Taking A Step Back

Ashoka Mody advocates a “rest stop for Europe” in this opinion piece.

33 replies on “Taking A Step Back”

It seems a reasonable enough piece but Mody fails to mention EMU at all and it is difficult to see how we can re-nationalize EU fiscal policy (sane as it that is) without the return of monetary policy to the national sphere as well (the end of the Euro) or a radically different type of monetary union more like Keyne’s international clearing union.

I can not see the Teutonic gold bugs sound money types going for the Euro-Bancor option so that leaves us with the end of the Euro.

Shay: Detroit has just gone bust. The US has a banking union. It does not have a fiscal bail-out union. The dollar zone survives.

“To this end, eurozone leaders must take three key steps. The dysfunctional system of European fiscal governance should be dismantled; fiscal responsibility should be returned to member states; and, to minimize the risk of excessive future lending, private lenders should be required to bear the losses implied by unsustainable sovereign debt.” A. Mody

The folly of loading financial system losses onto sovereigns and the illusion that fiscal policy could fill in the black hole …. burning 123 and ECB printing a few trillion should do it – even an adult could get it.

Fiscal responsibility can hardly be returned to the member states as they never handed it over in the first place. What they have bound themselves to do is maintain a certain level of budgetary discipline which is a different matter.

On the US, the author says;

“The states are not regulated by the federal government; they are disciplined by the knowledge that no one will repay their debts for them.”

That is also the grand plan as far as Europe is concerned or, at least, it was.

What is most disconcerting about opinion pieces such as these is that they appear to ignore what is actually happening. The euro crisis is attributable to economic imbalances which have to be corrected and this requires a contribution from both sides of the equation. In Germany’s case, it requires, for example, action on administrative measures that have distorted two of the major components of competition (i) labour and (ii) energy. There is movement on both fronts. There is now cross-party agreement to introduce a minimum wage if not yet full agreement on the (complicated) detail. The Commission is considering a complaint from a consumer organisation with regard to what appears to be a long-running and blatant subsidisation of the energy costs of industry. Early action on the latter seems likely as a German court has also cast a jaundiced eye on this means of helping organise an “export miracle”.


It goes without saying that those countries with the biggest need to remove distortions hampering productivity are those that have either lost or have difficulty in maintaining the confidence of the markets. But full implementation of the Single Market and implementation of the competition rules that pertain to it are a sine qua non if this endeavour is to succeed. And assistance from the wealthier economies will continue to be required and is in the interest of all.

The Commissioner responsible for competition recently outlined the background.


What separates the EU from the US, and which explains why it has such difficulty in running a single currency, is that it does not have an integrated market on a par with that which exists with the US. This is a fact which appears to have escaped academic attention; and the fact that the organisation of the EU is rather unique in that the countries that make it up are also the executive of its agreed policies, the notable exception being competition.

From Contagion to Incoherence: Toward a model of the unfolding Eurozone Crisis5

This post offers readers a fully-fledged analytical model of the unfolding Eurozone Crisis. It begins with a macro-economic analysis of the Crisis’ causes and then, importantly, models the feedback between Europe’s institutional and policy responses and the contagion process that began with Greece. For the fully-fledged (wonkish) version of the paper, click here What follows below is a maths-free summary of each of the paper’s sections.

http://yanisvaroufakis.eu/2013/03/05/from-contagion-to-incoherence-toward-a-model-of-the-unfolding-eurozone-crisis/ [h/t nakedcapitalism

Yanis concludes “that, at this stage of the Eurozone Crisis, the ECB’s intervention has arrested contagion at the expense of greater macroeconomic incoherence. And since the latter always, inevitably, reinforces the former, all celebrations of the Crisis’ taming are likely to prove pure folly.”

A serious paper – improves my understanding of those ‘dodgy capital flows’.

@colm mccarthy

Detroit has just gone bust. The US has a banking union. It does not have a fiscal bail-out union. The dollar zone survives.

Absolutely but they have a fiscal union, which Mody is suggesting rolling back a little (if only to get it right the next time) and a working trans continental democracy.

There is no European Union polis[*1] to legitimize a fiscal union and no popular democratic structures to make it accountable. In retrospect the EU should have attempted to build the social and political part of the EU more thoroughly before embarking on the economic. We can see from the latest Schengen barking from Germany just how far we are from any common idea of EU identity.

[1] The EU does seem to have a nascent aristocracy containing the likes of King Monti and Duke Barosso.

by Tom aka Rusty Rustbelt

The Tragedy of Detroit

One of the great highlights of my life was my first visit to Detroit in 1962. I fell in love with the metropolis and of course the Detroit Tigers.

This week the governor of Michigan will appoint an emergency financial manager for Detroit, if anyone will take the job. Even the left-leaning Detroit Free Press is on board with a takeover. The alternative would be a Chapter 9 bankruptcy filing.

Detroit has probably been bankrupt for a long time, but no one really knows. The City of Detroit, the Detroit Water and Sewer department, the Detroit pension plans, and the Wayne County government are all a mess. About sixty square miles of the city have been largely abandoned.


The recommendation that citizens of distressed countries could handle fiscal responsibility is not easy to square with opinion polls showing Fianna Fail not gone away at all. A few sweet nothings from Micheal Martin to David Begg and the public sector unions could be back onside (from FF perspective) quite quickly.

Note incidentally the GRA playing the role of awkward squad on Croke Park II. Question: what was PJ Mara’s occupation in or around 1997? You can’t teach an old dog new tricks but it doesn’t mean the old tricks don’t work.

The Egyptians talk about the “Deep State”, the entrenchment of the Mubarak era operatives. We have that too. Not to be trusted.

@ All

As a matter of general interest, the Schengen Agreement relates to the physical control of persons (passports etc.) at borders. The issue of free movement – the right to live and work in another country of the EU – is a different matter. The UK and Ireland are not participating in Schengen. They will therefore be applying the same rules to the citizens of these two countries as Germany will be until there is agreement – which is a matter for the countries concerned – to allow them to join the Schengen arrangements.

Incidentally, the issue of the social benefit arrangements to apply to the citizens of Romania and Bulgaria is currently a matter of some controversy in the UK.

Kind of fun that some are recommending Europe to follow the US model in regards to mobile phone networks:

“Throughout much of the United States, cell phone service is terrible (so is broadband, as Susan Crawford shows). And not just in rural or sparsely populated areas, but cell phone calls routinely drop in major metropolitan areas.”

Companies do well in the US, can the same said about its citizens? If not, what does it say about where US priorities are and is that something we’d like to have?

He may be from Madras but he is parroting the American gospel on the Euro. From the US viewpoint the Euro is in competition with the US$ as the global reserve currency. They are looking forward to an EZ implosion.

Even within the US there are respected pundits that see the need for the European Union to have a strong and stable currency. More importantly there are well respected Europeans that know it is essential for the future of the European Union that a majority of members are in currency union with clout. Having achieved clout on the trade front now is not the time to have a monetary union collapse.

I am surprised that Glauck is playing cheap, short term politics with the EZ. It behooves the PIIGS to align with France to establish a back up to the EZ if Germany decides to commit economic suicide.

@ Jesper

I made no comment about the issue of quality. The point relates to a free market and regulation – or the lack of it – when trying to run a single currency. My expectation would be that the Euro Area will make a better job of it than the US. Meanwhile, check your roaming charges when next you are on holiday!

Re: EZ Rest-Stop?
The Euro bus has already become a S*1T house for a sizeable minority of Europeans.

From the article:
“German President Joachim Gauck cautioned against the blind pursuit of an “ever-closer” European Union, acknowledging that the growing inequality among member states is generating “a sense of unease, even unmistakable anger,” and increasing the risk of national humiliation.””

The German president appears to empathise with and be more in tune with European opinion than either Merkel or Schauble. Perhaps there is some hope for Europe after all.

from Wikipedia
“he came to prominence as an anti-communist civil rights activist in East Germany.”
That took guts and conviction, once upon a time.


You say:
‘The point relates to a free market and regulation – or the lack of it – when trying to run a single currency. My expectation would be that the Euro Area will make a better job of it than the US.’
is something you might want to elaborate on. Would you mind explaining why Europeans would do it better than Americans?

Seems like hubris to me.

@Joseph Ryan

An anti-communist civil rights activist becomes an anti EU integration activist.

To me it means an anti in one regime finds a similar role in his next milieu.

The question we have to ask ourselves is can we thrive in todays world if we revert to our age old “ourselves alone” mindset within our hermitic island. The EU and EZ were our salvation. We got three decades of unprecedented prosperity out of our involvement. We then flogged the economy to death and to add insult to injury bailed out our private sector banks at taxpayer expense. There is not the slightest shadow of doubt in my mind but that we did this to ourselves.

The right wing British government were interested in low cost labour. Now that they are in a multiple dip recession and the lower classes are getting restive they have to throw a bone to the lower classes to calm them down. No better bone than the risk free shutting of the gate on foreigners.

We in Ireland cannot wrap ourselves in delusions of silk and ermine past grandeur as the British can. Ireland has been and still is the country of hard slog. Ireland’s progress or lack thereof depends on the energy and intelligence of its people not on one trick ponies like low corporate taxes or similar no brain gimmicks.

We have the level playing field we always yearned for in the EU-EZ. Could we reasonably ask for anything more.

“While the risk that governments will succumb to fiscal temptation remains, citizens’ current suffering is likely to deter future excesses.”
Does anyone believe that in the Ireland context? What has changed in Ireland governance to prevent future govt irresponsibility?

Another way of putting it: has it been the Irish themselves trying to solve their problems or the Troika /others, albeit within a a screwed up EZ?
I hear many Irish comments that hope the Troika stays around for a bit longer to ensure that positive, meaningful (objective) change happens.

Having said that, the majority of people have consistently voted for the status quo…..when self-interest is at stake of course. Change by all means, but not when it is at personal expense….so no real change is generally the result on so many issues.

Fractional Reserve Banking is a weapon of mass destruction. It is well know to those who study history. Allowing the rich to destroy the money of a state is simply cutting the Sovereign out of the equation. The rich get richer and buy when the bust is firmly established. They are not limited to national borders. Politicians are so restricted. Guess who wins? Wherever the bulk of the manipulators are based will be most protected, from the point of view of currency, req

@ Paul W

I hear the comment that you mention quite often myself. However, even with the departure of the troika, things will have changed dramatically under the agreement reached – by the Irish presidency – on the so-called “two-pack” regulations. Rabbits out of hats on budget day, such as the costly and mistaken decision on decentralisation, will no longer be possible.



I think that it is a fair issue to suggest that Mr Mody should outline his own role in the failures of the European Department of the IMF during the bubble.

Of course he has a different perch now to see inefficierncies etc but I would think that having signed off on a financial stability report on Ireland in 2006, he should at least explain why evidence of an out of control bubble was ignored – – several years of annual credit growth of close to 30% etc. He could in fact assist the planned committee of inquiry.

@ MH

Good point!

It occurs to me that this paper to which I linked on another thread fits well into the topic of this one.


While laying no claim to understanding the technicalities, the logic is readily understandable even to the layman and very persuasive. Professor Sinn certainly thinks so as it has now also been published by CESIFO.

The Eagles, as has been remarked on previously on this blog, put the matter well (Hotel California).

Last thing I remember, I was
Running for the door
I had to find the passage back
To the place I was before
“Relax, ” said the night man,
“We are programmed to receive.
You can check-out any time you like,
But you can never leave! “


“While laying no claim to understanding the technicalities, the logic is readily understandable even to the layman and very persuasive. Professor Sinn certainly thinks so as it has now also been published by CESIFO.”

80% of the sample refers to Target-2 – the other presumably to ‘official lending’ – a somewhat ‘dubious’ conflaltion of the data – and of course this fits with Herr Prof Sinn’s little deutschelander crusade on Target-2.

I’m .. er .. not ‘persuaded’.

That said, your status as the champion of Dear Lorenzo and the Herr Professor has been enhance by your contribution to this thread – and well received iin certain circles one presumes.

BTW, the BAU of the BBHF has noted the Freudian slip on the deutschelander eagle and where is has .. er .. landed!

So Detroit is bankrupt. Maybe. Let us take it at face value that Detroit citizens face massive cuts in public pay and pensions and social welfare and that bondholders face a torching. This is proof that the regime proposd in the opener is working but not that it works. As I understand it the argument is that if there is a genuine possibility of this calamity then market forces will act to make sure it doesn’t happen. I really can’t see why anybody in Ireland would wish for such a system for we are surely one of the front runners to be the Detroit of that brave new world.

Maybe we will get our “independence” later this year. But make no mistake that this will only be because we signed up to the fiscal treaty and we thus have a funder of last resort should we get into trouble again. That is the real world and makes the propositions put forward in the opener seem so terribly naive.

@ David O’Donnell


Stiglitz seems to have just reproduced old talking points.

It’s foolish to suggest that austerity was the main reason for the support of both Beppe Grillo and Berlusconi, a now convicted felon.

Stiglitz downplays the importance of local reform but without it, what can change after decades of paralysis?

I wish economists like him presented data on how a reflation in the north would assist struggling economies. Saying it’s self-evident isn’t good enough.

As for trade surpluses, that’s also a little more complicated than presented.

In 2009, Germany exported 25% more than the United States in gross terms but only 5% more in value added terms. China gains a few dollars from each Apple iPhone assembled but its trade deficit with the US rises at final manufacturing cost per unit shipped.

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