by Warren Mosler
First, the euro funding issue/crisis could vanish with a simple announcement, like: The ECB (European Central Bank) hereby guarantees all the debt of the national governments.
But they won’t do that. They are worried about their ability to subsequently enforce the Growth and Stability Pact, which has already proven unenforceable. In fact, the only enforcement tool for austerity seems to rest with the ECB, which conditions its funding on austerity.This is also the disciplinary principle behind my proposed ECB annual revenue distribution of maybe 10% of euro zone GDP to the national governments on a per capita basis.
The ECB would have the right to withhold future distributions to members who fail to comply with deficit rules. But this proposal isn’t even under consideration, so it is not likely to happen.
Mosler bonds (in the case of default they can be used for payment of taxes) for individual euro nations offer real hope, but time is short and the political process long.
That leaves the euro zone with what it’s been doing all along. Muddle along anticipating and entertaining, while debating, various funding proposals. Ultimately, when it gets bad enough, they will be forced to rely on the ECB writing the check and buying national government debt in the market place to facilitate ongoing funding.
All of this will be contingent on the member nation in question complying with terms and conditions of austerity set by the ECB. That is all highly deflationary, strong euro medicine while it lasts.
It’s also operationally sustainable. And phase 1, where austerity reduces deficits, has proven politically sustainable as well.
However we may now be entering phase 2, where austerity results in falling GDP. This will result in higher deficits for all the euro members.
So yes, it’s operationally sustainable (phase 2), and continues to support the euro, but the question is whether austerity measures intended to bring deficits down that instead cause deficits to increase are politically sustainable.
And, if not, what next? And when? How bad does it all have to get before they change policy? And what change would that be?
The first step would probably be some ‘new’ form of QE, and maybe even an interest rate cut, which only make things worse, as they wait for the appropriate lag before said policy ‘kicks in.’
And how long would it all continue to deteriorate before they stop waiting for it to ‘kick in’ and again change policy? Could this result in vacillation between a long chain of policy adjustments?
U.S. deficit reduction round 2 may is coming soon as well. To again quote that carpenter working on his piece of wood, ‘no matter how many times I cut it, it’s still too short.’
Is a misguided fuss over a reserve drain going to bring down global capitalism?
Thought of the day (again): Because we fear becoming the next Greece, we continue to turn ourselves into the next Japan.
Economist Mosler’s Recipe for Greece by Warren Mosler
What Should Greece Do? by Elliott Morss
Euro Crisis: Key Facts and Predictions by Elliott Morss
The Rough Politics of European Adjustment by Michael Pettis
Fragmentation of Global Power by Elliott Morss
Will Europe Face Defaults? by Michael Pettis
End of the Shell Game? by Dirk Ehnts
Merchant of Venus Redux by Andrew Butter
U.S. and EU Debt Crises Compared by Andrew Butter
Will Greece be Colonized? by Bradley G. Lewis
Greece: No Deal Without a National Referendum by Michael Hudson
EU: Politics Financialized, Economies Privatized by Michael Hudson
About the Author
Warren Mosler is co-founder and Distinguished Research Associate of The Center for Full Employment And Price Stability at the University of Missouri in Kansas City. CFEPS has supported economic research projects and graduate students at UMKC, the London School of Economics, the New School in NYC, Harvard University, and the University of Newcastle, Australia. He is Associate Fellow, University of Newcastle, Australia.
Warren is the founder and principal AVM, L.P., a broker/dealer that provides advanced financial services to large institutional accounts. He is also founder and principal of Illinois Income Investors (III), specializing in fixed income investment strategies for 29 years. He is presently located in the U.S. Virgin Islands where he heads Valance Co, Inc., the corporation that owns the shares of III Offshore Advisors and III Advisors, the companies that manage AVM and III.
Warren has a degree in economics from the University of Connecticut. He has 38 years of experience in a variety of fixed income markets, including derivatives. He writes at his blog http://moslereconomics.com/ and widely in the press and blogosphere. Warren is considered to be the founder of Modern Monetary Theory (MMT). You can read a longer bio here.