Italy Holds A Mirror to a Broken Europe

By Orsola Costantini, Senior Economist, the Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website

“Populist” and right wing parties are gaining ground all over Europe, with a message of euro-skepticism and pure distrust of the so-called European establishment. The Italiangeneral electionheld on March 4, 2018 was no exception: The strongly pro-Europe Democratic Party of the previous Prime Minister Matteo Renzi registered a historic low, obtaining 18.9% of the votes (a decline of 6.5 percentage points compared to the earlier elections). Renzi almost wears this loss as a medal, proof of his loyalty to the EU, rather than as a sign of his failure at solving or alleviating the problems of the country. The populist Five Star Movement (M5S) became the largest single party in Italy (with 32.2% of the vote) and the right wing and xenophobic party Lega Nord obtained substantial electoral gains (17.7% of the vote). But the result, a hung parliament, did not indicate one electoral coalition strong enough to govern by itself, triggering a longer than usual process to arrange for a government coalition. Finally, after 90 days of negotiations, the Five Star Movement and the Lega Nord reached an uneasy alliance for a coalition government. These two parties have in common a strong rhetoric against the traditional political establishment, even though Lega was in the government repeatedly in the past and ran in this year’s elections in a coalition with Forza Italia, the party of Silvio Berlusconi. Both M5S and Lega Nord share a belief that Italian economic growth cannot be revived within the policy conditionalities imposed by the Eurozone.

As soon as M5S and Lega Nord announced that Paolo Savona, an 82-year old “Eurosceptic”, would be their appointment to the Treasury, all hell broke loose in Rome, Brussels, Berlin and Paris. Italy’s President Sergio Mattarella vetoed the proposal, arguing that he had to“protect the savings of the Italian people.” EU budget commissioner Gunther Oettinger commentedthat, “Markets will teach Italy to vote for the right thing.”

The threat might just be real: the artificial creation of economic and financial emergencies has often shaped the distribution of power in the Eurozone, now heavily leaning toward creditors and surplus countries. But the Eurozone’s reliance on a large apparatus of quasi-technical regulations points to the absence of a yet fully defined and established hegemony.

The latest crisis can be described basically as a struggle to redefine the locus of power between nation-states, supranational institutions, and the market in the post-Bretton Woods age.

This struggle is not unique to the EU, but in a global context of reduction of public social expenditures and regulation, the EU institutions intensified this trend by providing a convenient “external constraints” excuse to national politicians who carried out fiscal austerity. But a more accurate look at the evolution of the Union clarifies that austerity was in fact a national preference and a political weapon for vested interests within and above nations. For instance, the budget rules have often been a locus of political negotiation, where different preferences could be validated by the formulation of appropriate estimates. Governments of different colors participated willingly in the game and now the “populist” Italian government might do this as well, thus covering up the real effects and amplitude of their policies.

The most important point to grasp, in fact, is that whatever party is in power, no real democratic debate can happen until technically dressed-up, closed-door negotiations about member countries’ policies and institutions stop. Way too easily, forces of all colors can dress up their preferences with the appropriate rhetoric and feed them to the public, avoiding a debate.

One condition to impede that is that wrong theories—such as those that claim that unemployment rates above 15% are “natural,” that public deficit spending is in itself inflationary and has negative effects on growth, that there is such think as a trickle-down effect, or that our resources are scarce and so should be our solidarity—must disappear once and for all. This amounts to fighting the imposition of an official “party-line” in economic theory and practice, which turns economics into a useless servant providing self-validation to elites and contributing to barring the debate and openness that are vital to a functional and fair society.

Between Centralization and National Autonomy

How and why did we get here? The answer lies in the peculiar evolution of the European architecture from the 1992 Maastricht Treaty onwards.

In fact, in spite of its depiction as a framework impossible to reform, the European system of economic governance has evolved substantially over the last two decades. As of 2018, after an intense period of legislative innovation, it has become a complex system of rules, deadlines and commitments supervised by the European Commission. The key element of this architecture is a large body of technical and apparently “objective” policy rules, which have become the locus of negotiation and the “revealed” expression of a supranational compromise based on underlying national preferences.

The evolution is the result of the interaction of two forces moving, as Kindleberger argued,[1]between centralization and pluralism: first, the desire of the Maastricht architects to reduce the autonomous role of national democratic governments (and the Keynesian welfare state); and second, the power of traditional national and bureaucratic forces, unsympathetic to anything resembling true political union. The most obvious expression of the first movement was the foundation of the European Central Bank (ECB) as an independent institution, prevented from directly financing the member states.[2]This obliterated the space for the state to enact appropriate public policies, independent of the whims of the financial markets. The second movement is recognizable in the original inter-governmental character of the EU’s political institutions, such as the European Council.

Sometimes the goals of these two forces converged; at other times they have opposed one another. In the process, and within a general view about the desirability of weakening the Keynesian state, concernsabout the overall stabilityof the system were overlooked. Eventually, if the arrangement would prove insufficient, a crisis would force the member countries into further action – as EU founding father Jean Monnet appears to have predicted. Yet underneath the surface, there’s been a fundamental contradiction in this institutional architecture: between a desire to be safer together, in the globalized economy, on the one hand; and a desire to be complacent (and hence, it is thought, credible) to the whims of international markets, on the other.

But whatever the initial intentions, the combination of financial deregulation, fiscal austerity, and one-size-fits-all monetary policy eventually encouraged divergent economic dynamics among Eurozone countries (see herefor a debate). The recent crisis further intensified this asymmetry, which has been described as a core-periphery relation between Northern and Southern Eurozone members, giving stronger negotiating power to the Northern creditors over the Southern debtors. This is reflected in the evolution of the common institutions and in the way those are interpreted and molded.

The Origins and Evolution of the Budgetary Supervision Framework

On the eve of the creation of the European Union, the contextual enactment of the new monetary and fiscal frameworks revealed itself to be crucial. In fact, the rupture of the linkages between governments and the national central bank was a strong incentive to maintain austere budget policies but was no real guarantee of the prospective sustainability of public debts and convergence of public policies. In the attempt to solve the problem, the member countries agreed on a Stability and Growth Pact (SGP), introduced in 1997. As is well-known, the accord defined ceilings for both public budget imbalances and individual country total public indebtedness (3% and 60% of GDP respectively).

The unspoken idea was that deregulated private capital markets together with fiscal rules would by themselves induce economic convergence among countries. The ECB and the TARGET2 payment system were designed to allow perfect capital mobility and symmetric access to the financial markets, under the assumption that price movements would grant perfect asset substitutability. The Stability and Growth Pact would grant efficacy to the inflation targeting strategies of the central bank. From the beginning of the process, many economists warned of the deflationary bias of the project and railed against the complete absence of concern for employment levels.[3] A long series of efforts by post-Keynesian economists and a few policymakers to provide the Union with some sort of insurance scheme was doomed by nationalistic fears coupled with anxieties about rising inflation and public debt. What really mattered to national elites at the time was to obtain a guarantee of price stability that could help the EU become an international financial center (mainly a French aspiration) and could help the attainment of current account surpluses. In this regard, Germany benefited the most from a relatively undervalued (external) real exchange rate which resulted from the monetary unification.

The first crack in this rule-based macroeconomic governance system occurred in in 2005, when both Germany and France violated the SGP budget constraints. As hard it is to believe today, at that time Germany and France pushed for a relaxation if not abrogation of the Pact.

The ensuing first reform of the SGP was a key moment for the institutional and economic evolution of the Economic and Monetary Union (EMU) and it turned out to be a partial defeat for the German Chancellor Gerhard Schröder. Crucially, in fact, the reform failed at eliminating the budget rule altogether, and instead what happened was that the nominal public deficit target was redefined as a structural budget estimate. The solution became that of adding escape hatches and flexibility to the Pact, all while retaining the disciplinary effect of an external rule, as famously expressedby Hans Eichel, Germany’s Minister of Finance at the time.

The structural budget estimate, in fact, puts actual public budget deficits in relation to the potential growth of the economy, a controversial and theory-laden concept, which for the Commission involves consideration of the effects of various political and institutional concerns, rather than those purely economic. Its ability to throw a cloak of spurious statistical precision over any mix of cross-pressures and interests make it a near perfect policy instrument for managing conflicts and negotiations behind closed doors. It helps neutralize the role of national electorates by presenting crucial policy decisions as the result of objective and scientific reasoning.

The story and details of this first reform show the degree to which austerity measures of the following years reflected shared elite convictions, rather than representing simply an imposition of one country on the others (for example: Germany) or the dictates of technocrats. Portugal, with Prime Minister Barroso, and Spain, with Prime Minister Aznar, as well as Belgium and the Netherlands, were in a position to refuse the austerity reforms suggested by the Commission – simply by taking advantage of the opportunity opened by Germany and other big countries – but chose not to do so.

At that time, the idea of the Union as an assembly of sovereign nations appeared to gain strength, against the central power of the Commission. But the economic policy decisions of peripheral countries that opened up to massive capital inflows, cut public spending, and reformed labor markets, together with the new reliance on estimated guidelines, amounted to a first step that transformed  European economic governance into a system that has a much deeper control on national economic policies than ever before.

Economic Alarmism and the Final Reforms

By the time the banking crisis and other economic pressures forced the question of further reform on the agenda, divergencesbetween the economies of the core and periphery within the Eurozone had enormously intensified, changing the political equilibrium and, in fact, nullifying the previous inter-governmental aspirations.

In the absence of a mechanism for risk sharing, a sudden reversal of massive movements of financial flows from Germany and France to Spain, Ireland and other countries resulted, inevitably, into a substantial increase in the relative power of the Northern-European creditor countries. Interest rates on the bonds of various Eurozone peripheral countries rocketed upward when they were forced to bail out private banks and financial institutions and in the immediate aftermath of the crisis, the creditor countries applied  relatively relaxed standards of budget surveillance and remediation to their own cases even as they imposed much harsher conditions on their solidarity towards the others.

One event was crucial, and it recalls what, in the 1970s, Federico Caffè[4]called economic alarmism: the practice of misrepresenting the economic situation, exaggerating the negative aspects and creating the impression of unprecedented conditions of emergency, as a way to present a certain policy mix, often disruptive of the previous socio-economic equilibrium, as the only possible solution.

In their famous walk at Deauville on 18 October 2010, the German chancellor Angela Merkel and the French president Nicolas Sarkozy brought the principle of economic alarmism to the next level. Bypassing the usual EU deliberation procedures, they agreed to affirm the no bail-out principle, now known as the principle of Private Sector Involvement (PIS), that is the partial bail-in of EMU governments’ bond holders. Immediately, the yields of Irish and Portuguese bonds sky-rocketed, followed by the Spanish and Italian ones.

Thus, “Merkozy” actually generated an emergency that prepared the terrain for  further reform, this time to enhance the power of the Commission against the countries found faulty of compliance with the fiscal rules. The 2011 reform, the so-called Six Pack Agreement, created a much tighter framework than the 2005 Pact. This in fact is the case, but only for weaker Eurozone countries, which are now subject to specific (additional) duties and controls.

The reform intensified the explicit control of the supranational European institutions over a comprehensive range of macroeconomic and institutional practices of member countries, while maintaining flexible and asymmetric implementation of the rules. In fact, the exceptions included in the 2005 Pact still hold with even some additions, including the “case of unusual events outside the control of the country with a major impact on the financial position of the general government” and the “case of severe economic downturn in the euro area or the union as a whole.”

In this new context, the Commission has dramatically determined the policy agenda in most EMU countries, pushing from Brussels for labor market and pension reforms as well as systematic changes in national tax structures designed to increase the weight of regressive consumption taxation. The creation of a financial emergency surely is a very dangerous game, a clear example of playing with fire.

The unstable framework, the high risks, the financial fragility and the political void have given enormous power to the European Central Bank, which often acts as a further arbitrator of fiscal policy, thanks to the (arbitrary) conditionality of its support to the member countries.

The Dangerous Game and the Italian Mirror

So the dangerous game continues. The absence of a political desire to create automatic mechanisms of financial backstop has emerged again in the context of the creation of a banking union, a process started in 2012 (with results that benefit the German banks disproportionally) and which is still ongoing. In contrast to what is stated in the European Commission’s plan of September 12, 2012, the decision of the European Council on December 13–14, 2012 to create a common system of supervision headed by the ECB was never accompanied by the possibility for the European Stability Mechanism to directly recapitalize banks. The 2012 Council also called for a harmonized regulatory setup and the adoption of the directive for bank recovery and resolution as well as a harmonized deposit guarantee scheme by June 2013 (IMF 2013). Instead, a Commission’s Banking Communication on the application of State aid rules to support measures in favour of banks in the context of the financial crisis(European Commission 2013) came out in July 2013, stating – all over again – the bail inprinciple: “the bank and its capital holders should contribute to the restructuring as much as possible with their own resources. State support should be granted on terms which represent an adequate burden-sharing by those who invested in the bank.”

If the member countries do not reach an agreement over a common deposit insurance shortly, that could be the locus of the next crisis. With a discussion of the progress of a banking union expected for this month’s Council meeting, this specter haunts the resolution of the current Italian political impasse. The reason is simple and lies all in the words of the Italian President of the Republic Sergio Mattarella when he announced that he could not accept the formation of a government that included an anti-Euro minister of Treasury. He said: “I need to take care of the savingsof the Italian people.” The sentence is quite revealing of the euro straightjacket. On the one hand, the core countries that dominate the negotiations are in a position to force a crisis in Italy (with, of course, uncertain results for all), thus indeed threatening the personal savings of the Italians and quite possibly of others. But it is also clear that, since the Maastricht Treaty, the common currency and the monetary union have meant for Italians, above, all a reduction of their real disposable income and of their ability to accumulate savings.

One warning is however necessary: as mentioned above, for a long time austerity was a choice and the Italian elites (and those who voted for them) cannot disavow much responsibility for the prolonged stagnation. This means also that exiting the euro area would be no guarantee of a shift in the political and economic priorities. Indeed, the chaotic debate that is now taking place between pro and anti- euro stands up for the embarrassing emptiness regarding what those priorities should be.

One important element to keep in mind is that austerity is not a symmetric concept: it does not apply equally to all sectors and groups of the economy. One case in point is the suggestions of the Commission for increases in the infamously regressive VAT taxes and for harsh labor market reforms, which reduced wages drastically. Such measures do not stimulate growth, to the point that they could well worsen the public finance position of an economy. They do however favor the rich against the poor.

From that point of view, the fiscal policy proposals of the new Italian government, such as the introduction of a “flat tax,” appear to similarly increase the unequal distribution of the tax burden. If the decision to cut taxes will be accompanied with a further reduction of public services and provisions, the overall effect of the budget could be restrictive. The risk is that the measures, as vaguely announced at this stage, reduce to a mere reshuffling of budget components in favor of various constituencies, with a basically zero effect on the budget balance.


While the 2010 crisis has most dramatically uncovered the need of European capitalism for a stronger central power, able to react rapidly to economic and financial down-swings with temporary discretionary interventions, the current inherent instability can either fuel or disrupt the process toward a unified solution. France and Germany may decide to use the discussion about the banking union to force an outcome that intensifies their control over Italian politics, but the dangerous game may have (perhaps unintended) political and economic consequences that could lead to disaster. Moreover, any progresstoward a stable centralization implies a reduction of the involvement of electorates in crucial economic decisions, by channeling them through technocratic procedures and closed door negotiations.

National constitutions and parliaments, crucial to the post-war European democracies, are becoming increasingly disenfranchised and toothless. These democracies represented the attempt, after the totalitarian experiences of the first half of the 20th century, to build institutional guarantees for the maintenance of well-balanced democratic representation and resolution of political and economic interests. This attempt has been given up. The locus of political negotiation, now, increasingly resides in technocratic committees, where tensions between diverse national elite groups are mediated by the recombination of budget components and institutional reforms.

Nation-states are today the only institution in Europe capable of conveying any democratic preference, making it the only possible space for the political action of the electorate. But while retreating within national borders altogether might seem like an appealing solution, it would not be a guarantee of a change of direction, not least because those nation-state structures have by now been eroded by decades of neoliberalpolicies. Now more than ever, we need to consider the difference between formal and substantial access to decisions.

Defining appropriate institutions to regulate and mediate between economic and social forces is a global and not just European challenge, but its achievement may appear too far out of reach.  One way to take back the space for constructive democratic deliberationand policy experimenting  is to oppose the technocratic and scientific apparatus that supports the current deadlock. The ‘technocratic’ rhetoric of economists and central bankers convinced most people that there is no feasible alternative to (financial) market logic, to fiscal austerity, low wages, flexible labor markets and independent central banks. This way, establishment economics has constrained (and continues to constrain) political choices, stripping electorates of their autonomy in political and moral judgement. This is a dangerous game, since the only way disenfranchised electorates can express their anger, anxiety and powerlessness is by choosing self-defined “anti-establishment” forces.  This has happened not just in Italy, but elsewhere in the Eurozone and in Britain as well. The U.S. is suffering the consequences of its own version of the exact same story. No one can tell where this will lead.

Economists are much to blame for the mess: They have the responsibility to help improve our current plight. The only way they can do this is by creating space for meaningful political deliberation on policy alternatives to fiscal austerity, high inequality and underpaid flexible workers.  They have to give up the official “party-line” in economic theory and practice – a Politburo which turns economics into a useless servant providing self-validation to the elites and contributing to barring the debate and openness that are vital to a functional and fair society.

This article relies extensively on my paper “Political Economy of the Stability and Growth Pact,” European Journal of Economics and Economic Policies: Intervention, Vol. 14 No. 3, 2017, pp. 333–350. doi: 10.4337/ejeep.2017.0029. I am endebted to Servaas Storm, Roberto Ciccone, Thomas Ferguson, Sergio Levrero, Robert Johnson, and Annamaria Simonazzi for substantial help in clarifying and sharpening my own argument.


[1] Kindleberger, C.P. (1996): Centralization versus Pluralism: A Historical Examination of Political-Economic Struggles and Swings within Some Leading Nations, Copenhagen: Copenhagen Business School Press. I owe this reference to Perry Mehrling.

[2] The decision to make the national central banks independent from the Treasury had already been taken in Italy in 1981 and in France in 1986.

[3] Too many to give an exhaustive list, but see for instance Godley (1992), Goodhart (1998), Parguez (1999), and Simonazzi/Vianello (1999).

[4] Caffè, Federico (1976): Un’economia in ritardo: contributi alla critica della recente politica economica italiana, Turin: Bollati Boringhieri

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  1. The Rev Kev

    Broken Europe is correct. From what I can see, the north of Europe has been turned into a wealth pump that is sucking out the wealth from southern Europe. That would be bad enough but to put financial straight-jackets on each country’s ability to respond and then to enforce policies that have a proven track record of failure such as austerity is criminal. Using ‘economic alarmism’ is a well know neoliberal tactic. Manufacture a crisis, push through ultra-capitalist positions that protect and benefit the wealthy while reducing the living conditions of the bulk of the population, rinse and repeat with each ratchet movement being set up so that you can’t go back.
    The only thing is that it is never asked just what the end stage is. I think that people in the EU can see that in the end their parliaments, senates, chambers and the like will over time be reduced to powerless figureheads with all true power residing in Brussels. Even the European Parliament will only hold so much power but most of the real power will reside to a group of people who are un-elected, unrepresentative and virtually immune to removal. It was this to a large extent made so many people in the UK back Brexit. With most political parties captured and sprouting the same neoliberal line, people are being left with only being able to choose rabid populists to voice their needs. This is what Mark Blyth calls “Trumpism”.
    Italy is just the latest example but the size of the economy means that it cannot be simply crushed like Greece was. The EU’s policies and practices have sown the winds here. When the EU was simply a trade organization most people supported it. But the past twenty odd years it is being turned into a political organization that nobody signed up for with more and more power being seized by not only the European Commission but the European central Bank as well. Whether it is Italy now or maybe Spain next, these cracks can no longer be papered over. There is an old German song that has the words ‘Wer soll das bezahlen, wer hat das bestellt’ which you can translate as ‘Who is going to pay for that, who ordered it’ and I think that more and more EU countries are asking themselves the same question.

    1. Synoia

      I think that people in the EU can see that in the end their parliaments, senates, chambers and the like will over time be reduced to powerless figureheads with all true power residing in Brussels.

      Yes, and this site believes Brexit a mistake.

      1. Matthew G. Saroff

        The reduction of power in national legislatures would not be a problem if the EU was not deliberately structured, as it has been Monnet founded the ECSC, as profoundly antidemocratic, unresponsive, and bureaucratic governing body.

        The governing philosophy of the EU has been, and has always been, opposed to the idea of accountability for its leaders.

      2. Jack

        I wouldn’t say that NC says that Brexit itself is a “mistake”. Rather, most of the commentary and criticism here is about how the British government is handling Brexit. The Brit gov basically has no plan for customs, tariffs, borders, and is ignoring all of the realities involved in separating themselves from the EU.

        1. Anonymous2

          Plus the problem outlined in the post is concerned with the Euro zone. The EU is not coterminous with the Euro zone
          You can argue perfectly coherently that Italy would be better off outside the Euro zone but in the Single Market. Leaving the EZ could only be done with very great care and the cooperation of the other EZ countries.

        2. Yves Smith Post author

          Yes, Brexit will make life for pretty much everyone not in the oligarch class vastly worse.

          Easy for you to go on about the value of national sovereignity when

          1. The UK will be even more of a rule taker than it is now by virtue of being a small open economy that trades

          2. The impact of non-tariff barriers (as in hard customs borders) will lead to a weak pound and no trade boost due to greater difficulties of exporting and EU companies moving production out of the UK. So you will see a much lower standard of living

          3. If the UK has a currency crisis, a banking crisis is likely to follow. See Willem Buiter’s Reykjavik on the Thames.

          You ideologues forget you can’t eat ideology. People live in the real world and deal with the consequences of reckless government stunts. You forget Brexit was a power play within the Tory party that spiraled out of control.

          You also ignore the fact that the UK had a very favorable deal with the UK, and the whinging about the EU was a way to shift blame for Tory and Blairite neoliberal policies.

          1. beachcomber

            Yves:- ” the whinging about the EU was a way to shift blame for Tory and Blairite neoliberal policies”.

            True, it was.

            But that was not all it was, which is what you (a “non-ideologue”?) forget – or choose to. It’s almost comical that you can so airily dismiss any possibility that ordinary people (as well as being stupid and/or gullible) might have motives which are not venal or discreditable.

            The opposition to EU membership has very deep roots. Furthermore, it cuts across all other grounds for disagreement – party, class, ethnic origin… you name it. That ought to tell you something, but instead the construction you insist upon putting upon it is (IMO) a partisan, highly selective, over-simplification. And I’m not referring only to the passage quoted above but most of the rest of your other comments on the subject that I’ve read.

            Anyone with that animus is going to be predisposed to predict disaster.

      3. vlade

        I said it before, and I will say it again – at this stage, I’d prefer a Brussel government over the one that resides in Whitehall right now – or any that was there since, well, a very very long time, probably longer than I’m alive.

        It’s not even that it’s more “democratic”, as the first-past-the-post is anything but, and the party selection for the safe/marginal seats are very deeply undemocratic.

        With the Brexit, it will be worse, as the parliament pretty much agreed to make itself impotent last week, while giving government massive executive powers. Yes, any future parliament can overturn this, but the parliament right now is so much captured by political parties, where the true power lies in the executive, that I have no trust in it being overturned anytime soon.

        In theory, shareholders have voting power over companies. In practice, we know that management will do whatever they like, especially with a captured boards. Executive seem to win over oversight nine times out of ten, as it pretty much always has somethign to bribe the oversight with.

    2. beachcomber

      @The Rev Kev

      Agree, broadly.

      But I think parts of your analysis are skewed.

      Without question, politically and economically the principal beneficiary of the particular way in which the EU happens to have evolved has been Germany. There’s one passing reference to this in Orsala Constantini’s article where she refers to the undervaluation of the euro at its introduction – which created the basis for the persistent-ever-since German export surplus – automatically creating a correspondingly-persistent import-surplus for her so-called “trading partners” (some “partnership”!). This is taken by official Germany to be some kind of virility-symbol (“my surplus is bigger than yours…”).

      Due to its economic strength (at least partly an artefact, and paid-for by docile German labour accepting lower living-standards and real-wage growth than their productivity would have supported) Germany rules the eurozone (and through it the EU) roost. Macron can posture as much as he likes but when the chips are down – exactly as happened to Hollande before him – if Merkel says “no”, that’s it.

      Secondly, to speak of “even” the European Parliament as if it were somehow a bastion of democratic power is (excuse me) laughable. It never had any power apart from that of saying “no”. It is a so-called “parliament” without the power to legislate – which is an oxymoron. It is a complete travesty of parliamentary democracy. As you say “most of the real power will reside to a group of people who are un-elected, unrepresentative and virtually immune to removal” (but I would say “all” not “most”, and omit “virtually”).

  2. Scott1

    I did not intend for this to be in bold.

    Since watching Warren Mosler explain how Italy and the rest of the EU nations ought proceed while in the grasp of an EU essentially enabling aggressive war by other means, I have been moved to nominate him for US President.

    From my perspective they see Greece was such a great success, Wall St. as led by Goldman Sachs is out to replicate for themselves the benefits accruing Germany of policies that mean Privatization triumphs. So it is for Puerto Rico, and why not knock off the states? The States & their Treasury Secretaries are no more cognizant of elastic banking than the Finance Ministers of the nations in the EU.

    Far as the FIRE sector is concerned the US Treasury is their exclusive reinsurer since 2008. Obama made sure they got all the cash they wanted and more. Sure 9 million lost their homes but land & real estate deeds were theirs for the taking and they took all they could have ever wanted leaving homes to mold and further indebted one way or another of course property values had to be held up and inflated.
    Rents went up. Ben Carson is all down with that.

    I am saying that Scientists are to Engineers what Economists are to Financial Engineers. Technocrats do not so frighten me. Are they employed by the wrong people? Do they have the wrong goals? What would the difference be between a Financial Engineer and a Technocrat?
    Who is it we want writing forms to be filled out? We had decided that it would make for better bureaucrats were they given a pathway to technocrat status.

    It is sad for Italy that they have refused to implement the New Lira as Warren Mosler so good naturedly explained. If Congress will not provide the money to the states that they require, maybe the states will take it upon themselves to do as he suggests would help Italy? As it is now for the states there is little difference between the ECB and German banks and the Treasury and the Fed. It could even be worse for the states of the Union, though maybe in places of the EU there is poverty to rival so much of America. Maybe in the EU there is another Alabama, or even Flynt Michigan.

    1. BillC

      Could you provide a link to the Mosler explanation you reference in your 2nd ‘graph? (My apology if I overlooked it in the article or your comment.)

  3. PlutoniumKun

    Great overview. I agree very much with the point made here which needs repeated emphasis – austerity was not ‘imposed’ by the EU on unwilling States – in most cases (Greece the exception), austerity was carried out at the initiative of national elites (including supposed left wing politicians, such as the Irish Labour Party), who used the crisis as cover. The notion therefore that breaking up the Euro will lead to an MMT paradise is naive – the intellectual battle against the notion that somehow austerity is the sensible and only option must be won at all levels – local, national and at EU level. The latter is to an extent the hardest because, again as the article points out, current structures favour the most powerful members, creating a huge barrier to change.

    One slight glimmer of hope – its anecdotal, but i do think that the damage caused by austerity has become so obvious that even business now sees it. In Ireland, one of the many impacts was the complete destruction of capacity in the construction industry. The result was that when the economy started to recover strongly a few years ago, the remaining building industry was completely unable to keep up, resulting in a housing crisis caused primarily by a lack of capacity. I’ve been surprised to hear even industry people recently talk about the need for social housing and direct government expenditure as they are realising that this boom and bust cycle exacerbated by austerity is damaging all industry, not least because workers can’t afford housing near the jobs, resulting in severe worker shortages.

    Incidentally, I’d recommend the article linked above – German Wage Moderation and the Eurozone Crisis: A Critical Analysis for a good overview of the myth of wage cost differentials as a ‘reason’ for structural imbalances in Europe.

    The real problem of the Eurozone is, accordingly is not that unit labor costs have not converged but that the common currency and monetary unification have not led to a convergence of member countries’ production, employment, and trade structures, but rather to a centrifugal process of structural divergence in production. In a nutshell, since the mid-1990s, Germany has become stronger and more productive in high-value-added, higher-tech manufacturing (in conjunction with outsourcing to Eastern European countries), while Southern European countries became more strongly locked into lower-tech, lower value-added and, often, non-tradable activities (Storm and Naastepad 2015c). This has reinforced the core-periphery relationship between Germany and the Southern-European countries—meaning that Southern European growth spills over into German growth (via trade and finance) but not vice versa (Janger et al. 2012; Simonazzi, Ginzburg & Nocella 2013; Botta 2014; O’Connell 2015). This centrifugal process has been fueled and strengthened not just by the surge in cross-border capital flows following the introduction of the euro, but also by the common currency itself (as argued by Wierts, van Kerkhoff and de Haan 2014) as well as by the centralized and uniform interest rate policy of the ECB which up to 2008 was perhaps appropriate for stagnant and low-inflation Germany, but was undeniably out-of-sync with inflation levels in Southern Europe (Storm and Naastepad 2015c). Cheap credit in the South created unsustainable asset bubbles and facilitated untenable debt accumulation which fed into higher growth, lower unemployment and higher wages—but all concentrated in the non-dynamic and often non-tradable sectors of their economies.

    1. vlade

      Indeed. IT could have been titled “Missing in Action: real European Left”.

      And I don’t mean just far-left, but Soc-Dem left that has been a mainstay of European politics since the war till 1980s. But since 1990s, starting with Blairisation of Labour, it has moved much more to center, and in fact, in some policies even right-of-center (the belief in austerity).

      That said, it’s sometime hard to affix the blame here, as the parties moved as the electorate moved (since most of them still see family as a good metaphor for country budgeting).

      The question is, how do you really educate the electorate?

      Slowly is the first answer, and that ignores having to compete with media (both MSM and a plenty of “alternative”) which are pushing their interest, not facts (or, when they push facts, they make sure it’s the facts that fit).

      1. PlutoniumKun

        I really wish I knew the answer to this. Most people don’t devote much of their time to understanding how the economy works – I’ve had conversations with even well educated and informed people who say things like ‘well, we all partied in the good days, we need to tighten our belts now, etc.’ in response to any conversation about austerity. The reality is that much of the memes of the right correspond to what we think of as ‘common sense’, and its hard work to fight against this. The problem is of course that much of the left gave up the fight a long time ago. But I am optimistic that there is a growing realisation – and not just among the left – that people have been sold a myth, one that happens to have been a very convenient myth for bankers.

        Incidentally, I would believe that the failure of the ‘soft left’ isn’t just an accident. You need only see how many left wing politicians from the 1980’s onwards found themselves with nice soft well paid sinecures after retirement to know that there is personal pressure and outright corruption involved. In Ireland it was very noticeable that it was a generation of Labour politicians of retirement age who eagerly embraced austerity when they came to power (the alternative was to have forced the right wing parties to join together to form a government). Some of these were genuine radicals and firebrands a few decades ago. I’ve little doubt that they were more than a little influenced by the prospect of a comfortable retirement.

        1. Colonel Smithers

          Thank you, PK.

          I would just add that some hard left ones were on the make and on the take, too.

          This is one reason why I think any left wing revival will be neutered like Trump has been from the opposite end of the spectrum.

          Some of these lefties partied or benefitted a bit too much and are “compromised”. What makes Corbyn dangerous is that he kept away from all that.

        2. flora

          re: “I’ve had conversations with even well educated and informed people who say things like ‘well, we all partied in the good days, we need to tighten our belts now, etc.’ ”

          The best response I’ve heard to this: The elite are partying and expect us non-elites to pay their bill (austerity).

          1. flora

            Social Darwinism* was discredited in the mid-20th century. Now, it has resurrected itself. Neoliberal govts give nearly unlimited aid to the most “economically fit” families (the very rich) and businesses (the very biggest) in the form of tax cuts and deregulations. At the same time, govts demand austerity from the less “economically fit” families (most of us) and businesses, cut social services and safety nets, and increasingly leaving most people to sink or swim in the neoliberal markets.

            The ‘government budget is like a family budget’ trope is a clever bit of obfuscation. It’s used to rationalize the old, discredited social Darwinism theory, now dressed up in new economic clothes.


            I know this is obvious to most NC readers, but I thinks sometimes it’s important to say the obvious.

      2. Colonel Smithers

        Thank you and, as always, well said, PK and Vlade.

        Further to the study quoted by PK, I recall a discussion with our favourite central banker at Threadneedle Street in 2010/11. Said superstar wandered off piste and talked about these issues and how they related to what we were there to discuss, financial stability and bank resolution. The pity is, Vlade points out, the MSM and much of the electorate have their issues.

        Further to Vlade’s point about the European left being MIA, from some of my interaction with supposedly left of centre MEPs and MPs from 2007 – 16, many are happy to move to the centre, really to the right, as dealing with matters such as deindustrialisation, imbalances, peripheral regions left to rot etc. is too much like hard work and a thankless task, especially as few people vote in these regions, few demand much of their representatives or most are beyond salvation, and sucking up to the rich and powerful is so much easier, more enjoyable and more profitable, vide the Labour MEPs queueing up to do the City’s bidding when I worked at City trade associations and the elegant homes, second and primary residences, so many of them have. As Richard Littlejohn said of the Kinnocks in the Sun two decades ago, “They have done well out of socialism.” The same could be said of the Smith, Blair, Clinton, Obama, Pelosi, Cuomo and Biden clans. I was going to add the Wedgwood Benn and Harman clan, but they have been wealthy for generations.

        I hope Christopher Dale Rogers chimes in as he is interested in the issue and will know why I cited this family as an example.

        1. PlutoniumKun

          Sometimes fiction identifies the process more clearly than studying real people. There was a Sopranos episode where Tony and his boys gradually work on a formerly radical community worker and politician to get him to help with a housing grant scam they’ve discovered. The episode was depressingly convincing in showing how a former idealist, ground down by the reality of politics and a bad divorce, all too easily, with a shrug of his shoulders, signed away his integrity for a share of the Mobs profits.

          I’ve observed a few Irish left wing politicians over the years, and I’ve seen how their idealism narrowed down to trying to achieve one or two good things, while compromising abjectly on the truly important matters. In the last government, the one most responsible for imposing austerity, one minister, a former student radical seemed content to work solely on trying to push religion out of schools. He failed. Another former member of the hard uncompormising left other kept the flag flying for Ireland staying a voice for the Palestinians while achieving little else. Even that small victory has now been wiped out by the current government. Another became a cheerleader for terrible concessions to the oil industry for exploration, all in the name of a few possible jobs in his constituency. They gambled it all on trying to flip the Irish labour party from a party of the working classes, to the party of younger, urban liberal voters. This is why they pushed so hard for the gay marriage referendum, and later the abortion referendum. The other parties simply put on their own liberal faces to ensure the Labour party never got credit for it. Now the party is simply a shadow of its former self and could well be entirely wiped out in the next election.

          1. liam

            Sad but true. I can’t help wondering how much of that was their own fault though. Undoubtedly a large dollop, (sticking to your principles has its own rewards), however, I think Vlade is correct when he zero’s in on the electorate. A large portion of the problem is that the electorate had genuinely moved, (or had been moved), to the right for quite some time. Tacking to the left was seen, and probably justly so, as bad politics. As you said: The reality is that much of the memes of the right correspond to what we think of as ‘common sense’, and its hard work to fight against this. There’s a lot of truth in that.

            I like to think that things come around. Sometimes something has to be seen through. Frankly if we can get past this turn to the far right, without too much loss of soul, and/or damage, we might find ourselves having turned a circle. A lot of the voters for the far-right, are motivated by the very same issues as those of the left; the difference being they were sold a sense of control over their lives. There must be a lot of current far-right voters who are frustrated that the issues that concerns them are only being addressed by the far right, (a prominent example being globalisation).

            I sometimes wonder if optimism is warranted, and usually counter that if what I’m hoping for is what I’m observing, it’s not a false hope. At the moment I have mere tea leaves to read. Listening to the radio this morning, I heard an economist from one of the stock broker houses here in Dublin speak about how academics looking at this period will wonder at how we failed to use fiscal spending in an anti-cyclical fashion. He was bemoaning the growth and stability pact of the EU, and how we might have tied our hands for the next crisis. The tea leaves tell me that the narrative is shifting. I hope the damage doesn’t have to be too great before that ‘common sense’ is a lot less common.

            1. PlutoniumKun

              Thanks liam. Yes, a lot of the problem was the fault of impatience within the old guard of the Labour party. To me it was a political no-brainer for them to refuse to go into coalition in 2011and instead to say ‘the right wing caused the crash, now they can try to fix it’, and essentially force a FG/FF coalition. But instead they rushed in for government with their hands tied. The result was inevitable.

              I am a little bit optimistic about the overton window – as you say, its now common to hear mainstream economists talk about the problems of austerity and even *whisper it* mention the Euro straightjacket. But it will take a long time to shift opinion all over Europe. For now, the clear majority of voters in nearly all European countries are centre and centre right, thats the reality.

            2. larry

              The narrative may, and I say this with some trepidation, be changing a little already. A recent Guardian editorial brought up deficit spending based on one of their staff going to a British Library lecture by Stephanie Kelton. Here are the relevant paragraphs, the earlier ones setting out the funding crisis in the NHS.

              “Before spending more money on the NHS, British politicians should take the advice of the US economist Stephanie Kelton: in a UK lecture this week, she explained that it was wrong for politicians and the media to argue that the government must balance its books, just like a household. If a household were to continually spend more than its income, it would eventually face insolvency; it is thus claimed that the government is in a similar situation. This is false.

              Yet politicians are obsessed with avoiding an increase in the deficit, an impulse so ingrained that Professor Kelton described as it “almost Pavlovian”. An analysis of the UK’s economic position tells us how to fund the NHS: growth is flatlining, real wages are stagnant and there’s little inflation. The UK’s indebted households are sinking deeper into debt. Hardly the time to raise taxes. The public sector deficit ought to be seen as an instrument to support the economy, not a way to break it. To pay for the NHS, which is critical for long-term prosperity, the government should engage in Keynesian deficit spending: this would help to keep not only the public healthy but the economy too.”

              I have seen it said that a couple of the staff of the paper have been influenced by MMT, one of them being Larry Elliott, although I have yet to see it in him myself.

              1. Clive

                Thank-you all above for such an interesting and useful thread.

                The state of current political discourse on both sides of the Atlantic are depressing. And absent, as yet, any meaningful improvement to the quality of our mass media, it’s hard to see how things are going to get any better any time soon.

                I just finished having lunch with a longtime friend, he’s an actuary and very liberal, bordering on left-wing. I managed to avoid getting into argument with him about Brexit (he’s a Remainer and definitely of the Remoaner wing of that group, I’m, er, not, so that a topic of conversation to avoid) and we got onto the NHS and while we agreed that any better funding settlement was not only a good thing in and of itself, but also an equally welcome shift in policy (reflecting political realities) away from the palatability of austerity.

                But then he started going on about “where’s the money going to come from” whereupon I tried to gently introduce the concept of taxes not funding spending and that the budget of a government and deficit spending is not “like the nation’s credit card”. Nope. He wouldn’t have it. And as I say, he is an actuary. So he’s no stranger to practical implementations of mismatched income, assets and eventual liabilities and how your models and model assumptions change everything.

                But no. If the government spends a £1, it has to somehow “earn” that £1. It was like trying to explain what colour is to someone who is colour-blind. How do you even begin?

                  1. Clive

                    Yeah, defence spending is a gift that keeps on giving in these matters. I tried, in vain, to ask about where the £60bn for Trident renewal is being “funded from” — and why that is to be treated differently and not assessed on the same basis with a “can we afford it?” evaluation.

                    I think I got about as far as opening up a chink of cognitive dissonance where he could only counter that defence of the realm is somehow different and subject to different criteria (like the Pentagon’s missing trillions are also apparently to be regarded as).

                    That’s as much as I think you can do in a lunchtime. And I’ve been working on my mother in law for over a decade, with nary the slightest hint of getting anywhere.

                    1. beachcomber


                      You deserve all of our deepest commiserations.

                      But – keep on fighting the good fight. You are not alone!

                    2. el_tel

                      I get the best results by using historical examples. Thus, when the Brits took over a new bit of Africa and wanted revenue they couldn’t tax their new subjects… They had no Pounds! Ultimately taxation had to be in GBP (since pigs and corn didn’t create any incentive to use GBP) so the Empire *had* to spend GBP into circulation FIRST to create a demand for it (that taxes had to be paid in it). It’s just another example of working the argument back to the start. How and why did the citizens get GBP in the first place??

                1. Mel

                  “If the government spends a £1, …”
                  It’s a sin to liken national economics to household, but it might work this time.
                  If parents are proposing to let their kid have some spending money, It will be a furious kid who hears “OK, we’ll give you $10 a week to spend for your own, but only if you give us the $10 first.”
                  I guess if the family were immense (a million children, say) then one could imagine some hypothetical kid somewhere who would provide $10 so this kid could be given it.

                2. Mark

                  I am amazed how often austerity or a lack of deficit spending is blamed on this blog, by authors and commentators, with hardly a mention how taxes have been cut on both sides of the Atlantic. Tax income/GDP and marginal rates have fallen all over the place and of course the top strata of income and wealth benefited almost exclusively. The results have been shown by Piketty in his book, where he documents how public wealth in first world countries took a nose dive during the late 20th century ultimately turning negative while (highly concentrated) private wealth keeps on rising. It is therefore quite incredible to portray something like MMT as a genuine “left” solution. The nobody likes taxes mantra helps the bourgeoisie in their class war. The experience of the 19th and 20th century ought to show us that high marginal tax rates for top incomes, a relevant wealth tax and a working estate tax are the bedrock for a working social democracy as envisioned by most on the left outside real communists. Which goes to show how much blame parties like Labour or SPD actually deserve for abandoning or in some cases outright abolishing these fundamentals.

                  On a side note Italy could solve its funding issues with a significant wealth tax on the millionaires and proper capital controls within a few years, a bit more spending would be an easily realised side benefit – all without violating the Stability Pact.

                  1. larry

                    Taxation will not solve the problem, even Italy’s funding problems. Bill Mitchell’s blog post, Taxes Don’t Fund Anything, and Stephanie Kelton’s blog post, What Happens When the government Tightens Its Belt are good places to begin to understand this issue. Bill is an Australian while Kelton is an American, but what they have to say applies to any sovereign country operating a fiat monetary system. While it does in a Eurozone system, it won’t be sufficient to get certain countries out of deep holes. Hence, the actions of the ECB, which is a central role of any central bank, which the ECB is constrained from exercising as well as it should be able to due to the Eurozone’s ridiculous neoliberal rules.

                    Italy is in a different set of circumstances as it has given up its own currency for what is in effect a foreign currency, the Euro. Had the Euro system been properly designed, many of the silly rules would be absent and the ECB would not be so ham strung by regulations that effectively prevent it dealing properly with problems faced by countries such a Greece and Italy, except under the table.When Draghi is replaced, the ECB may be even more reluctant to engage in assisting members of the Eurozone who are experiencing economic difficulties.

                    Lack of deficit spending and not taxation is the problem because a central problem is lack of effective aggregate demand. This is why commenters on this blog emphasize fiscal spending and not taxation. And the simple reason for this is that these commenters understand that taxation in a fiat monetary system does not fund anything. It is a Treasury bookkeeping exercise. Cf. above for cases like the Eurozone.

                    1. Mark

                      The point of taxes in this context is to take funds from people who do not spend them anymore but invest or save them and redirect them to a more immediately useful purpose which creates the demand you are missing. Different spending habits between the top income and wealth strata and the rest of the population are important here. Furthermore redistribution of capital is essential in a social democracy and taxes are the only way to do it. Public spending can raise living standards for everyone but it can not lower the top strata to the level of everyone else. Unless you are willing to inflate away any meaning behind the currency but at this point ownership and control of a lot of real estate for instance still trumps ownership of no or tiny real estate by an order of magnitude.
                      Public spending without a decrease in private demand can be increased by a higher deficit or by a higher tax income derived from sources which would not spend the funds domestically.
                      The US, UK and Eurozone are all at or above their current 2% inflation target and from what I understand inflation is the constraint on public spending via money creation according to MMT.
                      It sounds rather strange to bemoan the fact that Italy has given up sovereignty over its money supply by joining the Euro – this was a political not an economic decision afterall. It would be like being upset that Mississippi is part of the Dollar and can’t print. If the FED is able to divine a policy fit for the diverse States of the US what makes the ECB so inferior? Or is the FED indeed unable to do so despite its monetary sovereignty and might this be one of the reasons for some of the problems?

                3. eg


                  I’ve been having a similarly depressing series of conversations with a group of my friends. They are all engineers by training and most have been very successful in business.

                  My observation is that the more experience they have had with business balance sheets, the more difficult it is to make them understand monetary operations.

                  But I keep trying …

            3. David

              I’m not sure that electorates in general have moved to the right. Electorates are now voting for political parties which are conventionally described as right-wing, which is a slightly different issue. In France, for example, which I know best, some of the movement is back to traditional, or even explicitly reactionary, parties, some linked to the Catholic Right. This is partly in reaction to Hollande’s social legislation: gay marriage and gender theory lost the Socialists a lot of votes – ironically, often in the immigrant community – and gave new life to the traditionalist “family” lobby. Some voters moved right precisely because they disliked the effects of the social liberalism which had become the default ideology of the PS, and because they valued communities and local ties, which were (and are) being destroyed at frightening speed. Non-Mainstream right-wing parties also benefited from taking a more sceptical line towards Europe, and from the perception (correct in my view) that the establishment parties of both Right and Left are completely in hock to Brussels. They are also in hock to austerity politics, and because some of the opposition to such policies, and even a recognition that they are damaging, comes from the Right, then those parties are benefitting, as some on the Left also are. But there’s no sign that public opinion is moving to the right on economic issues by any standard of traditional measurement.

              1. PlutoniumKun

                You are right of course that we are seeing politics in an enormous state of flux. But it seems to me that repeatedly across Europe the centre right parties are seen as the ‘safe’ alternatives and are clinging on, while the centre left falls apart. From Spain to Finland nearly all the key countries are under some form of centre-right rule, and it seems hard to see how that can be shifted.

                1. David

                  I think, as you say, it’s more the failure of the “Left” than a resurgence of the Right. If you actually look at the percentages, the orthodox Right is essentially benefitting from the suicide of the liberal mish-mash which has masqueraded as the “Left” for a generation. In effect, the Right has always been better organised, hungrier for power, and has had more of a coherent ideology. They are benefitting in relative, rather than absolute, terms from this.

        2. Christopher Dale Rogers


          You beat me too it, I certainly was going to chime in and state the bleeding obvious that whilst Mainland Europe may, electorally speaking, be moving to the Right, the reverse has happened in the UK – and being bold, in the USA too if we consider the actual success of Bernie Sander’s 2016 bid for the Democratic ticket.

          First, I’d love you to elucidate on our “favourite banker at Threadneedle Street,” by this do you mean the Canadian one or his predecessor – of import as I’m dealing with some well known key central banking figures presently, both State-side and within Europe?

          With regards Vlade’s and your other suggestions – well it a known fact now in the UK that at least 40% of the electorate is sick to the high teeth of technocratic managerialism and vote accordingly when given the opportunity, be it the Brexit vote, or result of the 2017 UK June General Election.

          Indeed, so sick are many genuine Labour members and Labour voters they are actually quite keen for the technocratic managerialists to leave the actual People’s Movement and establish their own totalitarian centrist Party – of course, the gravy train you eluded too would end the moment another General Election was called, given you’d have actual real people representing Labour, rather than Oxford PPE clones.

          Lets not speak ill of Anthony Wedgewood Benn, but his son is another matter, although, as stated, the Blair’s, Kinnock’s and Clinton’s are worse, if only due to their greediness and yearning for absolute power for their respective clans.

          Its not all doom and gloom though, for whilst the Euro Right has benefited from the EU’s electorates distaste for the status quo, it is possible for Left of Centre groupings to profit if they too begin to question where the EU is going and what will become of the Nation State, notions of which are far from dead I’m pleased to say.

          1. vlade

            The problem is that while the 40% (or even more, dare I say) is disilussioned with the current elites, a number of them will go and buy from anyone peddling a replacement, especially if it’s a simple one, colliding with their world-views (like immigrants bad, deficits bad etc..).

            It’s not like this is the first time ever this happened, we’ve seen it again and again (most recenly in a big way was 1920s/1930s). Even the right-getting-more-votes part of it, and the occasional left success (Spain and France come to mind, one ending up in a bloody civil war, the other arguably somewhat slightly better).

            1. Clive

              I think that possibly this time around, the simplistic right wing ideals are going to be a lot harder sell. We have all seen their movie before. That might help in our modern era.

              Even if not, one thing is absolutely certain and that is, for Labour, there is just no going back to, as Christopher Dale Rogers put it above, the managerialism and technocratic nonsense which de habilitated Labour for nearly 20 years. Corbyn is no-ones idea of a perfect politician but he has one indisputable raison d’etre which is that he has no baggage from that era whatsoever. You can’t lay a finger on him ideologically-speaking. And he has almost completely sewn up the party’s grass roots power base and the NEC. Plus he’s transformed the funding base — a steady income stream plus motivated volunteers mean the do-ability of campaigning (something Blair never bothered about, thinking in his HRC-esque way that power was just his as a birthright) will not only get the core vote out, but will also have a good chance of extending it to disenfranchised working class Conservative voters.

              So the left, at least in the U.K., is in an entirely different place to that which it was even 5 years ago.

              In mainland Europe, however, the lack of a galvanising figure such as Corbyn has resulted in situations which are exactly as you describe (Italy, to return to the topic of the post, being a prime example).

              1. vlade

                Remember UKIP got 12.6% (and at times was polling around 20% IIRC) – and that Tories, who now seem to willingly supplant Tories are still around 40% mark, neck-to-neck with Labour.

                Coming up to WW2, UK’s FPTP actually helped, as Mosley and the like pretty much had no chance. And that’s despite Mosley being and ex-Labour MP, doing the whole Tory-Independent-Labour circle, and as somoene who got within 77 votes of Chamberlain in his own (Chamberlain’s) constituency.

                I can see how it would be a problem with the Tories moving to occupy UKIPs position – as you know, I’m not in the “Corbyn has the next elections sewed up” camp..

          2. Colonel Smithers

            Thank you, CDR.

            I meant Sheffield’s Andy Haldane, not the matinee idol from the colonies.

            1. Christopher Dale Rogers


              I still have my fingers crossed that the BoE’s present Chief Economist may become its Governor, which would be a necessity should we have a Corbyn-led Labour Government. We’ll see, but if my fishing expedition proves successful, Andy’s one of the persons I’d like to get back down to Asia again – with Kelton if possible to spice things up.

              1. vlade

                We can all hope. I believe he was pushed by King, but Osborne in particular overruled.. Another thing to add to his long list of total failures.

              2. Colonel Smithers

                Thank you, CDR.

                Fingers crossed, too, for Haldane, but there’s a suspicion that he “is not one of us” and may be a closet socialist, so he’s long odds for the top job. An identity politics candidate may be whistled up to keep Haldane out.

                Li(e)bor was used to keep out Tucker and Turner, but Tucker had, allegedly, other issues.

        3. David

          In Britain, the Labour Party’s move to the right was, at least in part, the result of the battering it received from the foreign exchange markets and the submission to the IMF in the 1970s. Callaghan and his cabinet were well aware that there was no justification for the spending cuts they were forced to make, but they seem, through some version of the Stockholm Syndrome, to have wound up sympathising with their tormentors. If Callaghan had not made the disastrous mistake of delaying calling an election until 1979, and starting a civil war in the party, and if half of its brightest members had not left to form the SDP, then Labour would have stayed in power, or been back in power in 1983, and able to benefit from the North Sea Oil revenues which Thatcher gave away as tax cuts for the rich. Effectively, the old Labour Party died at that point, and it was ready for the venture capitalists of Blair Capital to asset-strip it.
          Much the same happened with the Socialists in 1981 in France. Right man, right politics, wrong time and crucified by the markets. So the PS reacted by embracing identity politics … with the result we all are familiar with.

          1. Colonel Smithers

            Thank you, David.

            It sounds as if you were in the civil service?

            If yes, have you any idea of why the Labour government went to the IMF instead of, knowing North Sea oil revenues were about to come, say, issuing some gilts to keep things ticking over for a short while?

            I fear that a Corbyn government may be so battered by events and a reactionary rear guard that it will soon surrender and provide cover for the disaster capitalists and vultures waiting to pick over Brexitannia. In addition, Corbyn’s Labour, like Brown’s in 2009, does not seem to know or want to know that there are Old Labour supporters in Whitehall, the City etc. who would be delighted to help.

            1. David

              I was, but I was far too young and junior to have any special insight. My recollection, though, is that the 74-79 Labour government was always one step away from disaster, and came within a whisker of falling a number of times. It had to deal with the consequences of the 1973 oil shock, both inflationary and demand-destroying, which produced unemployment for which it was blamed. It had run out of steam, and lacked confidence in itself, as well as being savaged by the Tory-supporting media. On the other hand, there was this magic weapon could monetarism being pushed by the Conservatives and a lot of economic pundits, which was going to solve all our problems through clever manipulation of interest rates. I think in the end it was just seen as too politically dangerous to do the kind of thing you suggest, because “the markets” would destroy the Pound and provoke a crisis that would bring the government down. The inability to use North Sea oil revenues for creative purposes, in my view, is the greatest lost opportunity of modern British politics.

              1. Anonymous2

                Also, CS, the investment institutions went on strike in 1976 and refused to buy any new gilt issues. It was that, IIRC, that pushed Healey to go to the Fund to ‘restore confidence’ and get government funding up and running again.

                Plus sterling was falling by 15-20% p.a. in the f.x. markets. People feared a lurch into hyperinflation if the value of cable really started to plummet.

    2. Eustache De Saint Pierre


      I was under the perhaps false impression that the Troika after they had set up shop in Dublin, left Cowen & Co. a long list of cuts that had to be made in the public sector – or was it actually a case of deflecting blame on to the EU bad guys ?

      I also remember that Vincent Browne was a lonely voice of dissent & feeling a bit sorry for the Greens whose day in the sun turned very dark.

      1. PlutoniumKun

        I think there are still many unanswered questions about what exactly happened in those crucial few months, in particular the key decision to leave the bondholders untouched. My own feeling is that simply the government was completelyout of its depth and didn’t know what it was doing and simply grasped at any EU suggestion, and so the EU happily suggested that the bondholders (mostly German and UK of course) be rescued at everyones elses suggestion. But I know there are a few conspiracy theories around, the blogger GolemXIV has talked about a few of these, but I don’t know enough to know if there is any substance to them. I’ve often wondered what would have happened if the government had been led by a cynical b**ard like Charlie Haughey. For all his faults, he may well have simply said ‘Bail us out or we’ll take you all down with us and sink the European banking system’.

        I do think the Troika tried to make decent suggestions (within the context of their overall hit job) – obviously things like a property tax were long overdue. It says everything that the new taxes hitting property owners hit the buffers while the cuts affecting the poor went through. But once the broad principles had been conceded by the government, radical cut backs were inevitable, there was just nowhere else to find the money.

        The Greens were like deer in the headlights. The problem with the Greens was that the senior members were idealists but really have no deep analysis of politics or society, so they simply couldn’t offer an alternative voice. A number of attempts were made to create a more radical Green party in the aftermath, some of their proposals were really ahead of their time and very interesting. But they got nowhere electorally. But the mainstream Greens are slowly recovering and could possibly get enough seats to be a player after the next election. A coalition involving them and Sinn Fein could possibly be very interesting.

        1. Eustache De Saint Pierre

          Those were certainly chaotic days & if David McWilliams can be believed in his book ” Follow the Money “, judging by the late Brian Lenehan, they were certainly out of their depth.

          1. Colonel Smithers

            Thank you for this thread from the Emerald Isle.

            I have spoken to regulators brought in from overseas after the debacle of 2008 and making whole the speculators. They could not believe what was in the mind of the Irish authorities.

            I have also spoken to some banskters from Germany and Switzerland. They share the above opinions, but were relieved.

            Ireland certainly took one for the(ir) team.

            1. PlutoniumKun

              I can’t remember where I read this – I think it may have been Michael Lewis – but there were reliable reports that the Troika went in preparing to negotiate a haircut for the bond holders and were astonished that the Irish delegation was prepared for a 100% bailout.

              There was a very recent trial (resulting in a conviction of the former CFO of Anglo Irish Bank) and it was clear from what came out in the trial that the banks had successfully persuaded the government and Central Bank that it was a liquidity crisis, not a solvency issue. I think many of the governments advisors genuinely thought that the right guarantees would give the banks time to get back on their feet and in a few months all would be well.

  4. Bill Smith

    Isn’t the root of the problem with Europe (and some other places) that the people making decisions moved too far too fast without concern for certain segments of society? The people who make the decisions, because of their position in society are largely protected from the cost of their decisions. It’s those that are not ‘sheltered’ who bear the costs (financial / psychological). Those people have raised enough of a stink that certain politicians detected it / took advantage of it?

  5. DJG

    Brava, Costantini: I quote from above >>
    ….[W]rong theories—such as those that claim that unemployment rates above 15% are “natural,” that public deficit spending is in itself inflationary and has negative effects on growth, that there is such think as a trickle-down effect, or that our resources are scarce and so should be our solidarity—must disappear once and for all. This amounts to fighting the imposition of an official “party-line” in economic theory and practice, which turns economics into a useless servant providing self-validation to elites and contributing to barring the debate and openness that are vital to a functional and fair society.

  6. Sirena

    Random thoughts about my country (Italy).
    I think that a part of Italian government wants to exit euro, especially “Lega” economists.
    I do not know if it is a good idea or not. Giving the situation maybe it is. But I am not a specialist.
    I did not vote for any of two winners (lega and 5 stelle) but I do think that the only way for them to keep their promises is to leave euro.
    I also think that Savona and also his newly appointed “sottosegretario” (in Italian means vice minister) could be the people in charge of it.
    If I understand well, famous Savona’s plan b implies a switch euro/lira during a week end without any previous discussion and/ or announcement to the population.
    Now, if asked, most Italians would answer that they are against leaving euro.
    But on the other hand this government is now feeding a big anti Europe feeling in Italy which is constantly increasing. And this kind of feeling can be useful in case of exit.
    This thought came to me last week when I read Savona suddenly declaring euro “indispensable” (wow!), and denying he ever suggested leaving the single currency and when I read the profile of his new vice minister.
    This is only a theory, of course. Another explication is that Savona and his vice minister are so happy of their new job that they are ready to disown themselves.
    PS: on immigration issue Salvini says that his allies are Hungary and Poland. Two countries (both with currency other than euro) which have always rejected any discussion on the subject and any quotas. I am not sure that Lega wants to “raise the problem in order to find European solution”, as Salvini says. It seems to me that the purpose is just to get rid of immigrants. (Especially poor black ones).
    Maybe I am wrong.
    It is very difficult to try to understand the situation and the mood of my country in these days……

    1. Clive


      I’ve never known politics in the U.K. to be in such a state of flux. The only common denominator is the EU. But how it’s all playing out, it’s about as dissimilar as two completely dissimilar things in a pod.

      What is interesting is that migration is a big factor. For the U.K. though, this is intra-EU movement of people. For Italy, it appears to be extra-EU immigration which is the lightning rod.

  7. beachcomber

    This article compellingly adds yet further to the already substantial and growing body of criticism already leveled by democrats (in the widest sense, demagogues excluded) against the EU in its present form.

    IMO there is nothing whatsoever to be said for the path that the EU has followed since 2012 at least. Nor is there the slightest sign of any departure from it being contemplated; indeed everything points towards its being entrenched more firmly with every passing year. Nowhere in Europe is to be found either the political insight or the visionary leadership capable of grasping the truly disastrous nature of the monster that past errors have spawned; instead the intellectual and moral pygmies who rule Europe’s destiny just plough blindly on, continuing to feed it. (And that goes as much for those in UK as anywhere else – if the cap fits, kindly wear it).

    The direction taken since Maastricht has been undeviating and continually self-reinforcing. The UK getting itself out of what it ought never to have got into is an absolute necessity for its own self-preservation and for the restoration of its democratic freedoms. Those in UK who have persuaded themselves that the EU as presently constituted is capable of fundamental reform, and that staying in it – in ANY form – can therefore beheld to be consistent with that aspiration, are living in a dream-world and it’s high time the scales fell from their eyes. They’re doing neither themselves nor the rest of us any service by clinging to their illusions.

    There are only two possible solutions for the EU’s problems, and there have only ever been. One is federation, the other is break-up. What exists now (which is neither, a chimera) cannot endure because it is not just undemocratic but anti-democratic. It is rule – effectively – by unelected unaccountable technocrats: an oligarchy which, like all such, knows which are the groups it must placate in order to perpetuate itself in power, and which can be ignored and sacrificed. The will of the people is an irrelevance: they can always be lied-to with impunity (as Jean-Claude Juncker has explicitly advocated). (The same applies in the USA but we can’t change that).

    There’s no way of getting out which isn’t going to be messy, but there’s no choice other than to keep travelling determinedly in the direction that’s already been chosen, while trying to limit so far as possible (which won’t be by much) the amount of short-term disruption which results.

  8. MisterMr

    “But it is also clear that, since the Maastricht Treaty, the common currency and the monetary union have meant for Italians, above, all a reduction of their real disposable income and of their ability to accumulate savings.”

    In my opinion, this is not really the point, in fact we (Italians) are oversaving and this is part of the problem: in 2016, the wealth to income ratio in Italy was the highest among rich countries

    This in part depends on a slow growth in income (both because of small real growth and small inflation), but IMHO it’s also a matter of a “saving glut” in Italy. It should be noted that Italy is currently a net exporter and so it’s not “living above its means” in any way, the increase in the debt to GDP ratio can be explained by a saving glut problem (due to increased inequality, aging population oe whatever), plus the accumulation of interest.

  9. Synoia

    This is a dangerous game, since the only way disenfranchised electorates can express their anger, anxiety and powerlessness is by choosing self-defined “anti-establishment” forces. This has happened not just in Italy, but elsewhere in the Eurozone and in Britain as well. The U.S. is suffering the consequences of its own version of the exact same story. No one can tell where this will lead.

    We most certainly know where this will end:

    In Europe, the next attempt at a German Empire, which has always resulted in massive War, Famine, Pestilence and Death.

    In the US increasing genteel southern governance, where everybody but “us” is a lazy, idle slacker, totally incapable of pulling themselves up to “our” lever by their own bootstraps. Ignoring the money advantage given to “us.”

    We also know that any attempt to break out of this system, will be met with massive resistance and savage retaliation: Aka: US Civil War and next, Brexit.

    No compromise is possible, not because the “left” will not compromise, but those with the money and power will surrender neither.

  10. David

    (Hope this is not a duplicate post: the first draft vanished before I could send it).
    Part of the problem is what I call “Aristotelian” thinking, after the philosopher who observed the natural world and made all sorts of common sense and fallacious deductions. Obviously, things fall because they are heavy, heavier things fall faster etc. I still remember watching the Apollo astronauts drop a hammer and a feather onto the surface of the moon, and the hairs on the back of my neck standing up because they hit the ground at the same time. It just seemed so counter-intuitive.
    It’s the same with economics: the economics of the post-war era (not to mention MMT) just seems counter-intuitive. By contrast, Aristotelian economics (“you can’t spend what you don’t have”) seems intuitive because it corresponds to our private understanding, from which we always generalise. When I had the patience to argue about such issues I used to ask people whether they had a mortgage, or whether they had saved up for their house, but the response was still uncomprehending. History suggests that, even when ideas are discredited, they hang around until they are replaced by an articulated alternative. Austerity economics was brushed aside in the 1930s by rearmament (which the Treasury bitterly opposed) and war. It’s hard to think of any expected catastrophe which might do the same now.

    1. beachcomber

      “It’s hard to think of any expected catastrophe which might do the same now”.

      Well, if Steve Bannon’s (and John Bolton’s?) dreams come true, war (with China) may be nearer than you think.

      1. JTMcPhee

        Remind us again how people like Bannon and Bolton, and Jamie Dimon and Nancy Pelosi and Feinstein and Rex Tillerson and Wolfgang Schäuble and Tony Blair and Merkel and Berlusconi and Netanyahoo and Duterte and Pompeo and Abe and Thatcher and May and Scott Walker and the other Koch poodles, got to the point where they get to “set the policies” that the rest of us live and die by?

        “Give me a place to stand and a long enough lever, and I shall move the world!”

        We mopes have this well-justified feeling that “something ain’t right,” that the world is off kilter and bad things are happening and worse are coming. And because we don’t know what we want the world to actually look like, based on any kind of small-to-large understanding of what works, for the long haul, what satisfies “enough food to eat only to one’s real hunger, to drink only to one’s actual thirst,” and to think about others’ actual needs as something more than marketing leverage and reasons to disdain, the grasping people among us get to organize around a deadly vector of good ole MORE-ism.

        Lots of thinking and discussion about means and ends, but what do most people really want their world to look like? One could cynically say “just like it is,” because that’s obviously how it’s turning out. But really, what would a different organizing principle, something other than the MOREism axis, actually look like, and since these kinds of notions do need to be sold to propagate, what’s the message and thrust that decent people, looking for comity and something other than personal advantage and “gain” (requiring others to “lose”) ought to be coalescing around and moving on?

        Or really, is that kind of renascence even possible, given our collective nature?

      2. Tony Wright

        From what I have read elsewhere Bolton has it in for Iran too , and they have a smaller military than China ( and lots of lovely oil ).
        And Bolton seems to have Trumps ear, judging by the recent abandonment of the Iran nuclear deal by the US.

      1. David

        Well, yes, I sometimes think that too. But I suspect that the effects will be unequal and unevenly distributed, and won’t necessarily, of themselves, produce non-austerity policies. Anyway, can we wait that long? I fear there’ll be no state left in many countries to actually do the heavy lifting.

  11. Sound of the Suburbs

    When you look at the history of the Euro-zone it is like watching a slow motion train wreck. An initially bad idea for a single currency is made worse by official incompetence and bungling throughout its existence.

    Let’s assume the Euro-zone’s technocrats are not complete idiots.

    What are they doing?
    It looks ridiculous; there must be a hidden agenda.

    George Soros has revealed the use of Karl Popper’s “piecemeal social engineering” by a select elite to bring about European integration.

    A single currency has been a long held ambition of Europe’s elite, but the Euro isn’t complete and needs fiscal transfers to make it work.

    The initial design was a stepping stone and they hoped to force Germany into fiscal transfers along the way (Karl Popper’s “piecemeal social engineering”).

    Economic transformations had already been in progress on the other side of the world in Japan and Asia. Richard Werner was in Japan at the time and wondered what the hell the idiots in charge were up to. After realising these people were not complete idiots, he knew they must have a hidden agenda, which he reveals in his book “Princes of the Yen”.

    You need to engineer a crisis, and the financial bubble is the crisis that no one stops developing. Everyone enjoys the good times and can’t see the coming disaster.

    The Club Med nations enjoyed their debt fuelled booms before the crisis and the ECB had set very low rates to encourage them to go out and spend now. Things developed nicely and eventually the bubble burst after 2008.

    They should now be able to strong arm Germany into fiscal transfers and complete the roll out of the single currency, but Angela Merkel was insistent that “Every country must clean up its own sh*t” in a meeting in Paris on 4th Oct 2008.

    With Karl Popper’s “piecemeal social engineering” there will always be set backs and other parts of the plan could be moved forwards. Progress could still be made in transforming the economies of the Club Med nations using the same techniques they had used in Japan.

    Unfortunately, Germany has never relented and it looks like Karl Popper’s “piecemeal social engineering” has reached the end of the road.

    When we look back we can see that first trial of the techniques involved wasn’t that successful and Japan has never really recovered from its 1980s financial bubble.

  12. Sound of the Suburbs

    George Soros in 2013 …. he was right.

    “To make matters worse, the austerity policy promoted by Germany has the effect of prolonging the crisis and perpetuating the subordination of debtor countries.

    This has created political tensions as demonstrated by the political stalemate in Italy. Italy now has a majority opposed to the euro and the trend is likely to grow.”

    It took five years for the populist to get in, but the writing had been on the wall for years.

    “There is a close parallel between the euro crisis and the international banking crisis of 1982. Then the IMF and the international banking authorities saved the international banking system by lending just enough money to the heavily indebted countries to enable them to avoid default but at the cost of pushing them into a lasting depression. Latin America suffered a lost decade.

    Today Germany is playing the same role as the IMF did then. The setting differs, but the effect is the same. The creditors are in effect shifting the whole burden of adjustment on to the debtor countries and avoiding their own responsibility for the imbalances. Interestingly, the terms “center” and “periphery” have crept into usage almost unnoticed, although in political terms it is obviously inappropriate to describe Italy and Spain as the periphery of the European Union. In effect, however, the euro had turned their government bonds into bonds of third world countries that carry the risk of default. This fact was ignored by the authorities and it is still not properly recognised. In retrospect, that was the root cause of the euro crisis.

    Just as in the 1980s, all the blame and burden fell on the “periphery” and the responsibility of the “center” has never been properly acknowledged. The periphery countries are criticized for their lack of fiscal discipline and work ethic, but there is more to it than that.”

    “The financial problem is that Germany is imposing the wrong policies on the eurozone. Austerity doesn’t work. You cannot shrink the debt burden by shrinking the budget deficit. The debt burden is a ratio between the accumulated debt and the GDP, both expressed in nominal terms. And in conditions of inadequate demand, budget cuts cause a more than proportionate reduction in the GDP — in technical terms the so-called fiscal multiplier is greater than one.”

    Of the bailouts of 490 bn to the periphery, 420 bn went back to the banks at the core; this is who got the bailout money, e.g. German and French banks.

    This is what George is talking about, more reckless lending from financially liberalised banks at the core that grew too big to bail.

    1. JTMcPhee

      Soros, himself a looter and wrecker, is kind of like Warren Buffett, who also stated “warnings” about what was being done to the mopes: “ Of course there’s a class warfare, being waged by my class, the rich, and my class has won.” One might think these “warnings” and observations might be more in the nature of telling us mopes that “Resistance is futile.” And one wonders how Soros, sharp fella that he is, might run another huge arbitrage on what’s happening in Europe… “Remember the £!”

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