Monday, 23 March 2009

I Think too Small Sometimes

Willem Buiter examines why the European Central Bank can't easily do Quantitative Easing, the anti-deflationary move de jour. It's a hugely technical article that I'm not going to pretend I fully understood (Any of my fellow non bankers care to explain a seigniorage Laffer curve without consulting Google? Thought not). But the idea at the heart of it seems simple enough to me: a central bank can only properly function as such if it has the backing of a tax raising state.

In normal times, a lot of effort is put into making this backing as ambiguous as possible to reassure markets that they are free from direct political control - hence the so called independence of the Bank of England. But the BoE is 100% owned by HM Treasury. The ECB is owned by 27 national central banks, each with their own constitution and particular relationship to their home state.

Buiter indicates that the markets are pricing in the possibility of default by some Eurozone national governments - particularly Ireland, Greece, Portugal, Italy and Spain (in that order of risk). So,

".... it is reasonable for the EBC/Eurosystem to insist on a joint and several guarantee by all 16 Eurozone governments for any Eurozone government debt acquired by the ECB...... Such a joint and several guarantee does not exist at the moment - a reflection of the absence of a fiscal Europe and a fiscal Eurozone...The ECB has no fiscal back-up. There is no guarantee, insurance or indemnity for any private credit risk it assumes. "

So it can't easily do Quantitative Easing. Which would seem to suggest either clever folk like Buiter convince them to sort out some 'held-together-with-string' temporary fix (which he doesn't think will work given the Fortis experience), something big has got to change in the democratic architecture of Europe or, simply, deflation beckons across the Eurozone.

Back in December I wrote,

"That hoary old Marxist chestnut of a question, the relative autonomy of the State, may rear its head again. A thousand undergraduate essays ...... will be dusted down and regurgitated. But the old essays may be missing the point. It may be that the thing to explain in 2009 is not the 'gap' between direct class power and State action which Miliband and Poulantzas tried to theorise, but the speed and nature at which this gap decreases."

But I was talking about the UK, not the EU. I think too small sometimes.


  1. That is why ultimately European Capital will have to create such a State or else the EU will collapse. The current crisis demonstrates why the EU needs Centralised i.e. State Fiscal and Monetary Policy. There has never been a single market that didn't also have a single currency, but that also requires a complimentary fiscal structure, as well as common property laws etc.

    Its notable that Brown in his latest speeches is adopting a position almost as Pro-EU as Ted Heath. My own feeling is that an EU State would be progressive, but I wouldn't argue for it. I would argue for a Socialist United States of Europe. If Capital creates a single EU Statte then good, it will facilitate the creation of EU wide Trade Unions, and Workers Parties, but its on that we should focus.

  2. In the long run I think I agree with you Arthur. But I always remember what Keynes said abut the long run....

    In the short run tho', it seems to me that the Euro will come under pressure as current arrangements mean that the Germans will have to pay for the rescue of, for instance, the massively failed Spanish property market as well as quite a lot of the marginal economies in the Eurozone such as Ireland. I agree we've reached a point where Europe without the EU is all but unthinkable - but we haven't reached a point where Europe without the euro is unthinkable. I suspect the currency will survive but it will come under pressure. Brown can be as p0sitive as he likes about it but would you let the UK join now if you were Merkel?