inability to print money? Because of fiscal federalism and the pooling of risk within the Canadian monetary union . . . If Europe did opt for this solution, the creditworthiness of each country would be aggregated into that of the broader Eurozone. This would be credit-positive for the entire region, since the overall debt burden of the Eurozone is not much higher than that of the United Kingdom or the United States. The joint-and-several guarantee, coupled with robust fiscal rules, would make Eurobonds more or less similar to the bonds issued by the most creditworthy entities within Europe.”

    This was always the _point_ of an economic and currency union: the whole is more stable than the parts because stress is redistributed, and problems regionally can be damped down by the greater resource (and legal authority) of the center. The critical thing is to keep the center from prejudicially rationing or offering credit, which is why a transparent political mechanism has to come into play even if the actual administration of state finance is a technical matter for ‘officials in suits and spectacles.’ What has held things up are parochial [nationalist] political entities who for reasons of advantage and also justifiable fears of external manipulation have stuck in the mud. Those who want stability are coming to outnumber those who want partiality, that’s my view as it appears to be yours.

  19. joe

    I only read about a third of the article and it’s so very obviously from the US perspective that I take it to be just another manifestation of a syndrome, which, when you take them all together, indicates that the US is on the way down, with respect to their position as the dominant global power.

    The current situation is, at least in terms of the emotional atmosphere, somewhat reminiscent of the UK after the second world war– when people in the UK realised that they had lost control of the Empire. It took some time, for the British business class to adjust to their newly lowered position and in the years that followed, their increasingly frantic attempts to save their own positions of privilege were responsible for liquidating the remnants of British industry– as simultaneously, we saw the financial industry in the UK rise to its current dominant position.

    The German’s are so obviously right that the current actions of the financial industry, of course those parts which are privately owned, but more importantly, the increasingly significant public owned parts, are being controlled by very un-public (undemocratic) processes. This would not be important, if decisions about how to spend public dollars were not so obviously political. But in this case, the resolution of the current financial disaster is going to effect the future well-being of the citizens, whose tax dollars are being used to recapitalise the lending institutions (via the national public debt) which are in danger of causing the financial system to fail.

    This is about making the finance industry subject to the democratic rule of law. But many, particularly in the US are, quite frankly, so deluded that they are unable to admit that their own actions are responsible for the current crisis. Delusion is easier than accountability, but in the long run, the financial industry, as it exists on Wall Street is done for. It may take twenty years and a lot can happen in the mean time, but the current situation is not stable and we will have to return to a finance industry based on the real economy. (And the real economy means, among other things, humans, who make mistakes, and an industry regulated and robust enough to deal with the real economy.)

  20. IF

    Could you please give a reference for “In a recent speech in Brussels, Schauble gave the chat in German and included the usual rants about the lazy Greeks, profligate Irish, etc., but right at the end of his speech, switched to Italian and quoted Galileo’s “Eppur si muove” (and yet it moves)”? I’ve searched and could not come up with articles describing this. Schaeuble did write a book that is titled “Und sie bewegt sich doch”

    So, if this was not a drive by shooting by you it would still not be clear without context what meaning he assigns to the phrase.

  21. Finster

    Yes, this IS inflationary:

    Even if the created money is restricted to retiring sovereign debt, bond holders who now face wipe out and write down (justifiably so) receive the money in payment of their debt and can spend it on other assets. Malinvestment gets validated and liquidated at public cost at near par value.

    Money comes into existance without actual wealth backing it. This IS inflationary. You cannot become more wealthy by increasing the stock of money. Money is not wealth. Any creation of money by the ECB proportionally disposses any other holder of ECB IOUs.

    Weimar Germany printed money to pay the striking Rhur workers. These did not provide comparative production or wealth creation. End result: Hyperinflation.

    Crediting national accounts is state financing, which is forbidden by the ECB charter.

    1. joebhed

      I agree it’s illegal, but it would not be inflationary up to the point of the fullest employment that the euro-economy can realistically support – all other things being equal.

      No monetary action is inflationary in and of itself.
      As long as there is a NEED to be financed by that monetary action, it cannot be inflationary.
      Rather it will support economic growth by meeting that need.
      Certainly there is vast unmet economic need now, and the crashing of the banks will only add to that unfunded economic need.

      Many, many Trillions have come into existence without any “backing” and has not caused inflation.
      For the simple reason that the money grew the economy.

    2. Nathanael

      Perhaps this article of the ECB charter will become a dead letter.

      Money-printing simply isn’t inflationary when there’s massive amounts of potential economic activity sitting idle — high unemployment and lots of unused tools for those workers to use, and people who want the products they would create.

      This is the situation we’re in right now.

  22. Blue Eyes

    Monetising the debt won’t be inflationary?! This is economics 1.01, buddy. Hope your employesr/customers aren’t reading this.

    Plus it would be unlawful under the current treaty.

    1. Nathanael

      Monetizing debt is not inflationary unless you’re at full employment (or very nearly).

      Until then, it just goes into, well, employment.

  23. John

    VERY Simply asked:-

    why doesn’t ECB print money and give it to the Greeks and kick them out from the Euro.So this infact means the greeks can pay the german and french banks.

    Why is it good for Germany- they got their money back

    Why is it good for Greece – they have saved themselves from default

    Why is it not bad for inflation –
    Had Greece not defaulted, and whoever lended to them( say only German and French banks) would have got back what they were rightfully deserving. This is not extra money into the system and thus there is no inflation from this. So the EU has to take care of controlling inflation by increasing interest rates

    Why is it good for the economy-
    the defaulters have been kicked out and will be on their own hence forth

    Why is this not a solution? whats the flaw?

    1. RajaRamMohanRoy

      Because the ruling party doesnt want to lose elections.
      Because Germany heads the ECB.
      Because Germany doesn’t want to bear the brunt by issuing Euros.
      Because Germany doesn’t want inflation.
      Because Germany doesn’t want profligate spending by the useless PIIGS.

    2. Pritish

      The whole world knows that incase of printing notes, inflation will kill the economy, just as it happened in Zimbabwe, Yugoslavia, Britain too in 1975.Incase of default, it would be the case of Argentina and Russia.

      So the only way is not to print , but donate/pardon like EFSF., but at the cost of super powers like Germany. Well, there is no other way out!

  24. Jose

    It’s interesting to observe the differences between the Mosler/Auerback approach and that of Bill Mitchell concerning the EMU crisis.

    The former seem to want to save the euro at all costs while the latter prescribes a default followed by exit from the euro for Greece, Italy etc.

    So MMTers while agreeing on the diagnosis have very different prescriptions in matters of practical policy.

    I’m afraid this will leave the public a bit confused and may undermine the credibility of a young yet very valid theoretical perspective.

    My advice would be for them to get together and agree on policy recommendations before publishing articles such as this one.

    1. chris

      A very valid theoretical perspective?

      Entrench and perpetuate failed bureaucracy by covering over debt with paper not worth fecal coliform!

      1. Jose

        That’s the practical prescription – maybe invalid.

        The theoretical perspective however – MMT, sectoral balances approach – remains the very best we have.

        1. chris


          It is still just a theory.

          If the CERN Hadron Super Collider can repeat its experiment of pushing particles faster than the speed of light (or other scientists can repeat the experiment) Einstein is repudiated.

          MMT was not fostered nor envisioned by minds as great as Eintein.

          It is a theory.

          1. pater tenebrarum

            Not only is it just a ‘theory’, it is really nothing but warmed over chartalism. It’s the new refuge of statism-supporting monetary cranks. Most famous chartalist who became a central bank president: Rudolf von Havenstein. Enough said.

    2. Nathanael

      Either prescription will “work” in terms of reviving the economies. It is an essentially political question which to do.

  25. ex VRWC

    If we could cut the BS, we can reduce this plan to the following:

    -We hand over control to some unelected eurocrats in the ECB

    -They pretend the existing debt doesn’t exist

    -They ration out new debt like governments ration out food and fuel in a war

    -They pretend the whole thing is a profitable enterprise and enable government’s to sell their populace on it by calling it ‘revenue sharing’

    The adoption of this crackpot scheme is presented as ‘the only choice’ that Germans will have to accept, or ‘the euro blows up’. I am sure the euro is getting to the point that it is no longer held dear by the populaces of it’s nations. The only thing that remains is – will these populaces be able to reign in their bureaucrats or will the elites have their way, voters be damned?

    1. chris

      Good synopsis.

      Trust bureaucrats and the theoretical crowd blowing smoke up their skirts and screw everyone but the bureaucrats and who they really serve (the plutocrats).

  26. joebhed

    I think it’s because we are the debt-end of the cycle, with unpayable debt-service payments that might run to the Trillions of Euros, that Marshall/Warren’s proposal cannot get past the straight-face test, and the consideration it deserves.
    Everybody seems to know that this chaotic downfall of the Euro-system is inevitable, due to its unworkable beginnings.
    But to me, this looks like a studied effort to achieve the same end as did Edison’s description on public finance related to the Muscle Shoals project:
    “The nation that can issue the dollar bond can issue the dollar bill also”.
    Edison’s point was that by issuing the currency and paying it directly for the services of building the project, the taxpayers would pay for everything just once.
    But if it were financed by a bond, a group of bankers “who lifted not a shovel, nor provided a pound of concrete” would collect the cost of the project another time and a half. And they get to create their money out of nothing.

    If there were a moneary solution for the EU, it would be direct issuance of “currency” rather than adding to the already unaffordable debt.
    The problem is in those unworkable beginnings: the EU is not a “nation” and it hasn’t direct monetary sovereignty.

    Once that sovereignty is restored to Greece, their only real salvation is to follow Edison’s advice: despite Bretton Woods and the WTO, the nation can issue it’s money without issuing debt.
    Then they are as home free as anyone can be.

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