2013 EEAG Report on the European Economy


4 replies on “2013 EEAG Report on the European Economy”

Below is an example from the report of exactly the type of thing we’re attempting to correct.

”…the introduction of so-called long term refinancing operations providing liquidity via three-year tenders led to a substantial increase in gross liquidity. However, a large part of this money was hoarded, i.e. kept at deposits at the ECB…Total credit provision and the development of broad monetary aggregates, however, still indicate that this ample liquidity is being hoarded by the financial sector and hence is not really being put into circulation.”

The authors of this report fail to distinguish between the central-bank-reserve-money and bank-account-money and they seem to think that banks fund loans from their reserve accounts, as opposed to creating the money they lend up to a multiple of their reserve accounts.

The ECB, via the national central banks, creates reserve-account-money which is the type of money that banks use to settle interbank payments but it’s not in general circulation.

The report suggests that the banks are hoarding this money but in actual fact it can never leave the central banks balance sheets until it’s destroyed again once the sale & repurchase agreement reaches maturity. Ample reserve-account-money, or liquidity, does put the banks in a better position to create bank-account-money for customers but this is fundamentally different from reserve-account-money ”being put into circulation”.

The banks can’t normally create bank-account-money unless someone is willing or able to go into debt to them, regardless of how much liquidity they have.

It seems the authors think that banks lend existing money which comes from their reserve accounts and this is wholly inaccurate.

It is such an important detail to get right and our guide to the eurozone system which explains the above in more detail is available at:


This article by Martin Wolf pulls together in a convenient format the contributions of the main protagonists in the “austerity wars”.


He is unequivocal in his views as to which side is correct, especially given the UK experience under the Conservatives.

However, this nod in the direction of Professor Sinn and his colleagues raises some questions.

“Nevertheless, I can see two arguments for the ECB’s behaviour. The first is that help could only follow a demonstrated willingness to embrace austerity. Second, as the latest European Economic Advisory Group report rightly notes, the real problems have been destabilising capital flows, external imbalances and worsening competitiveness, not fiscal deficits. But one can justify fiscal austerity, brutal though it is, as the only way to force adjustments of relative costs and the needed labour market reforms. My colleague, Wolfgang Münchau, argues that the opposite is true. But I wonder whether the eurozone will survive its cure. Countries in the core would be better off themselves if they gave the weaker more time to adjust.”

If the “real problems” are as he suggests, is it not the priority to correct them?

How can the ECB be attributed the sole blame when it is clear that its policy room for manoeuvre is clearly circumscribed by both its statute and the attitude of its principal shareholder?

On his last point, this seems the most likely outcome of the next European Council, it being assumed that Italy has a prime minister in place to send to it.

This was on German TV yesterday:
Not IP-blocked (to Sweden anyway)

It’s about the banking crisis and where the money went. All in German, but for the ones who don’t understand German it might be possible to hear what some said in English. A couple of Irish people were interviewed (among them was Karl Whelan).

Refreshing to see the banking-crisis called by its proper name – banking crisis.

Wolfgang Munchau has some trenchant things to say in his Der Spiegel blog (HT Eurointelligence).


The commentary has stirred up a bit of a hornet’s nest with over 300 comments.

Glancing through them, there seems to be little sympathy for the analysis. One comment (314), in particular, struck my eye. It attributes the situation to the introduction of the Harz IV labour reforms by Schroeder which had the impact – almost certainly unintended – of creating a major low wage sector sector in the most industrially advanced country in Europe, if not in the world, with a dampening impact on wage levels in general and, of course, on consumption. As the writer comments, “the fruits of our labour are handed over to foreigners”, qualifying the policy as absurd.

It is interesting to note that the French and German social affairs ministers are, apparently, to table a joint proposal at the Social Affairs Council today for the introduction of some form of harmonised minimum wage across Europe!

As to whether Spain and Portugal will oblige by following the example of Italy, as predicted by Munchau, this seems most unlikely.

Steinbrueck, in referring to the election in Italy of “two clowns” has, apart from causing the Italian President, who happened to be on an official visit to Germany, to cancel a meeting with him, has raised further doubts about his suitability as a candidate for the post of Chancellor.

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