MMT and the EU: A Case for Capturing the Prevailing Narrative

Yves here. I’ve sometimes had readers take me to task for pointing out that 1. the EU has the much stronger hand in the Brexit negotiations and 2. the EU has, with only a very few lapses, negotiated in a much more professional and good-faith manner than the UK has. That has been misrepresented as I must hate the UK or “national sovereignity” which increasingly has become tantamount to “Don’t give us no stinkin’ rules” even though no one will buy your goods unless you adhere to their standards.

Richard Murphy has apparently run into similar criticism for not saying enough bad things about the EU for the taste of some. Despite being straightjacketed by EU budget rules, it’s still generally less far down the neoliberal path than the US or the UK. And it still has competent bureaucrats. Name a career public official in the US or UK who is on the level of Michel Barnier or Margrethe Vestager.

By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK

I have been asked in a comment on the blog:

How do you reconcile your advocacy of MMT, and opposition to economic austerity, with support of a very pro austerity organisation like the EU?

As far as I can make out all leading MMT economists are hostile to the neoliberalism/ordoliberalism which is hardwired into the EU Treaties and would advise Britain to put as much administrative distance between us and the EU as possible. The so-called Stability and Growth Pact and even worse Fiscal Compact have been responsible for creating the conditions that have led to the widespread disillusionment with the EU both in the UK and elsewhere.

To which my answer is, easily.

First, there aren’t that many leading advocates of MMT who live in the EU, I would suggest. In the USA and Australia, maybe. But the EU, no. And I would add that the US and Australia are also dedicated to neoliberal structures and to federalism. The EU’s more flexible approach is, if anything, substantially less dedicated to neoliberalism, and certainly to federalism, so let’s compare like with like to start.

But then let’s go the essence. At my core I do not claim to be an economist. A political economist, yes. An economist, no. I think the difference fundamental.

The economist seeks to answer how resources are allocated using the organisation of those resources as the mechanism to answer that question. This is a closed system analysis.

The political economist does something quite different. They ask how a society allocates resources considering the power relationships that exist within it. That is open system analysis.

Economics ultimately presumes that the prevailing narrative of organisation will always persist. So, most economics presumes that because neoliberalism is adhered to by well over 80% of economists it follows that neoliberal narratives will always prevail.

Political economy recognises that all power persists so long as its narrative can be supported by society. And political economy presumes that those with alternative narratives have power simply because of their ability to tell those other stories.

MMT is an alternative narrative. It is disruptive at a time of disruption. And the EU is a powerful potential source of essential international cooperation. It’s just been subverted to serve a false narrative. But I do not for a moment doubt that European cooperation is of massive benefit. Nor do I doubt it is needed, urgently.

So, I look at what there is – the EU – imperfect as it is, and seek to change it using the power of alternative narrative.

I could, alternatively, presume change is not possible and accept we can deliver nothing through economic argument and walk away, whilst leaving neoliberalism intact in the EU.

Which of those is the more useful approach? Surely it has to be the one that seeks to eliminate neoliberalism? And I believe that is possible.

Please do political economy, not economics, in other words. The latter provides no hope. The former does.

And that’s why I will stick with the EU, imperfect as it is. Imperfect as it may always be, in fact, just like every other human construct. But I prefer to take what there is and win it for our cause than leave it in permanent and powerful opposition to it.

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  1. BlakeFelix

    Ya, the EU has structural flaws that should be addressed, but Brexit is to my eye a very half baked response to them. It was a decent threat to spur reform, but it’s hard to see how actually following through on it is going to leave anyone better off. Kind of like how Trump made Biden look good for basically showing up in a suit and being able to talk to people, Brexit is making the EU look good, not because it is good, but because the alternative seems dangerous and deranged. And the EU half of the twentieth century looks clearly better than the non EU half. Austerity is dumb, but what the countries did with their huge spending before that was much dumber.

  2. John Rose

    Very little reporting on what the European Central Bank is doing. Are they quietly acting on fiat money reality, little by little, and thereby abandoning austerity? Would be good to see.

  3. PlutoniumKun

    Just a point on this – EU critics frequently confuse the EU as an entity with the sovereign States that make up that entity. In many respects, the EU (as in, the network of public servants who run it) are significantly to the left of many or most of its member states. When you look at voting patterns in Europe since the early 1990’s, they have been strongly towards the centre right, with just a relative handful of genuinely left of centre governments, and in those cases they were mostly quite powerless to one degree or other. Or put another way, the citizens of the overwhelming majority of EU countries have been voting more or less neoliberal, ordoliberal or Austerian to one degree or another consistently for 3 decades. The EU could hardly be anything else but fiscally orthodox in those circumstances.

    The notion, which some on the left (including some MMT advocates) seem to like to advocate, that the EU is an neoliberal designed austerity plot designed to crush left wing governments is simply a fantasy. There were no left wing government to crush, because hardly anybody voted for one. Greece was an outlier, in overall political terms a pretty much irrelevant one as at that stage it was clear that electorates across Europe were favouring centrist or centre right parties in the aftermath of the financial crisis.

    Another key issue with the relatively slowness of MMT to take root Europe, is that most MMT scholarship that I’ve seen has tended to focus on relatively large countries with some potential for autarky (yes, I know there is some work on open economies, but its generally very small and peripheral). This could arguably be true for Germany and one or two of the larger countries, but the great majority of EU countries are small, open economies, where MMT has less direct practical value. I’m not suggesting it has no value, or that countries were not unwise to give up their monetary sovereignty (I think they were), but the reality is that a Denmark or Ireland or Portugal or Austria has always had far less room to manoeuvre with monetary or fiscal policy than a US or Canada or Australia. So even for the left, MMT has not had the same value as a potential policy instrument.

    A key problem of course is that even those of us who are enthusiastic about the potential for MMT and related policies, is that the Euro design makes it very difficult to implement, even if there is widespread public support. For all sorts of reasons, it would be very difficult to envisage a situation whereby popular agitation forced governments to change their most deep rooted attachment to balanced budgets. So if MMT is to be adopted at Euro level, it will most likely be adopted slowly, at a technocratic level, and applied in an emergency only. I can hope that Covid is one such emergency which pushes Europe in that direction.

    1. Watt4Bob

      Neoliberalism seems to share a characteristic or two with alcoholism, it being a sort of syndrome within which an individual may feel less sick if they have a friend who is a worse drunk than they are, and the common story line that hitting rock-bottom is the only thing that leads one to consider changing behavior.

      It is in this sense that the rest of the world can feel more ‘normal’ as long as there is the USA to compare themselves to.

      It is also in this sense that the USA seems intent on hitting bottom as opposed to taking electoral change as an opportunity to adjust our economic course.

      The USA being the capital of neoliberalism, I can see how the rest of the world might be waiting for some leadership on this front.

      I’m sort of confused as to where the City of London fits into this picture?

      Are they the secret drunk doomed to fail first, via Brexit?

      1. PlutoniumKun

        I think that if the City of London had an ideology, it would be old fashioned 19th Century economic Liberalism, nothing ‘neo’ about it. Many in the City will no doubt hope they will profit from Brexit, some genuinely believe that London will thrive as a Hong Kong in the Atlantic, although I think they will be sorely mistaken if they think the main European powers (or the US for that matter), will tolerate it. The main European states tend to think long term, and I think once the immediate Brexit dust settles, they will focus on restructuring finance in a way more suitable to the EU. Switzerland is already getting the backdraft from German and French impatience with tax dodging and private bank accounts – a laissez faire City of London is a much bigger threat.

        Neoliberalism has been an infection in most European countries to some degree or another since the 1980’s, often in surprising places, like Scandinavia. Although in truth, in countries like Germany, the pre-existing mercantilist and ordoliberal establishments were never all that attracted to it, and the Statist system of France was also resistant. This doesn’t mean they were more progressive, just that most European countries have always had very different shades of right wing thought, many of which are not really compatible with anglosphere neoliberalism. But nearly all European countries have had, and still have, noisy free market/libertarian advocates, although they are rarely mainstream, even within the right.

        A key point though is that most European countries have variations on multiple choice voting, which reduces the chance of one party rule – this has meant that its far harder to ram through radical change in the way that is considered pretty normal in the US or UK. The left, Unions, greens, etc., have always had more options when its come to slowing down neoliberalism in most European countries, even when the right has been in power.

        1. Watt4Bob

          Thanks for your answer.

          I had been under the impression that Wall $treet had historic roots in the City, and that there was a fare bit of collusion between the two.

          1. PlutoniumKun

            I don’t really know about collusion, except insofar as they share broad interests in looting. I’ve always thought of them as quite fierce competitors, and so far as I understand, NY has been actively trying to get business from the City on the basis of Brexit. And I think a lot of finance operators actively like to arbitrage the different rules and traditions between Wall Street and the City.

            But I have no great insight or knowledge on this, I’m sure there are others here who could enlighten us.

    2. Susan the other

      It could also be said that a neoliberal “balanced budget” is an oxymoron. Because neoliberal budgets disregard social well being in favor of markets and monopolies – which lead to chaos. Ordoliberalism is not the same thing as neoliberalism because ordoliberalism takes into account certain social necessities that make an ideology function and cohere. And monetary sovereignty is at the heart of both ideologies. So when Merkel says that the EU “shares sovereignty” it becomes a compromise. If monetary sovereignty, or political economics as above, is shared politically then decisions must always be made about the uses of the “shared” commonwealth. The EU, before 2008 was far more neoliberal – but they are changing. Just thinking about the unforgivable treatment the EU gave Italy in the depth of the first coronavirus wave and then “apologized” is instructive. That refusal to help when help was needed is the EU attitude that must be eliminated if the EU plans to stay together. And the EU’s very high tolerance for deliberation and democratic processes is relentless. That’s a good thing. I see strong similarities here in the US now with Covid piled on top of the 2008 awakening – before this catastrophe each state balanced its budget and did not take NIRP loans from the US Treasury. If they got loans the terms were not very good. Now things are changing. Probably not because the neoliberal ideology is having meaningful deliberations in Congress – far from it – but because neoliberalism is a fantasy. A very expensive and dangerous one. So what does this leave? It leaves direct spending by sovereign treasuries as needed. Ideology isn’t dictating nonsense solutions. Now politics, survival politics, is dictating the best use of democratic sovereign spending. That’s pretty close to MMT.

      1. PlutoniumKun

        I agree that underlying processes are pushing Europe to adopt more MMT policies in all but name. It will never be called MMT.

        At its heart, neoliberalism is very different from mainstream ordoliberal/Christian Democrat politics in much of Europe. For all its faults, the Christian Democrat tradition is rooted in the notion of national communities and mutual aid. Most Christian Democrat parties (at least in the north) never had a fundamental problem with social spending to help the poor, and never saw radical individualism as some sort of expression of freedom.

        Those who know far more about European political philosophy than me can no doubt elaborate, but I think it goes back quite deeply to the differing intellectual traditions in the Anglosphere from much of Europe.

    3. vlade

      Very good point.

      I’d add to that – in fact, in a number of places the EU was what held back even more neoliberalism (which was one of the reasons Tories hated it, even while moving it more and more towards their “market” version. Still wasn’t enough).

      It’s far from perfect, especially Eurozone – in fact, if people did want to attack something Eurozone would be a great target that even most Europeans didn’t like much. But Eurozone =/= the EU.

      1. PlutoniumKun

        Yup, the Eurozone is probably the second worst thing about the EU after the CAP.

        As you say, we had decades of the Tories fighting what they saw as a European, collectivist, socialist EU, full of stupid regulations designed to protect workers rights and the environment. And then some of the left somehow persuaded themselves that the Brexit vote was a rebellion by the little people.

        The best thing about Brexit is that it shifts – ever so slightly – the balance of power in the EU away from the right – the UK was always the biggest cheerleader for bad competition policy and awful environmental policies within the EU, and did its damnest to stop any workers protection – even under Labour. My hope is that the need for rapid recovery after Covid will shift the argument against the Austerians within Europe of whatever stripe – I’ve noticed that some centre right parties (including here in Ireland) have been openly arguing for looser monetary and fiscal policies.

  4. Halcyon (formerly AnonyMouse)

    Purely from a UK perspective, given the state of politics in the nation at present – as a purely practical matter, seems obvious to me that the EU is acting on a restraint on many of those who would probably like to take us *even further* down the neoliberal, 51st State pathway that we’ve gone through so far.

    The problem with Lexit, it turns out, was not so much the Brexit bit as the Left bit, which without electoral reform and/or a substantial shift in our politics… it’s just hard to see how a UK liberated from “EU shackles” would be any better at enacting policy at present.

    With respect to the MMT issue, I interviewed Patricia and Christian from the MMT Podcast on this subject and noted that MMT from a UK/EU perspective clearly has some issues, given that MMT advocates are keen for monetarily sovereign governments to use that power to the best of their advantage, and therefore monetary sovereignty is the whole ballgame and not something to give up lightly.

    This came across as a criticism of the EU, and we were taken to task on it by some EU fans. The other perspective, of course, is to say that the EU needs even closer economic and governmental links – becoming much more like a single polity – and that EU institutions with a better understanding of MMT would want to have closer economic integration, more fiscal and political union, etc. so that they could more fully utilize monetary policy, and you also wouldn’t have quite so many tensions in the union between nations that are performing differently economically. This long-term transformation might have made it more difficult for the UK, with its own currency, to be an integral part of that Union.

    I don’t see much of a contradiction between thinking that: 1) a union of countries that are very economically different signing up to a single currency involves each of them cedeing a lot of the useful power that comes from monetary sovereignty, and hence the EU is bad in this sense, 2) prevailing politics in the EU would put a brake on many policies that would go against the neoliberal consensus, but also that 3) Brexit as it is being pursued is being pursued for an awful set of reasons by some of the least trustworthy political actors around, and that 4) it is also being pursued with a great deal of incompetence and is likely to cause a great deal of economic damage, which, given that the same clowns from 3) are still around, is likely to be used to justify more austerity.

    People are waaaay too prone to binary thinking when these issues are raised… I have no doubt that the many, many NC followers who are pleased to see the back of Trump would hardly consider themselves paid-up members of the Joe Biden fanclub.

    By the by, the MMT podcast has done several interesting episodes on the EU, including this one with Dirk Ehnts here

  5. Carla

    Richard Murphy: “But I prefer to take what there is and win it for our cause than leave [the EU] in permanent and powerful opposition to it.”

    I think what the EU did to Greece is what has turned so many in other parts of the world against the “European project.”

  6. eg

    As a citizen of neither the UK nor a EU member state, is it possible that BOTH the UK and EU are horrible neoliberal prisons in their own right, and that neither is preferable?

  7. Sound of the Suburbs

    The Euro was designed in the good old days before the problems of neoliberalism had come home to roost.
    They got the real fanatics in from the University of Chicago.
    “The putative “father of the Euro”, economist Robert Mundell is reported to have explained to one of his university of Chicago students, Greg Palast: “the Euro is the easy way in which Congresses and Parliaments can be stripped of all power over monetary and fiscal policy. Bothersome democracy is removed from the economic system”
    Michael Hudson “Killing the Host”
    This was one of those all important design criteria for neoliberal fanatics.
    Everything would be controlled by perfect markets.
    Governments and the electorate were the only things they really had to worry about.

    Everyone cheered as periphery economies boomed on borrowed money, e.g. the Irish Celtic Tiger economy.
    No one realised Wall Street was flooding the world with toxic assets.
    “It’s nearly $14 trillion pyramid of super leveraged toxic assets was built on the back of $1.4 trillion of US sub-prime loans, and dispersed throughout the world” All the Presidents Bankers, Nomi Prins.
    The periphery nations boomed on money borrowed mainly from the banks at the core.
    The big European banks loaded up on Wall Street’s toxic assets.

    The Titanic was heading straight for the iceberg.
    The neoliberal designers of the Euro-zone had expected perfect markets to ensure none of these things happened.
    Nations didn’t have their own central banks to backstop national financial systems when a financial crisis hit as this wasn’t seen as necessary.
    The Titanic hit the iceberg and there weren’t enough life boats.

    The markets hadn’t batted an eyelid while all this was happening, and they got no signals from the markets that anything was going wrong.
    Market participants are really hot on public debt, though.
    Once Governments had patched up their banks as best they could, and suffered from falling tax receipts after the crisis, Government debt ballooned.
    The markets reacted, and drove bond yields up at the periphery making things worse.
    Market forces were intent on destroying the Euro-zone.
    It looked as though the Euro project was doomed until Mario stepped in to save the day.

    TBTF only works for big banks when nations have their own central banks to backstop the financial system.
    In 2008, the Euro-zone discovered their banks were too big to bail as the usual mechanisms to do this had not been incorporated into the design of the Euro-zone.
    Governments could not get the money from their own central bank to backstop the financial system.
    Neoliberals used to believe in everything being controlled by perfect markets, and so they didn’t need to worry about financial crises as they would never happen.
    Neoliberals hate Government spending, and never realised a day would come when Governments had to spend to bail out the financial system, but it did, and they couldn’t.

    Why don’t you make things worse with austerity?
    This does look like the solution when you use neoclassical economics.

    Policymakers that use neoclassical economics tend to think austerity is the answer, and they did in the 1930s as well.
    Policymakers couldn’t remember what happened when they used austerity in the 1930s; it’s a really bad idea.
    Recommended reading “Austerity, the History of a Dangerous Idea” Mark Blyth.

    Western policymakers don’t understand the mechanics of the monetary system and there was no way they could see the problem with austerity.

    The IMF predicted Greek GDP would have recovered by 2015 with austerity.
    By 2015 Greek GDP was down 27% and still falling.
    The money supply ≈ public debt + private debt
    The “private debt” component was going down with deleveraging from a debt fuelled boom. The Troika then wrecked the Greek economy by cutting the “public debt” component and pushed the economy into debt deflation (a shrinking money supply).
    Greece was pushed into a Great Depression type event by the Troika.

  8. Senator Blutarsky

    Isn’t the problem with the EU the fact that most of its countries have the euro as their currency, especially with regard to MMT?
    Only the ECB hast sovereignty over the euro which makes all euroland members currency users, not currency issuers. So euro members, at least technically, can go broke in that currency and thus have much less control over their spendings.
    With regard to non-euro countries, their degree of neoliberal orientation is mostly dependend on whether they want to join the euro. In that case, they will implement neoliberal policies to increase their chances of being accepted. At least that’s I would argue.

    While the ECB is in control of the euro, the euro members have some influence over its policies.
    However, it’s the most austerity loving country that arguably has the most influence over the ECB: Germany. France isn’t much better. Macron is trying to implement all the neoliberal policies that germany already did. Smaller countries with consistent foreign trade surplusses like the netherlands back up austerity, too.

    How would it be possible to capture the prevailing narrative in a group of countries that consists mostly of currency users of which the most influential ones want austerity?
    AFAIK, Portugal doesn’t do austerity and fares well, but due to the lack of influence, this is simply ignored by the rest and, sadly, by the media, too.

    Do we need things to get much worse, for instance with regard to italy, for the EU ship to change its course?
    Some kind of dynamic in some of the EU states could lead to changes in monetary policies, but I can’t see it.
    Seems, I’m somewhat pessimistic about how this new narrative could come about.

    1. PlutoniumKun

      Yes, MMT type policies would have to be implemented at Eurozone level, or not at all – individual member countries have zero room to manoeuvre – and those countries that stayed out don’t have much either, as they are so trade dependant on Eurozone countries and can be very vulnerable to speculators.

      The Eurozone design is fundamentally flawed of course, it is by design deflationary, something that most people (myself included) didn’t really grasp when it was formed. Much of it is designed around German concerns, but its not really true to say that Germany is the most austerity loving country – in many respects, Germany has often been quite pragmatic on fiscal matters (they use many counter-cyclical fiscal policies – for a variety of reasons, its the smaller northern countries, particularly Finland, Austria and the Netherlands that are the true hardliners with austerity.

      1. Senator Blutarsky

        But by implementing it on the Eurozone level, the problems begin and things get really complicated.
        If you allow budget deficits or higher debt levels for member states you would have to conceive a whole new, in case of the EU, most likely insanely complicated framework of rules to govern that.
        The making of those rules would be influenced, again, by the strongest member states for the rules to make them work to their advantage.

        MMT states that government spending, deficits and debt isn’t constrained by arbitrary debt limits but by (mainly) the parameters inflation rate, interest rate and unemployment rate, that have to be balanced out.

        After almost 20 years of the euro, the sourthern EU countries have substantially different values regarding these 3 parameters.
        However, and correct me if I’m wrong, allowing a southern EU country a higher debt level would still affect the entire eurozone.
        If you would allow higher debt for all the southern countries having problems it would take monetary wizards to predict and control the impact of those policy changes on the other member states.

        Additionally, I doubt you would solve the problem that the one-currency-for-all approach hasn’t successfully dealt with: The problem that internal devaluation of ‘certain’ northern countries lead to deindustrialization of other countries.
        The contract of Maastricht includes rules to deal with that, like keeping the inflation rate at about 2% and not exceeding foreign trade surplusses to 3% (for germany it’s 6%, of course).
        These simple rules were being ignored and I can’t see how a vastly more complicated set of rules would be ignored when inconvenient, too.

        Some time ago, some economists already proposed a system for money transfer from richer to poorer countries to equalize the effects of internal devaluation.
        That system propably would be more controllable with regard to impact, but ‘no transfers’ is one of the core rules of the eurzone, so that probably won’t happen either.

        Again, I’m really pessimistic…

  9. Dick Swenson

    First, I wish that all those who write would stop producing sentences such as “Nor do I doubt it is needed, urgently.” Write in simple declarative sentences, thus “I believe it is needed, urgently.” is preferable.

    Other than that, I completely support Mr Murphy who explained himself well.

    Second. MMT is a simple idea that incorporates the observation that once a country has the sole authority to coin money, i.e., print it, and insists that its internal financial processes are only conducted in terms of that money, then discussions of deficit ceases to include the concept of “debt.”

    Third, adopting the principles of MMT more or less implies that various options are now open to the government in its support of its society. That is, as Mr Murphy notes, the discussion moves from “economics” to “political economics.” Morality enters the discussion.

  10. Scott1

    As long as there are reasons for maintaining confusion about who and what gets to create currency to cover the costs of government decisions we will not see pragmatic rectification of the glaring flaws baked in from the beginning.
    It is my suspicion that the competition is between governments and banks for currency creating power.

    The US abandoned Glass Steagall. This gave banks more power. The banks abused that power and as a result got bigger. The same thing has been happening in the EU. There are good reasons to give the banks the job of issuing loans. That is until they keep on creating crisis after crisis, demanding money while demanding austerity as they financially engineer ways to get all the money.

    Should we nationalize the banks? If the governments of the world demand austerity on their own for no other reason but habit and greed why work for that either.
    US financial engineering leads the way is the reason I bring it up in this context.
    Nationalization of banking when there is no nation alines with fascism for fascism is rule by corporation and why we objected to the TPP which as presented by the Obama administration included an arbitration court unworthy of even the name court and was called something else, Tribunal?

    The existential threat of climate change eliminates the amount of time for governments to endure periods of austerity. Austerity means money will not be created for massive national and international investments in alternative energy sourcing.

    Modern Monetary Theory is the last best idea on the block.

    Modern Monetary Theory is pragmatic all the time but most pragmatic when it comes to the massive spending necessary to redo the entire energy sourcing infrastructure.

    For example superconductor transmission lines become necessary for tide turbine electrical generation, but they have to be kept cool. All in all the systems offer electrical power to power the populated coasts, but it is such a massive engineering solution only government can finance it.
    We are getting near to being forced to nationalizing the banks if they end up standing in the way because they want to create currency and are not willing or able to support, buy, what has to be bought.
    Thanks. Thanks Warren Mosler, Stephanie Kelton, Michael Hudson, Randall Wray, and Producer Steve Grumbine, and of course Yves Smith & Lambert.

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