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Currency Wars: The New World Ordoliberalism

There’s been quite a bit of chat­ter late­ly about the threat of “Cur­ren­cy Wars” amongst glob­al pol­i­cy­mak­ers. A sit­u­a­tion might be declared a “cur­ren­cy war” when one or more coun­tries engage in poli­cies that end up sig­nif­i­cant­ly chang­ing the val­ue of their cur­ren­cies, shift­ing the glob­al trade dynam­ic. But nations might engage in poli­cies that sig­nif­i­cant­ly change the val­ue of their cur­ren­cies for a lot of rea­sons, so the dec­la­ra­tion of a cur­ren­cy war is nev­er tak­en light­ly. It’s also not tak­en light­ly since it can sig­nal a shift in fun­da­men­tal mar­ket forces that can have broad and sus­tained impacts on the glob­al finan­cial mar­kets and the broad­er glob­al econ­o­my. Present­ly, the US and Japan have unleashed the finan­cial bazookas: Both the Fed­er­al Reserve and the Bank of Japan (BOJ) have near zero inter­est rates and both are sig­nal­ing that they will hold those rate at these his­tor­i­cal­ly low lev­els until the glob­al econ­o­my appears to be well on the road to recov­ery. Addi­tion­al­ly, the Fed and BOJ are employ­ing addi­tion­al “mar­ket oper­a­tions” that involve buy­ing and assets from finan­cial insti­tu­tions (e.g. the Fed’s “Quan­ti­ta­tive eas­ing”), typ­i­cal­ly used to free up cred­it for the finan­cial sys­tem or low­er bor­row­ing costs). So it’s pret­ty clear that his­tor­i­cal­ly low inter­est rate are going to be the norm for the next cou­ple of years or longer and, over­all, this like­ly to be good news for the world giv­en the ongo­ing eco­nom­ic [1] trou­bles [2] in these two crit­i­cal economies.

In Europe, how­ev­er, the Euro­pean Cen­tral Bank (ECB) has a decid­ed­ly dif­fer­ent over­all path to recov­ery. The euro­zone’s cen­tral bank­ing strat­e­gy has been to main­tain a sur­pris­ing tight over­all cred­it envi­ron­ment with the ECB hold­ing its overnight rate at 0.75% vs the near 0% rates at the Fed and BOJ. In addi­tion, while, the ECB has also agreed, in prin­ci­ple, to engage in open mar­ket bond pur­chas­es to ease up the euro­zone’s sov­er­eign debt cri­sis, no bonds have actu­al­ly been pur­chased yet by the ECB [3]. To be fair, the ECB has engaged rather exten­sive emer­gency lend­ing to euro­zone banks [4] in place of out­right bond pur­chas­es (over 1 tril­lion euros), but as we’re going to see below, the ECB’s cur­rent poli­cies also seem almost designed to ensure the bulk of those emer­gency loans get paid back ear­ly.

In oth­er words, while the ECB appears to agree with the Fed and BOJ that cen­tral bank assets pur­chas­es can be a legit­i­mate pol­i­cy under emer­gency cir­cum­stances, the ECB appears to take a much stricter def­i­n­i­tion of what con­sti­tutes “an emer­gency”. While the Fed and BOJ seem to be treat­ing high unem­ploy­ment in the face of near zero rates as “an emer­gency”, the ECB has tak­en a decid­ed­ly dif­fer­ent view. From the ECB’s appar­ent per­spec­tive, high unem­ploy­ment is sim­ply what is to be expect­ed as a con­se­quence of eco­nom­ic down­turns and result­ing aus­ter­i­ty. These are intend­ed to be tem­po­rary pains required for future pros­per­i­ty. Ensur­ing “price sta­bil­i­ty” (low infla­tion) is, instead, the sole man­date of the ECB and that means the only emer­gen­cies that war­rant sig­nif­i­cant cen­tral bank actions in the euro­zone are those emer­gen­cies that risk the pur­chas­ing pow­er of the euro itself.

The Fed, on the oth­er hand, has a dual man­date [5] of price sta­bil­i­ty and full employ­ment. Like the ECB, the BOJ has a sin­gle man­date of price sta­bil­i­ty. But unlike the ECB, the BOJ is effec­tive­ly behav­ing as if it has the Fed’s dual man­date [6]. This fun­da­men­tal “man­date divide” may not seem very sig­nif­i­cant when the glob­al econ­o­my is doing well. But when the world is try­ing to claw its way out of the world glob­al reces­sion since the Great Depres­sion, inter­est rates are near zero, and two major cen­tral announce aggres­sive new mon­e­tary eas­ing, it can become prob­lem­at­ic when oth­er major cen­tral banks decide that reduc­ing cred­it and shrink­ing deficits is a high­er pri­or­i­ty [7]:

G20 set to dilute big pow­ers’ demands on cur­ren­cies

By Jan Strupczews­ki and Tet­sushi Kaji­mo­to
MOSCOW | Fri Feb 15, 2013 3:22pm EST

(Reuters) — The Group of 20 nations will not sin­gle out Japan over the weak yen and will dis­re­gard a call from G7 pow­ers to refrain from using eco­nom­ic pol­i­cy to tar­get exchange rates, accord­ing to a text draft­ed for finance lead­ers.

A G20 del­e­gate who has seen the com­mu­nique — pre­pared by finance offi­cials for their boss­es — also said it would make no direct men­tion of new debt-cut­ting tar­gets, some­thing Ger­many is press­ing for but which the Unit­ed States want­ed struck out.

If adopt­ed by G20 finance min­is­ters and cen­tral bankers meet­ing in Moscow on Fri­day and Sat­ur­day, Japan will escape any cen­sure for its expan­sion­ary poli­cies which have dri­ven the yen low­er and drawn demands for action from some quar­ters.

“There will not be a heavy clash about cur­ren­cies in the end, because nobody can risk such a neg­a­tive sig­nal,” said anoth­er G20 del­e­ga­tion source.

The cur­ren­cy mar­ket was thrown into tur­moil this week after the Group of Sev­en — the Unit­ed States, Japan, Ger­many, Britain, France, Cana­da and Italy — issued a joint state­ment stat­ing that domes­tic eco­nom­ic pol­i­cy must not be used to tar­get cur­ren­cies, which must remain deter­mined by the mar­ket.

Tokyo said that reflect­ed agree­ment that its bold mon­e­tary and fis­cal poli­cies were appro­pri­ate but the show of uni­ty was shat­tered by off-the-record brief­in­gs crit­i­cal of Japan.

A quick review of that recent G7 dra­ma and sub­se­quent whip­saw­ing in the yen [8]:
The cur­ren­cy mar­ket ker­fuf­fle was, in part, a con­se­quence of the nuanced/vague nature of the G7’s state­ment on Japan’s stim­u­lus spend­ing and cur­ren­cy deval­u­a­tion. The G7 com­mu­ni­cat­ed this by basic say­ing that there would be no attempt to cen­sure Japan over its new aggres­sive mon­e­tary eas­ing. Fol­low­ing this state­ment, a Japan­ese offi­cial pub­licly declared it to be a G7 endorse­ment of Japan’s poli­cies and those poli­cies include talk of inten­tion­al­ly tar­get­ing a fall in the yen. So the mar­kets took this as a sign that the yen would be allowed to fall fur­ther and the yen did just that: it fell fur­ther. Then a G7 offi­cial released a com­ment say­ing that [9], no, the Japan­ese offi­cial was incor­rect and the G7 was indeed con­cerned about the rate of the fall in the val­ue of the yen and also con­cerned over state­ments by Tokyo over tar­get­ing exchange rates. In oth­er words, the G7 said stim­u­lus spend­ing designed to increase inter­nal demand is ok, just don’t inten­tion­al­ly try to deval­ue a cur­ren­cy in order to make exports more attrac­tive. Or some­thing along those lines. Cur­ren­cy wars tend to involve a lot of rhetor­i­cal con­fu­sion [10].


The G20 draft mere­ly sticks to pre­vi­ous lan­guage on the need to avoid exces­sive cur­ren­cy volatil­i­ty, the del­e­gate said.

The yen has fall­en by around 20 per­cent since Novem­ber. Hav­ing firmed ear­li­er on Fri­day, it turned tail and dropped about 0.6 per­cent against the dol­lar and euro in response to the com­mu­nique details.



Offi­cials lined up to pour cold water on talk of a cur­ren­cy war where coun­tries indulge in com­pet­i­tive deval­u­a­tions.

Euro­pean Cen­tral Bank Pres­i­dent Mario Draghi said recent spar­ring over cur­ren­cies was “inap­pro­pri­ate, fruit­less and self-defeat­ing” and U.S. Trea­sury offi­cial Lael Brainard warned against “loose talk”.

France has been a lone voice call­ing for euro exchange rate tar­gets. Draghi said the cur­ren­cy was trad­ing in line with long-term aver­ages, a point endorsed by Inter­na­tion­al Mon­e­tary Fund chief Chris­tine Lagarde.

Also, make a note of France’s lone call for an exchange rate tar­get, as it will be rel­e­vant to an impor­tant lessons high­light­ed below regard­ing a new dynam­ic in our con­tem­po­rary cur­ren­cy conun­drum: cur­ren­cy exchange rate poli­cies can become exceed­ing­ly com­pli­cat­ed when cur­ren­cy unions are involved. They tend to lend them­selves to win-lose sit­u­a­tions. Or win-“win more” or lose-“lose less”. Win-win sit­u­a­tions are also pos­si­ble, but we haven’t seen too many of those emerge out of the euro­zone cri­sis yet. *fin­gers crossed!*

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The meet­ing in Moscow of min­is­ters from the G20 nations, which account for 90 per­cent of the world’s gross domes­tic prod­uct and two-thirds of its pop­u­la­tion, also looked set to lay bare dif­fer­ences over the bal­ance between growth and aus­ter­i­ty poli­cies.

The draft com­mu­nique reflect­ed a row brew­ing between Europe and the Unit­ed States over extend­ing a promise to reduce bud­get deficits beyond 2016 A pact struck in Toron­to in 2010 will expire this year if lead­ers fail to agree to extend it at a G20 sum­mit of lead­ers in St Peters­burg in Sep­tem­ber.

The G20 put togeth­er a huge finan­cial back­stop to halt a mar­ket melt­down in 2009 but has failed to reach those heights since. At suc­ces­sive meet­ings, Ger­many has pressed the Unit­ed States and oth­ers to do more to tack­le their debts. Wash­ing­ton in turn has urged Berlin to do more to increase demand.

“It’s very impor­tant to cal­i­brate the pace of fis­cal con­sol­i­da­tion,” Brainard said. “It’s ... impor­tant to see demand in the euro area and some of that must take place through inter­nal rebal­anc­ing.”

There will be no direct men­tion of fis­cal tar­gets, in response to U.S. pres­sure, reflect­ing its focus on run­ning expan­sive poli­cies until unem­ploy­ment falls, the G20 del­e­gate said.

Cana­di­an Finance Min­is­ter Jim Fla­her­ty, address­ing the work­ing din­ner, said the growth ver­sus aus­ter­i­ty debate rep­re­sent­ed a “false dichoto­my” that should not pre­clude action to boost jobs and growth now while tar­get­ing bal­anced bud­gets lat­er.

The G7 and G20 pow­ers are large­ly uni­fied in their oppo­si­tion to tar­get­ed cur­ren­cy deval­u­a­tions. The con­flict between the US and Ger­man over long term “fis­cal tar­gets”, how­ev­er, under­scores a more fun­da­men­tal dis­agree­ment between the gen­er­al role gov­ern­ments should be allowed to play dur­ing an eco­nom­ic cri­sis: should gov­ern­ments and cen­tral banks even be allowed to engage in the kinds of aggres­sive mon­e­tary poli­cies we see com­ing from the Fed and BOJ? Or should the pol­i­cy response focus almost exclu­sive­ly on set­ting “fis­cal tar­gets”. The term “fis­cal tar­gets” is a fan­cy phrase for “gov­ern­ment spend­ing aus­ter­i­ty intend­ed to cut deficits” and its clear­ly the approach favored by the ECB and its chief mem­ber the Bun­des­bank. Ger­many’s Bun­des­bank is chief amongst the sub­or­di­nat­ed nation­al cen­tral banks that oper­ate in the euro­zone and what the Bun­des­bank gen­er­al­ly wants, the Bun­des­bank gen­er­al­ly gets. And the Bun­des­bank real­ly does not like low inter­est rates and LOVES “fis­cal tar­gets”. To a large extent, when we talk of a Fed/ECB divide, it’s real­ly a Fed/Bundesbank divide.

In the above excerpt, there are ref­er­ences to the row over whether or not the “fis­cal tar­gets” set by the G20 in Toron­to in 2010 — and set to expire this year — should be renewed for 2016 [11]. The tar­gets, cham­pi­oned by Ger­many, involve the major economies of the world cut­ting their deficits in half by 2016. Ger­many appears to be inter­est­ing in set­ting up more “con­crete” deficit-cut­ting agree­ments. At this point it’s unclear what the enforce­ment mech­a­nism Ger­many is envi­sion­ing to ensure com­pli­ance with such tar­gets, but con­sid­er­ing that this these call for glob­al “fis­cal tar­gets” are com­ing from Ger­many in the midst of extreme glob­al eco­nom­ic weak­ness — espe­cial­ly weak­ness­es in the euro­zone — it’s pret­ty clear that Ger­man pol­i­cy­mak­ers would real­ly like to see aus­ter­i­ty go glob­al [12]:

G‑20 at Odds Over Fis­cal Goals as Fails to Meet 2010 Aim
By Ilya Arkhipov & Rain­er Buer­gin — Feb 15, 2013 6:57 AM CT

Group of 20 gov­ern­ments dis­agreed over the strength of new fis­cal goals as they risk miss­ing the tar­gets set three years ago.

After com­mit­ting at a Toron­to sum­mit in 2010 to halve bud­get deficits by this year, most advanced nations are now fac­ing fail­ure on that score and on a relat­ed pledge to sta­bi­lize their debt by 2016.

As G‑20 finance chiefs meet in Moscow, the chal­lenge now is to find a replace­ment for the Toron­to goals after weak eco­nom­ic growth ham­strung fis­cal con­sol­i­da­tion world­wide. While Ger­man Finance Min­is­ter Wolf­gang Schaeu­ble advo­cat­ed “con­crete” tar­gets, Russ­ian offi­cial Kse­nia Yudae­va said for­mal com­mit­ments would be “coun­ter­pro­duc­tive.”

“We might want to have long-term prin­ci­ples and par­tic­u­lar strate­gies for coun­tries with high deficit lev­els,” Yudae­va, Russia’s G‑20 sher­pa, said in an inter­view. “But I don’t think we need any pre­cise com­mit­ments like dur­ing Toron­to. It should be much more flex­i­ble.”

The G‑20 will dis­cuss adopt­ing a new dead­line for deficit goals and may set 2016 as the new tar­get date, Russ­ian Finance Min­is­ter Anton Silu­anov said today. Giv­en the debt bur­den of indus­tri­al nations, “a cred­i­ble path of debt reduc­tion is real­ly essen­tial and the pos­i­tive envi­ron­ment should be used by the G‑20 coun­tries,” Schaeu­ble said.

Fis­cal Stance

Assess­ing the appro­pri­ate stance of fis­cal pol­i­cy has caused rifts between the major economies since the glob­al finan­cial cri­sis began in 2007. It’s pit­ted the U.S., whose offi­cials have pre­ferred to focus on boost­ing eco­nom­ic growth in the short term, against a Euro­pean push for imme­di­ate aus­ter­i­ty mea­sures.


‘Very Restric­tive’

The Euro­pean fis­cal stance remains “very restric­tive,” leav­ing room for eas­ing as the region’s debt cri­sis ebbs, Brazil­ian Finance Min­is­ter Gui­do Man­te­ga said.

The finance chiefs already watered down their Toron­to agree­ment after Novem­ber talks in Mex­i­co City, say­ing they would ensure “the pace of fis­cal con­sol­i­da­tion is appro­pri­ate to sup­port recov­ery.”


To stim­u­late or not to stim­u­late, that is the ques­tion (to be asked by a cen­tral­ly coor­di­nat­ing author­i­ty)

The major cen­tral banks don’t just have a divide in their over­all philoso­phies regard­ing the risks and ben­e­fits of mon­e­tary stim­u­lus. From a pow­er-struc­ture stand­point the ECB is oper­at­ing in a vast­ly dif­fer­ent envi­ron­ment from its US and Japan­ese coun­ter­parts. For starters, the Fed­er­al Reserve and BOJ are both cen­tral banks for a sin­gle econ­o­my where­as the ECB is kind of the chief cen­tral bank for a large num­ber of nations that each have their own cen­tral banks. As such, the ECB is con­stant­ly forced to choose a sin­gle set of mon­e­tary poli­cies for a wide vari­ety of nations with very dif­fer­ent needs. Addi­tion­al­ly, because mon­ey is like­ly to flow with­in the euro­zone as a con­se­quence to chang­ing eco­nom­ic real­i­ties it’s very pos­si­ble for poli­cies that dam­age some euro­zone mem­bers to end up help­ing oth­er euro­zone mem­bers. For instance, one of the more per­sis­tent pat­terns we’ve seen emerg­ing dur­ing the course of the euro­zone cri­sis has been ris­ing bor­row­ing costs for the weak­est nations cou­pled with ultra-low (and some­times neg­a­tive) bor­row­ing costs for Ger­many. This type of phe­nom­e­na is not some­thing the Fed of BOJ have to face.

Anoth­er dif­fer­ence in the pow­er struc­tures of the ECB vs the Fed or BOJ is that when euro­zone mem­bers fall into finan­cial trou­bles the con­trol of the entire nation is hand­ed over to an ECB-EU-IMF “troi­ka” that gets to man­age the coun­try, set poli­cies, and impose aus­ter­i­ty should the troi­ka choose do so. And the ECB is always part of the troi­ka. In oth­er words, while cen­tral banks are nor­mal­ly polit­i­cal­ly “inde­pen­dent”, there has always been a risk that the politi­cians would just replace the cen­tral bankers should those bankers uni­lat­er­al­ly decide run a “tight mon­ey” pol­i­cy over strong pub­lic oppo­si­tion. That risk of an indi­rect pub­lic revolt is just not a big issue for the ECB. As long as the ECB’s poli­cies please the euro­zone’s most pow­er­ful mem­bers (Ger­many, in par­tic­u­lar), the ECB will be large­ly free to engage in the kinds of poli­cies that would nor­mal­ly leave a pop­u­lace livid. This “troi­ka” real­i­ty [13] great­ly facil­i­tates the ECB’s abil­i­ty to impose tight-mon­ey pro-aus­ter­i­ty poli­cies.

These fun­da­men­tal dif­fer­ence in cen­tral bank oper­a­tional con­sid­er­a­tion raise an addi­tion­al ques­tion regard­ing the above arti­cle excerpts: When pol­i­cy­mak­ers talk about the need for more “con­crete” fis­cal tar­gets and new “promis­es” to cut deficits in half by 2016, how could such “promis­es” and “goals” car­ry any sort of weight with­out some­thing like an inter­na­tion­al ana­log to the euro­zone that includes a kind of super-cen­tral bank or super-troi­ka to man­date poten­tial­ly unpop­u­lar poli­cies? These might seem like sil­ly “out there” ques­tions giv­en the cur­rent G20 divide over whether or not to extend the 2010 Toronot “fis­cal tar­gets” or cen­sure Japan for it’s aggres­sive stim­u­lus. But keep in mind that there are pol­i­cy­mak­ers with big­ger inter­na­tion­al plans on their minds. This includes the Euro­pean Union’s eco­nom­ic and mon­e­tary affairs min­is­ter Olli Rehn. If you think of Mario Draghi’s ECB as the “aus­ter­i­ty-lite” bloc in the euro­zone and the Jens Wei­d­man­n’s Bun­des­bank as the “aus­ter­i­ty-heavy” crowd, Rehn is sort of in the mid­dle [14]. He’s been call­ing for greater cen­tral bank mon­e­tary pol­i­cy “coor­di­na­tion” for years. It’s not exact­ly clear what exact­ly he has in mind, but back in 2010 he said that he saw “a cer­tain need for rein­forced inter­na­tion­al coor­di­na­tion of mon­e­tary pol­i­cy” and then sug­gest­ed that the IMF could be the “coor­di­na­tor” in chief [15]:

Glob­al mon­e­tary pol­i­cy coor­di­na­tion need­ed: EU’s Rehn

By Jan Strupczewsk­tae

WASHINGTON | Sat Oct 9, 2010 11:35am EDT

(Reuters) — The world needs more coor­di­na­tion of mon­e­tary pol­i­cy to avoid exchange rate volatil­i­ty and achieve bal­anced eco­nom­ic growth, the Euro­pean Union’s eco­nom­ic and mon­e­tary affairs com­mis­sion­er said on Fri­day.

Such coor­di­na­tion could take place in the frame­work of the Inter­na­tion­al Mon­e­tary Fund or the Group of 20 biggest devel­op­ing and devel­oped economies, the com­mis­sion­er, Olli Rehn, said as the IMF and World Bank con­vened meet­ings here.

“I can see that there is a cer­tain need for rein­forced inter­na­tion­al coor­di­na­tion of mon­e­tary pol­i­cy,” Rehn told Reuters in an inter­view. “We are dis­cussing with our part­ners the pos­si­ble ways and means to advance such coor­di­na­tion in the G20 and IMF.”

Finance min­is­ters and cen­tral bank gov­er­nors from the Group of Sev­en rich­est indus­tri­al­ized coun­tries were to dis­cuss the issue on Fri­day evening, and the talks are like­ly to be con­tin­ued in the wider G20 forum at the end of the month.

“I am look­ing for­ward to the G7 and lat­er the G20 dis­cussing the chances of enhanc­ing inter­na­tion­al coor­di­na­tion of mon­e­tary pol­i­cy, where the G20 and the IMF might play an enhanced role,” Rehn said.

Asked if it should be the IMF that would help coor­di­nate poli­cies glob­al­ly, Rehn said: “In my view the IMF is a nat­ur­al choice for facil­i­tat­ing enhanced inter­na­tion­al coor­di­na­tion of mon­e­tary pol­i­cy.

The need for more coor­di­na­tion is under­lined by recent actions by sev­er­al coun­tries around the world to weak­en their cur­ren­cies in order to help exports and boost eco­nom­ic growth.


“In order to achieve a rebal­anc­ing of glob­al growth, which is the main mes­sage of the IMF annu­al meet­ings, there is a need to address the cur­ren­cy issue as well; exchange rates should reflect eco­nom­ic fun­da­men­tals,” he said.


Asked if the euro, trad­ing around $1.40, was too strong, Rehn said:

“Since sev­er­al oth­er cur­ren­cies have been put on a path of depre­ci­a­tion recent­ly, the euro has gained in val­ue. It is not good for the Euro­pean econ­o­my, nor for the world econ­o­my, for the euro area to car­ry a dis­pro­por­tion­ate bur­den of exchange rate volatil­i­ty.”

The above arti­cle was writ­ten in Octo­ber 2010, when the euro was trad­ing near $1.40 as a con­se­quence of the ECB run­ning a rel­a­tive­ly tight mon­e­tary pol­i­cy com­pared to the oth­er big cen­tral banks. The fol­low­ing arti­cle is from ear­li­er this month but eeri­ly sim­i­lar: Mr. Rehn reit­er­at­ed his calls for more inter­na­tion­al coor­di­na­tion of mon­e­tary pol­i­cy while fret­ting over the dan­gers a ~$1.35 euro could do to the euro­zone economies. Inter­est­ing­ly, at this point a num­ber of Europe’s lead­ing exporters don’t appear to mind an increas­ing euro [16]:

EU’s Rehn wants clos­er cur­ren­cy coor­di­na­tion — report

VIENNA | Sat Feb 9, 2013 10:45am GMT

(Reuters) — The Euro­pean Union’s top mon­e­tary offi­cial wants clos­er coor­di­na­tion on cur­ren­cies to avoid poten­tial­ly dam­ag­ing dis­rup­tions to world trade, he told an Aus­tri­an mag­a­zine.

The remarks by Eco­nom­ic and Mon­e­tary Affairs Com­mis­sion­er Olli Rehn come amid a stand­off between France and Ger­many over whether a strength­en­ing euro needs an offi­cial Euro­pean response or whether mar­kets should be left to set exchange rates.

Ger­many said this week the strong euro was not a con­cern and sig­nalled oppo­si­tion to a French pro­pos­al for a mid-term tar­get rate, expos­ing pol­i­cy divi­sions over main­land Europe’s cur­ren­cy between its top two economies.

The Euro­pean Cen­tral Bank will mon­i­tor the eco­nom­ic impact of a strength­en­ing euro, ECB Pres­i­dent Mario Draghi said on Thurs­day, feed­ing expec­ta­tions the climb­ing cur­ren­cy could open the door to an inter­est rate cut.

“I recog­nise the risk of com­pet­i­tive deval­u­a­tion. We have recent­ly warned the gov­ern­ment of Japan about cor­re­spond­ing steps towards depre­ci­a­tion of the yen,” Rehn told Pro­fil mag­a­zine in an inter­view pub­lished on Sat­ur­day.

“We need reforms in the inter­na­tion­al mon­e­tary sys­tem so as to avoid neg­a­tive influ­ences on inter­na­tion­al trade. The coor­di­na­tion with­in the G7, G20 or the IMF should there­fore be improved,” he added, refer­ring to pol­i­cy-set­ting groups of lead­ing nations and the Inter­na­tion­al Mon­e­tary Fund.

Rehn said a stronger euro would be very harm­ful main­ly for the south­ern euro zone coun­tries, while Ger­many, Aus­tria, the Nether­lands and Fin­land could han­dle this. “But the south­ern coun­tries would have prob­lems with their exports to oth­er parts of the world,” he said.


The euro­zone’s Cur­ren­cy Civ­il War. Coor­di­nat­ing is hard
One of the fun­da­men­tal chal­lenges fac­ing glob­al­iza­tion is over the ques­tion of whether or not the pri­or­i­ties should be to cre­ate a uni­fied set of glob­al rules or a uni­fied set of glob­al goals. Some glob­al goals — say, reduc­ing suf­fer­ing — might be best approached with a glob­al rule like the uni­ver­sal enforce­ment of human rights. But oth­er goals, like avoid­ing a glob­al depres­sion, might not do so well by the impo­si­tion of glob­al rules on mon­e­tary poli­cies. And as France has been dis­cov­er­ing late­ly, if your nation live’s under a uni­fies mon­e­tary pol­i­cy regime you prob­a­bly don’t want the aus­ter­i­ty fetishists run­ning that regime [17]:

Analy­sis: France runs into Ger­man wall on EU growth dri­ve

By Mark John

PARIS | Sun Feb 10, 2013 6:57am EST

(Reuters) — French efforts to divert Europe from eco­nom­ic aus­ter­i­ty have foundered twice in a week due to Ger­man resis­tance, under­lin­ing a grow­ing pol­i­cy divide that is hob­bling the core part­ner­ship.

Berlin reject­ed Pres­i­dent Fran­cois Hol­lan­de’s call on Tues­day to set a mid-term tar­get for the euro, a move he hoped would bring the sin­gle cur­ren­cy down to a lev­el that would make it eas­i­er for French indus­try to sell its goods abroad.

Three days lat­er, Ger­man Chan­cel­lor Angela Merkel joined forces with Britain’s David Cameron at a Brus­sels sum­mit to push through the first ever cut in the 27-nation’s bud­get, tak­ing an axe to spend­ing on infra­struc­ture projects backed by Paris.



Hol­lande could have expect­ed a hero’s wel­come in Brus­sels for his han­dling of his first war in the African state of Mali, where French forces have dri­ven al Qae­da-linked rebels out of its main north­ern towns and into the hills.

More­over, with Cameron hav­ing put Britain’s EU mem­ber­ship on the line by promis­ing a ref­er­en­dum on it if re-elect­ed, last week’s sum­mit could have offered France and Ger­many the stage to ral­ly togeth­er in a demon­stra­tion of Euro­pean sol­i­dar­i­ty.

But in the bud­get wran­gling that ensued, it was Hol­lande who looked iso­lat­ed as his efforts to forge a coali­tion of south­ern and east­ern Euro­pean states demand­ing more gen­er­ous spend­ing were quashed by Ger­many, Britain and oth­er north­ern coun­tries.

EU offi­cials were mys­ti­fied when Hol­lande, cit­ing oth­er engage­ments, chose not to attend a pre-sum­mit hud­dle with Cameron, Merkel and EU Pres­i­dent Her­man Van Rompuy on Thurs­day after­noon where key details of the deal were ham­mered out.

From then on, what Cameron called the band of “like-mind­ed bud­get dis­ci­pli­nar­i­ans” includ­ing Ger­many, the Nether­lands, Swe­den and Fin­land had the upper hand and for France, it was a mat­ter of sal­vaging what it could from the sum­mit.



Ulti­mate­ly, cuts to an EU bud­get which in total rep­re­sents bare­ly one per­cent of the region’s eco­nom­ic out­put are unlike­ly to influ­ence how quick­ly it comes out of the cur­rent down­turn.

How­ev­er the clash between Paris and Berlin on the lev­el of the euro cur­ren­cy points at deep-root­ed dif­fer­ences in the nation­al inter­ests of the two coun­tries that may prove more telling in the long run.

A study by Deutsche Bank last month cal­cu­lat­ed that France’s exporters start being priced out of world mar­kets when the euro ris­es above 1.22–1.24 dol­lars — a lev­el it has already long left behind to trade at $1.33 now.

Ger­many’s high­er val­ue-added export prod­ucts, how­ev­er, only start to be dis­ad­van­taged when the exchange rate is above $1.54. Until that point, there is lit­tle dam­age to the Ger­man econ­o­my and indeed some ben­e­fit in a strong euro because it keeps the prices of import­ed goods and hence infla­tion in check.

“We do not agree on eco­nom­ic pol­i­cy and a num­ber of oth­er areas,” Jean-Dominique Giu­liani, head of the Robert Schu­man Foun­da­tion, a French think tank on Europe, told Europe 1 radio.

“The gulf between France and Ger­many is widen­ing some­what and that wor­ries me.”

The Deutsche Bank study ref­er­enced in the above excerpt reveals anoth­er impor­tant com­pli­ca­tion fac­ing the euro­zone nations when attempt­ing to craft­ing a one-size-fits-all-pol­i­cy for the whole cur­ren­cy union: One of the pat­terns that’s emerged is that when­ev­er bad news hits the mar­kets, we find mon­ey flow­ing out of the weak­er euro­zone bonds mar­kets and into Ger­man bunds [18]. Now, when that bad news is in the form of a ris­ing euro that reduces every­one’s poten­tial exports, the euro­zone’s wealth­i­er mem­bers could engage in the kind of stim­u­lus or mon­e­tary mea­sures (e.g. inter­est rate cuts) seen else­where in the world to jump start every­one’s economies. This kind of stim­u­lus could have the effect of a cur­ren­cy deval­u­a­tion, so economies could be stim­u­lat­ed across the con­ti­nent while the euro falls in val­ue, but it would come at the cost of some addi­tion­al debt — at least in the short run — for the coun­tries financ­ing the stim­u­lus, but giv­en that well placed stim­u­lus that invests in the future that should­n’t be a prob­lem [19].

There’s anoth­er option that might also bring down the val­ue of the euro too: When economies crash, the val­ues of their cur­ren­cies often fol­low suit. But the val­ue of the euro is based on a strange mish mash of increas­ing­ly diver­gent economies that all get fac­tored in togeth­er. So by allow­ing the euro to rise just enough to only trash some of the euro­zone economies, the euro could actu­al­ly end up falling back down to a more com­pet­i­tive lev­el with­out any stim­u­lus at all. It just takes some time...and the selec­tive col­lapse of the euro­zone economies. Plus, much of the mon­ey flow­ing out the crash­ing economies are like­ly to end up flow­ing back into Ger­many and the oth­er wealth­i­er mem­bers. And the “best” part of this selec­tive col­lapse strat­e­gy is that it does­n’t require any nation’s post­pon­ing any of the “struc­tur­al reforms”. In fact, those “struc­tur­al reforms” can con­tin­ue at an even faster pace! It’s win-“win”.

With the euro cur­rent sit­ting at ~$1.30 it would­n’t take much more than a 15% rise of the euro before we find all of the euro­zone economies run­ning into seri­ous trou­ble. But accord­ing to the fol­low­ing arti­cle, that same above Deutsche Bank study found that the euro’s “dan­ger zone” range for the Ger­man econ­o­my was esti­mat­ed to be 1.54-1.94 dollars/euro com­pared to the 1.22–1.24 dollars/euro putting France at risk(although, real­is­ti­cal­ly, it’s prob­a­bly much clos­et to 1.54 dollars/euro). So if that study’s esti­mates are rea­son­able (which is always a big if), the euro — cur­rent­ly ~1.30’s dollars/euro — might be able to rise anoth­er 50% (although prob­a­bly much less than 50%) before it becomes “dan­ger­ous­ly high” for Ger­many’s econ­o­my. It’s an exam­ple of one of the cur­ren­cy union conun­drums we’re learn­ing about: by using a sin­gle cur­ren­cy — and Bun­des­bank-style cen­tral bank­ing — to inte­grate a set of diverse economies into one har­mo­nious eco­nom­ic union, the strong euro pol­i­cy cham­pi­oned by the Bun­des­bank is dri­ving the euro­zone economies into the cat­e­gories of “the already screwed” and “not yet screwed” with respect to the rise of the euro. It’s a reminder of why a cur­ren­cy union isn’t nec­es­sar­i­ly the best union to start off an inter­na­tion­al inte­gra­tion project. Maybe a union of social con­tracts towards pro­vid­ing democ­ra­cy, civ­il rights, a decent stan­dard of liv­ing, high-qual­i­ty labor laws, uni­ver­sal envi­ron­men­tal pro­tec­tion, and an oppor­tu­ni­ty to pur­sue a mean­ing­ful life would be a bet­ter approach [20]

UPDATE 1‑France says surg­ing euro “too high”

Wed Jan 30, 2013 11:35am EST

By Jean-Bap­tiste Vey

Jan 30 (Reuters) — The French gov­ern­ment sound­ed the alarm on Wednes­day about the surg­ing val­ue of the euro, vow­ing to raise the issue with euro zone and G20 part­ners as con­cerns about cur­ren­cy wars flare.

The euro has risen to a 14-month high against the dol­lar and hit its high­est lev­el in 33 months against the yen , mak­ing euro zone exports dear­er on inter­na­tion­al mar­kets.


Econ­o­mists say that France suf­fers more than Ger­many when the euro ris­es because its exports are more price-sen­si­tive than Ger­man exports, which include more high­er val­ue-added prod­ucts.

A Deutsche Bank study found that the French econ­o­my begins to take a knock when the euro’s rise above 1.22–1.24 dol­lars while for Ger­many the pain thresh­old is not reached until the euro gets to an exchange rate in a range of 1.54–1.94 dol­lars.

In Pro­fes­sor Wei­d­man­n’s class don’t expect extra cred­it no mat­ter how hard you try

It appears that the major pow­ers have decid­ed, for now, against declar­ing the mon­e­tary poli­cies by Japan (and the US to a less­er extent) a form of “Cur­ren­cy War­fare”, but keep in mind that the deci­sions last week by the G7 and G20 pow­ers against cen­sur­ing Japan were done over the oppo­si­tion of a Ger­man-led coali­tion of wealth­i­er Euro­pean nations. Also keep in kind the Bun­des­bank chief, Jens Wei­d­mann, is con­tin­u­ing to demand that see the world “tough it out” through aus­ter­i­ty in order to avoid try to bring the glob­al econ­o­my back on track. Wei­d­mann also argues that a ris­ing euro is not a prob­lem and in fact jus­ti­fied based on the euro­zone’s strong eco­nom­ic fun­da­men­tals alone. The mar­kets, it would appear, are deeply impressed with the ECB’s abil­i­ty to impose aus­ter­i­ty poli­cies regard­less of cir­cum­stance [21]:

Wei­d­mann Says ECB Won’t Cut Inter­est Rates to Weak­en Euro
By Jana Randow & Jeff Black — Feb 15, 2013 4:03 AM CT

Euro­pean Cen­tral Bank coun­cil mem­ber Jens Wei­d­mann said an appre­ci­at­ing euro alone won’t trig­ger a cut in inter­est rates and the exchange rate’s gains are jus­ti­fied by the eco­nom­ic out­look.

The strength of the euro “is one fac­tor among many in deter­min­ing future infla­tion rates” and “we will cer­tain­ly not jus­ti­fy any mon­e­tary pol­i­cy deci­sion with one sin­gle fac­tor,” Wei­d­mann, who heads Germany’s Bun­des­bank, said in a Feb. 13 inter­view. “I believe that the exchange rate of the euro is broad­ly in line with fun­da­men­tals. You can­not real­ly say that the euro is seri­ous­ly over­val­ued.”

His com­ments come as cen­tral bankers and finance min­is­ters from the Group of 20 nations meet in Moscow today amid spec­u­la­tion of a cur­ren­cy war. Loos­er mon­e­tary pol­i­cy in the U.S. and Japan com­bined with mount­ing opti­mism in Europe drove the euro to 14-month and three-year highs against the dol­lar and the yen ear­li­er this month. The cur­ren­cy has dropped two cents since ECB Pres­i­dent Mario Draghi said on Feb. 7 that its appre­ci­a­tion pos­es a down­side risk for infla­tion, sig­nalling he may con­sid­er cut­ting rates.


While the euro area’s reces­sion deep­ened in the fourth quar­ter, there are signs the region is start­ing to recov­er. Eco­nom­ic con­fi­dence rose for a third month in Jan­u­ary and investor sen­ti­ment has improved since Sep­tem­ber.
If the appre­ci­a­tion of the exchange rate reflects a regained con­fi­dence in the euro area and an improved growth out­look, then this is ful­ly in line with fun­da­men­tals,” said Wei­d­mann, who oppos­es any fur­ther ECB action to fight the debt cri­sis and was the only coun­cil mem­ber to vote against the cen­tral bank’s bond-pur­chase pro­gram.

ECB Fore­casts

Wei­d­mann sug­gest­ed the ECB won’t sig­nif­i­cant­ly revise its eco­nom­ic fore­casts next month. In Decem­ber it pre­dict­ed a 0.3 per­cent con­trac­tion this year fol­lowed by growth of 1.2 per­cent in 2014. Infla­tion was pro­ject­ed to aver­age 1.6 per­cent this year and 1.4 per­cent next year.

“Our fore­cast, which I think is still in line with what we’ve seen so far, is one of a grad­ual recov­ery in the sec­ond half of this year, lag­ging the upswing of the world econ­o­my,” Wei­d­mann said. “I have no rea­son to doubt this base­line” and con­fi­dence indi­ca­tors serve “as a con­fir­ma­tion of our pro­jec­tions.”


Notice that the head of the Bun­des­bank is argu­ing that there is no need to be con­cerned about the rise in the euro because this rise mere­ly reflects renewed mar­ket con­fi­dence in the region’s econ­o­my even though the euro­zone [22] reces­sion [23] deep­ened [24] in the last quar­ter. In addi­tion, Wei­d­man­n’s own fore­casts for the euro­zone include a “grad­ual recov­ery in the sec­ond half of this year, lag­ging the upswing of the world econ­o­my”. The mar­kets appar­ent­ly like economies that are lag­ging their peers. Those “struc­tur­al reforms [25]” will kick in dou­ble­plus­good any day now.

Skip­ping down...


‘Unan­i­mous Agree­ment’
All mem­bers of the ECB’s Gov­ern­ing Coun­cil agree “that cen­tral banks can­not solve the euro-area cri­sis,” Wei­d­mann said. “There is unan­i­mous agree­ment that only struc­tur­al reforms and fis­cal con­sol­i­da­tion” are the answer.
A slow­er pace of adjust­ment in euro mem­ber coun­tries remains “one of the major risk fac­tors” for the eco­nom­ic out­look, he said.
Wei­d­mann, 44, left his job as Ger­man Chan­cel­lor Angela Merkel’s advi­sor to take the helm of the Bun­des­bank in May 2011. He stuck to his crit­i­cism of the ECB’s as-yet-untapped bond- buy­ing plan, which has been tac­it­ly sup­port­ed by Merkel, say­ing the calm it has brought to finan­cial mar­kets was to be expect­ed.


When Bun­des­bank chief Jens Wei­d­mann states that the ECB’s gov­ern­ing coun­cil is in “unan­i­mous agree­ment that only struc­tur­al reforms and fis­cal con­sol­i­da­tion” are viable options, he’s basi­cal­ly say­ing that mon­e­tary pol­i­cy (e.g. the kinds of cen­tral bank­ing poli­cies we’re see­ing from the Bank of Japan and the Fed) real­ly can’t do any­thing to impact the over­all euro­zone sit­u­a­tion. Iron­i­cal­ly, how­ev­er, by not engag­ing in mon­e­tary actions (like cut­ting the ECB’s inter­est rate), the ECB might be cre­at­ing a sit­u­a­tion that fuels a net mon­e­tary con­trac­tion (e.g. starv­ing the euro­zone bank­ing sys­tem of cred­it) and it’s all relat­ed to the ECB’s ear­li­er emer­gency mon­e­tary pol­i­cy. Back in Decem­ber 2011 and then again in Feb­ru­ary 2012, the ECB let Europe’s banks turn in all sorts of dis­tressed secu­ri­ties (espe­cial­ly Span­ish and Ital­ian debt) as col­lat­er­al for a three year loan. It was the kind of thing cen­tral banks are sup­posed to do when large sys­temic risks loom and no oth­er enti­ty has the clout need­ed to impose a shift in mar­ket sen­ti­ment. And the ECB’s maneu­ver did help quite a bit. At least they helped quite a bit in the finan­cial mar­kets. The aus­ter­i­ty poli­cies that were a con­di­tion (and Bun­des­bank demand) of the bond mar­ket inter­ven­tion have wreaked hav­oc on the employ­ment sit­u­a­tion but that can’t real­ly be blamed on the ECB’s emer­gency loans.

But there’s a pro­vi­sion to the ECB’s new emer­gency loan pro­gram that has just start­ed kick­ing in that prob­a­bly won’t help: Last month the banks became allowed to return those three year loans ear­ly. And if the health­i­est banks do return those loans, that effec­tive­ly sucks cred­it out of the euro­zone bank­ing sys­tem and rais­es bor­row­ing costs for the weak­est nations [26] and gen­er­al­ly reduces the cred­it cush­ion out there for unex­pect­ed crises. So not only is the euro ris­ing in val­ue right now, but as long as the ECB holds its inter­est rate steady while the rest the US and Japan holds rates at near-zero lev­els the strongest euro­zone banks are going to have an incen­tive to repay those ECB loans ear­ly and shrink the over­all euro­zone cred­it sup­ply. On top of all that, ECB loan repay­ments that suck cred­it out of the euro­zone bank­ing sys­tem also have the effect of push­ing up the val­ue of the euro [27]. Plus, the health­i­est banks will get the first chances to unload the assets that all the banks turned in as col­lat­er­al when the loans first took place (and that includ­ed a lot of crap­py assets), lead­ing to fur­ther bifur­ca­tion of the euro­zone banking/finance sec­tor (which is one of dynam­ics that led to the ECB’s emer­gency pro­grams in the first place). It’s that self-rein­forc­ing cycle of awful­ness that should sound famil­iar at this point [28]:

Banks’ LTRO Repay­ments to Under­line Two-Tier Europe: Euro Cred­it
By John Glover — Jan 24, 2013 9:12 AM CT

Lenders repay­ing cash bor­rowed from the Euro­pean Cen­tral Bank via its Longer-Term Refi­nanc­ing Oper­a­tions are poised to under­line the north-south divide that char­ac­ter­izes the euro region.

Banks can start pay­ing back this week more than 1 tril­lion euros ($1.33 tril­lion) of three-year mon­ey they bor­rowed in two por­tions dur­ing 2012. Only banks able to raise funds at less than the 75 basis points the ECB charges are like­ly to repay, and they will prob­a­bly be from north­ern Europe, said Richard McGuire, a strate­gist at Rabobank Inter­na­tion­al in Lon­don.

“If it turns out the repay­ments come from the core banks only, then that’s a neg­a­tive,” McGuire said. “It shows there’s still a two-tier euro zone. The ten­sion is still there.”

The ECB’s LTRO pro­grams in Decem­ber 2011 and Feb­ru­ary 2012 reduced the risk of a sys­temic cri­sis blow­ing the sin­gle cur­ren­cy apart. Along with ECB Pres­i­dent Mario Draghi’s July pledge to do “what­ev­er it takes” to pre­serve the euro, the cash infu­sions helped stem a rout in Span­ish and Ital­ian bonds.

Between 200 bil­lion euros and 250 bil­lion euros are like­ly to be repaid “and we aren’t expect­ing many periph­er­al banks to take part,” said Derek Hynes, who helps man­age $9.5 bil­lion at ECM Asset Man­age­ment Ltd. in Lon­don. “They have some mar­ket access now, but they’ll need three to six months to gain the con­fi­dence to hand back the mon­ey.”

Rates Rise

The prospect of mon­ey flow­ing back to the ECB has dri­ven up inter­est rates in the futures mar­ket. The rate on three-month euro futures expir­ing in Decem­ber 2013 rose as high as 0.54 per­cent on Jan. 18, the most since July and up from 0.25 per­cent at the start of the year. The two-year inter­est-rate swap cost has climbed to 55.2 basis points from 38 at the end of Novem­ber.

The LTROs swelled the ECB bal­ance sheet to 2.94 tril­lion euros, up from about 2.5 tril­lion euros on Dec. 16. While a rever­sal of that as banks repay is “a major mile­stone,” it may pro­duce “stealth” inter­est rate increas­es, George Sar­ave­los, a strate­gist at Deutsche Bank AG in Lon­don, said in a report.

The yield on two-year Ger­man notes increased to as high as 24 basis points on Jan. 17 from minus 1.5 basis points at the begin­ning of the year. The rate is now 17.4 basis points.

Banks can now repay their bor­row­ings at week­ly inter­vals. The ECB is expect­ed to pub­lish the num­ber of com­pa­nies repay­ing and the amount returned tomor­row, with nation­al cen­tral bank accounts reveal­ing lat­er which coun­tries reim­bursed LTRO cash.
Fad­ing Attrac­tion


Span­ish and Ital­ian banks took about 334 bil­lion euros of the 532 bil­lion euros of LTRO bor­row­ing dis­closed by the banks and tracked by Bloomberg. Cash was parked in gov­ern­ment secu­ri­ties, help­ing to sup­port bond mar­kets as sug­gest­ed at the time by France’s then-Pres­i­dent Nico­las Sarkozy.


The “Too lit­tle, too late is bet­ter late than nev­er” school of cen­tral bank­ing
ECB head Mario Draghi has often said that the rel­a­tive val­ue of major cur­ren­cies should be deter­mined “by the mar­kets”. It’s anoth­er way for the ECB to say “we don’t want to do this or that pol­i­cy at this point” with­out actu­al­ly say­ing that explic­it­ly. And that would seem to be send­ing a sig­nal to the mar­kets that the euro is poised to rise....unless the econ­o­my does so poor­ly that it ends up falling any­ways. So when we fac­tor in a ris­ing euro (with falling exports) cou­pled to a shrink­ing euro­zone cred­it mar­ket, should we expect a renew­al of the kind of full-blown crises that prompt­ed the ECB’s emer­gency lend­ing in the first place?

Well, prob­a­bly not. The near-full blown melt­downs of the recent past that prompt­ed mea­sures like the “LTRO” emegency loans in the first place have been put under con­trol to vary­ing degrees so the threat of any sort of imme­di­ate debt cri­sis emerg­ing in the finan­cial mar­kets has sub­sided for now. It’s the labor mar­ket that’s threat­en­ing to trig­ger the round of crises [29]. The aus­ter­i­ty poli­cies that have come as as con­di­tion for each of the bailouts for the South­ern Euro­pean economies coun­tries — plus Ire­land — are mak­ing the suc­cess­ful ECB inter­ven­tions in the euro­zone bond mar­ket and finan­cial mar­ket an irrel­e­vant accom­plish­ment. Ris­ing record unem­ploy­ment [30] is going to insure the bailed out banks won’t have func­tion­ing economies need­ed work off their remain­ing moun­tains of debt (which was quite fre­quent­ly nation­al­ized pri­vate finan­cial sec­tor debts). But, for now, the banks should have suf­fi­cient funds to pre­vent the kind of bank­ing sol­ven­cy crises we’ve seen in recent years.

Anoth­er rea­son why the ear­ly repay­ment of the emer­gency loans prob­a­bly won’t be a big deal is that the mar­kets have been learn­ing many lessons about how the euro­zone’s lead­er­ship might respond. These have been pow­er­ful lessons in the past few years. Being the first major cri­sis since the cre­ation of the euro­zone, this has been a learn­ing expe­ri­ence for every­one. And one of those lessons learned has been that the ECB will even­tu­al­ly step in to fix a dire sit­u­a­tion. But only after it becomes dire. That’s just how they roll. Should the rise in short-term bor­row­ing costs rise too much the ECB will inter­vene [31].

So we’ll like­ly see a con­tin­u­a­tion of the sup­port by the ECB for the euro­zone finan­cial mar­kets and more aus­ter­i­ty for the pub­lic. The mar­kets know there’s a pret­ty sol­id ECB guar­an­tee on debt in the cri­sis-hit euro­zone coun­tries for at least in the short­/medi­um-ish term even if the Bun­des­bank seems to want to unwind all the emer­gency lend­ing pro­grams. The bifur­ca­tion [32] of euro­zone sov­er­eign debt mar­kets between the healthy and weak banks can prob­a­bly con­tin­ue [33] for a while longer. If the health­i­est banks return more loans than expect­ed, things will, iron­i­cal­ly, sud­den­ly start get­ting worse even though larg­er than expect­ed loan repay­ments could be seen as sign that things are get­ter bet­ter. And if things start get­ting worse enought for the weak­er economies, the ECB will prob­a­bly do some­thing to con­tain the dam­age. At least that’s what the mar­kets seem to be expect­ing [34]. And you can’t blame them. It’s the ‘just in time, one hopes’ brand of cen­tral bank­ing that the ECB seems to have been striv­ing for the entire time [35]

MONEY MAR­KETS-Draghi fuels bets for low­er mon­ey mar­ket rates

Tue Feb 19, 2013 8:52am EST

* ECB’s “accom­moda­tive” stance cre­ates one-way bet on rates

* LTRO repay­ments, high or low, seen flat­ten­ing Eonia curve

* Trade already crowd­ed, leav­ing slim gains for late­com­ers

By William James

LONDON, Feb 19 (Reuters) — Euro­pean Cen­tral Bank pres­i­dent Mario Draghi has cre­at­ed a win-win sit­u­a­tion for traders in the run-up to Fri­day’s announce­ment on ear­ly repay­ments of bank­ing sec­tor loans, with short-term rates expect­ed to go any­where but up.

Traders are bank­ing on the euro zone mon­ey mar­ket curve flat­ten­ing over the com­ing weeks, unwind­ing a rise in longer-term bor­row­ing costs that has effec­tive­ly tight­ened mon­e­tary con­di­tions over the last month.

Larg­er-than-expect­ed ear­ly repay­ments of emer­gency bank­ing sec­tor loans in Jan­u­ary caused mon­ey mar­ket rates to rise, push­ing up the whole­sale cost of mon­ey that fil­ters through the finan­cial sys­tem and draw­ing the atten­tion of the ECB.

But, that reac­tion has since mod­er­at­ed and even a larg­er-than-expect­ed sec­ond repay­ment would be unlike­ly to prompt anoth­er rise because mar­kets believe this would increase the chances of the ECB cut­ting inter­est rates to keep pol­i­cy loose.

Low­er-than-fore­cast repay­ments, or any sig­nal from the ECB on cut­ting rates could even dri­ve rates low­er, mar­ket par­tic­i­pants said.

“You could call it a Draghi ‘put’. He sug­gest­ed at the last press con­fer­ence that the ECB may act if it does­n’t like what it sees,” said Elwin de Groot, strate­gist at Rabobank in Utrecht.

“So, if there’s too strong a reac­tion from the market(to the repay­ment) they may take new mea­sures, and the first best option is maybe a cut in the refi­nanc­ing rate.”

The faster the sur­plus of liq­uid­i­ty in the bank­ing sec­tor shrinks, the more the mon­ey mar­ket curve steep­ens as traders bring for­ward expec­ta­tions of when increased com­pe­ti­tion for scarce cash starts to push rates up.


So is bet­ting that an ECB rate cut will fol­low a larg­er than expect­ed loan repay­ments a sound bet? Well....maybe. But at the same time, over the last few years we’ve con­sis­tant­ly seen Jens Wei­d­mann and the Bun­des­bank vehe­ment­ly oppose vir­tu­al­ly all of the exist­ing emer­gency ECB mea­sures. It’s the Bun­des­bank’s oppi­si­tion that seems to be the required ingre­di­ent for the “too lit­tle, too late” cen­tral bank­ing method­ol­o­gy the ECB has been devel­op­ing. So if banks do end up mak­ing sur­pris­ing­ly large emer­gency loan repay­ments and the mar­kets are bet­ting that this would like­ly lead to mon­e­tary eas­ing by the ECB, the mar­kets might want to hedge their bets [36]:

Bun­des­bank looks ahead to ECB “exit” as LTROs repaid

By Eva Kuehnen and Andreas Framke

FRANKFURT | Fri Feb 22, 2013 12:07am GMT

(Reuters) — A bumper return of 3‑year loans to the ECB would boost the case for it exit­ing cri­sis mode, a top Bun­des­bank offi­cial said ahead of Fri­day’s news on how much banks will hand back at a repay­ment win­dow next week.

Joachim Nagel, in charge of mar­ket oper­a­tions at the Ger­man cen­tral bank, stressed, how­ev­er, that it was still unclear when the exact time for an exit would be as the Euro­pean Cen­tral Bank’s mon­e­tary pol­i­cy has not yet worked even­ly across the 17 euro zone coun­tries.

The ECB lent banks a total of more than 1 tril­lion euros (864.8 bil­lion pounds) in twin 3‑year, ultra-cheap lend­ing oper­a­tions in Decem­ber 2011 and Feb­ru­ary 2012 — a ploy that ECB Pres­i­dent Mario Draghi said “avoid­ed a major, major cred­it crunch”.

The ECB is now giv­ing banks the chance to repay the funds ear­ly. Last month, it began allow­ing them to pay back the first of the twin loans. Fri­day’s announce­ment will detail how much of the sec­ond they plan to return at the first chance on Feb­ru­ary 27.

“If the excess liq­uid­i­ty in the bank­ing sys­tem abates sig­nif­i­cant­ly, then it would be time to con­sid­er an exit from the non-stan­dard mea­sures brought on by the cri­sis,” Nagel told Reuters, with­out giv­ing a spe­cif­ic lev­el.

“It is not yet com­plete­ly clear when exact­ly it will be time for the exit. The mar­kets and the finan­cial sys­tem are still far too frag­ment­ed for that. I warn against declar­ing an end to the cri­sis despite the calmer phase on mar­kets in recent months.”


The mar­ket-dri­ven unwind­ing of the ECB cri­sis mea­sures stands in con­trast to the poli­cies being pur­sued by cen­tral banks in the Unit­ed States and Japan, which are loos­er.

This pol­i­cy con­trast has helped dri­ve up the euro, which is also sup­port­ed by investor con­fi­dence that the bloc will hold togeth­er after Draghi’s pledged last July that the ECB would do “what­ev­er it takes” to pre­serve the sin­gle cur­ren­cy.


Banks to ECB: maybe we need those loans after­all
So will the mar­kets be fac­ing a sit­u­a­tion where the ECB retreats from “cri­sis mode” as the Bun­des­bank desires? Or will we see a con­tin­u­a­tion of the ECB’s emer­gency mea­sures? Well, that seems to depend on the whether or not the euro­zone banks return more ECB emer­gency loans or less than expect­ed when the repay­ment of the sec­ond round of emerge­ny loans becomes an option. And Fri­day (Feb. 22) was the day that the euro­zone banks got to declare the amounts they intend to repay to ECB when the win­dow for 2nd round loan repay­ment opens on Feb. 27. “For­tu­nate­ly” for euro­zone economies in need of a low­er euro and con­tin­u­ing finan­cial cred­it the news was “good”...in the sense that the news was­n’t actu­al­ly very good so some ECB eas­ing might be on the way [37]:

Euro Touch­es One-Month Low as ECB Bank Repay­ments Miss Fore­cast
By Joseph Ciol­li — Feb 22, 2013 2:48 PM CT

The euro touched the low­est lev­el against the dol­lar in six weeks after the Euro­pean Cen­tral Bank said insti­tu­tions will repay less of Long-Term Refi­nanc­ing Oper­a­tion bor­row­ing next week than econ­o­mists fore­cast.

The 17-nation cur­ren­cy trimmed gains ver­sus the yen as the Euro­pean Com­mis­sion fore­cast the region’s econ­o­my will shrink for a sec­ond year in 2013. The Aus­tralian dol­lar rose the most in sev­en weeks after cen­tral bank Gov­er­nor Glenn Stevens said the bar for inter­ven­tion was high. Japan’s cur­ren­cy weak­ened amid a White House meet­ing between Prime Min­is­ter Shin­zo Abe and Pres­i­dent Barack Oba­ma, who made no men­tion of the yen dur­ing remarks after the dis­cus­sion.

“The mar­ket is trad­ing on con­fi­dence and sen­ti­ment, and the LTRO news shows that tail risk has shrunk less than we thought,” Greg Ander­son, New York-based head of Group of 10 cur­ren­cy strat­e­gy at Cit­i­group Inc., said in a tele­phone inter­view. “What we’ve seen this week is the last of the euro longs get­ting squeezed out.” A long posi­tion is a bet that an asset will rise.

The euro fell was lit­tle changed at $1.3186 at 3:45 p.m. in New York after touch­ing $1.3152, the low­est lev­el since Jan. 10. The shared cur­ren­cy is down 1.3 per­cent this week. It rose 0.3 per­cent 123.21 yen today after strength­en­ing as much as 0.8 per­cent. The yen weak­ened 0.4 per­cent to 93.43 per dol­lar.

The euro may depre­ci­ate to the 2013 low of $1.2998 it reached on Jan. 4 if it declines past a sup­port lev­el at $1.3151, Cilline Bain, a Lon­don-based tech­ni­cal ana­lyst at Cred­it Suisse, wrote today in a client note. Sup­port is an area on a chart where buy orders may be clus­tered.


Ger­man Con­fi­dence

The com­mon cur­ren­cy declined as the ECB said 356 banks will hand back 61.1 bil­lion euros ($80.5 bil­lion) on Feb. 27, the first oppor­tu­ni­ty for ear­ly repay­ment of the sec­ond LTRO. The medi­an fore­cast in a Bloomberg News sur­vey was for 122.5 bil­lion euros.

The region’s gross domes­tic prod­uct will con­tract 0.3 per­cent in 2013, com­pared with a Novem­ber pre­dic­tion of 0.1 per­cent growth, the Brus­sels-based com­mis­sion said.

The euro rose ear­li­er after the Germany’s Ifo insti­tute in Munich said its busi­ness cli­mate index, based on a sur­vey of 7,000 exec­u­tives, climbed to 107.4 from 104.3 in Jan­u­ary. That’s the fourth straight gain. Econ­o­mists pre­dict­ed an increase to 104.9, accord­ing to a Bloomberg News sur­vey.


Ordolib­er­al stagde­fla­tion, pos­si­bly com­ing to a com­plex social arrange­ment near you
One of the more fas­ci­nat­ing aspects about the euro­zone’s struc­ture is that it’s man­aged via the ECB(officially) and the Bundesbank(unofficially) and this has cre­at­ed a per­sis­tent “good cop/bad cop” dynam­ic although a “reluc­tant good cop/Calvinist fun­da­men­tal­ist bad cop” anal­o­gy might be a lit­tle more appro­pri­ate. This is going to be an impor­tant dynam­ic for the world to come to terms with an under­stand, because if folks like Olli Rehn — the EU eco­nom­ic and mon­e­tary min­is­ter that wish­es to see greater inter­na­tion­al “rein­forced coor­di­na­tion” of mon­e­tary and fis­cal poli­cies — ever see their envi­sioned sys­tem put into place, the “reluc­tant good cop/Calvinist fun­da­men­tal­ist bad cop” dynam­ic might be com­ing to a coun­try near you.

That quirk of the Bun­des­bank — the quirk that makes it appear to be philo­soph­i­cal­ly [38] unable [39] to [40] advo­cate [41] any­thing [42] oth­er [43] than [44] aus­ter­i­ty [45] poli­cies [46]- that’s a “quirk” we might expect to find in any sort of future inter­na­tion­al “euro­zone-lite” com­plex inter­na­tion­al debt “arrange­ment”. It’s the Bun­des­bank’s Ordolib­er­al­ism [47] ortho­doxy, where the state must cre­ate the reg­u­la­tions nec­es­sary to cre­ate mar­ket con­di­tions that will most close­ly approx­i­mate per­fect­ly com­pet­i­tive mar­ket­place. The mar­ket out­comes still rule, but they’re out­comes from a mar­ket that is being active­ly designed and man­aged by the state. And tem­po­rary “one time” actions like state stim­u­lus spend­ing are con­sid­ered seri­ous breach­es of Ordolib­er­al ortho­doxy. If eco­nom­ic heal­ing is to take place, it should take place at a sys­temic lev­el. Bud­get cuts, deficit reduc­tion, and gen­er­al aus­ter­i­ty are the pre­ferred approach­es to fix­ing eco­nom­ic imbal­ances. The Ordolib­er­al­ism of the Bun­de­sank is cer­tain­ly a more prag­mat­ic form of eco­nom­ic utopi­anism when com­pared to, say, Ayn Rand’s Objec­tivism that dom­i­nates the US’s con­ser­v­a­tive move­ment in that Ordolib­er­al­ism does­n’t assume mar­kets mag­i­cal­ly self-cor­rect under any cir­cum­stances. It’s more prag­mat­ic, but still crazi­ly unprag­mat­ic in that it still treats the mar­ket out­comes of the state-man­aged mar­ket­places as some­how sac­tro­sanc­tr and mag­i­cal­ly super-effi­cient. Eco­nom­ic the­o­ries tend to fix­ate on mon­e­tary tranas­ac­tions alone in their mod­els because that’s what’s mea­sured. But it’s approach that tends to mod­el mar­ket out­comes as being too mean­ing­ful leads to warped eco­nom­ics.

Ordolib­er­al­ism, like lais­sez-faire the­o­ries, takes mar­ket out­comes and eco­nom­ic imbal­ances very very seri­ous­ly. Part of what makes the cur­rent appli­ca­tion of Ordolib­er­al thought to the euro­zone cri­sis so grim­ly fas­ci­nat­ing to watch is that the Ordolib­er­al par­a­digm has been vir­tu­al­ly untest­ed for some­thing like a cur­ren­cy union of 17 dis­parate nations. The philo­soph­i­cal dis­as­te for some­thing like trade imbal­ances and deficit spend­ing can take on entire­ly new dynam­ics when trans­lat­ed from an indi­vid­ual nation to an entire col­lec­tion of nations bound togeth­er by and cur­ren­cy union. And even though inter­na­tion­al Ordolib­er­al­ism has been a dis­as­ter so far it does­n’t sound like many Ger­mans are inter­est­ed in chang­ing course [48]:

The New Repub­lic
NOVEMBER 28, 2012
Please, Herr Krug­man, May I Have Anoth­er?
How America’s favorite lib­er­al stokes Ger­man masochism


WHEN GERMANS VOTE in next year’s nation­al elec­tion, they will have the choice between two can­di­dates who hold the dis­tinc­tion of hav­ing been repeat­ed­ly insult­ed by Paul Krug­man. The New York Times colum­nist has a habit of accus­ing Angela Merkel of dim-wit­ted­ness, ques­tion­ing her “intel­lec­tu­al flex­i­bil­i­ty” and accus­ing the mem­bers of her gov­ern­ment of “liv­ing in Wolkenkuckucksheim—cloud-cuckoo land.” Krug­man has treat­ed Peer Stein­brueck, her Social Demo­c­ra­t­ic com­peti­tor for the country’s high­est office, no bet­ter. The aus­ter­i­ty poli­cies embraced by Stein­brueck, who was Germany’s finance min­is­ter in 2008 and 2009, were pure “bone-head­ed­ness”; his speech­es crit­i­ciz­ing deficit spend­ing were “know-noth­ing dia­tribes.” Krug­man even went so far as to com­pare Steinbrueck’s ide­ol­o­gy with that of the least pop­u­lar polit­i­cal group, in con­tem­po­rary Ger­man eyes, after the Nazis—the Tea Par­ty.


The rela­tion­ship between the pop­u­lar Times colum­nist and the dom­i­nant Euro­pean econ­o­my has thus set­tled into a sta­ble, if neu­rot­ic, pat­tern: Krug­man attacks Ger­mans for their eco­nom­ic habits and trash­es their most beloved pub­lic offi­cials; in response, Ger­mans wince, com­plain, and then ask for more. Irwin Col­lier, pro­fes­sor of eco­nom­ics at the Free Uni­ver­si­ty of Berlin (and a friend of Krugman’s from their grad­u­ate-school days at MIT), admit­ted that it was unlike­ly that any of those stu­dents who line up to hear Krug­man speak at uni­ver­si­ties actu­al­ly change their minds after engag­ing with him.

Accord­ing to David Marsh, chair­man of the advi­so­ry board of Lon­don & Oxford Cap­i­tal Mar­kets, it’s not a sur­prise that Ger­mans would vol­un­teer for such pun­ish­ment. “Krug­man is part of the rit­u­al of self-crit­i­cism in Ger­many,” he tells me. “There is a ten­den­cy in the cul­ture of self-fla­gel­la­tion.” But that does­n’t explain how a Nobel Prize–winning econ­o­mist got involved. If Ger­many has a nation­al pen­chant for masochism, why did Krug­man become one of its pri­ma­ry pub­lic enablers?

KRUGMAN IS AWARE that peo­ple with his under­stand­ing of eco­nom­ics don’t nor­mal­ly receive much atten­tion in Ger­many. “We have a tra­di­tion in the Anglo-Sax­on world, you try and have a schemat­ic view of the econ­o­my,” he tells me. “Ger­man have this whole—well, it’s kind of hard for me to know what they’re say­ing.”

Krug­man is not alone in his con­fu­sion. The philo­soph­i­cal touch­stone of con­tem­po­rary Ger­man eco­nom­ics isn’t the work of Adam Smith, or Hayek, or Marx, but rather Wal­ter Euken, a man whom few out­side of Ger­many have ever heard of (though he’s so well-regard­ed in his own coun­try that his face has appeared on a Ger­man stamp). In the 1930s, Euken found­ed a school of eco­nom­ics at the Uni­ver­si­ty of Freiburg that came to be known as ordolib­er­al­ism. It com­bined a com­mit­ment to free mar­kets with a belief in strong gov­ern­ment, but its pri­ma­ry eco­nom­ic con­cern was sta­bil­i­ty—under­stand­able in a coun­try scarred by the expe­ri­ence of hyper­in­fla­tion in the 1920s, the depres­sion of the 1930s, and the sub­se­quent rise of Nazism.

When West Ger­many need­ed to cre­ate a state in the after­math of World War II, the ordolib­er­al the­o­reti­cians set up the “social mar­ket econ­o­my” that became the country’s unques­tioned eco­nom­ic frame­work. They cre­at­ed a robust wel­fare state, but it was embed­ded in a legal struc­ture that was engi­neered to pro­mote eco­nom­ic stability—rules for bal­anced bud­gets, rules for labor par­tic­i­pa­tion in the workplace—and ide­al­ly would­n’t require con­tin­u­ous inter­ven­tion by the state.

The flip side of this obses­sion with rules was a dis­taste for the sorts of prag­mat­ic respons­es to crises pre­ferred by Amer­i­can econ­o­mists. That’s why many Ger­mans still tend to embrace “auto­mat­ic sta­bi­liz­ers” like unem­ploy­ment insur­ance, but shy from dis­cre­tionary spend­ing, like mas­sive stim­u­lus pack­ages. They would pre­fer to suf­fer short-term pain now for the promise of arriv­ing at a more sus­tain­able equi­lib­ri­um lat­er. And worst of all for Ger­mans is the idea—not at all unusu­al in Anglo-Sax­on eco­nom­ic literature—that infla­tion can help lift a coun­try out of an incip­i­ent depres­sion. Ger­mans hear the word infla­tion and think only of their worst night­mare: insta­bil­i­ty.

That explains why “Ger­many has very few influ­en­tial Key­ne­sian econ­o­mists,” as a recent report by the Euro­pean Coun­cil on For­eign Rela­tions put it. Olaf Stor­beck, eco­nom­ics cor­re­spon­dent for the Ger­man busi­ness dai­ly Han­dels­blatt, is some­what more blunt: “Key­ne­sian­ism is a dirty word in Ger­many,” he says.

Col­lier is blunter still. When I ask how he would sum­ma­rize the native Ger­man tra­di­tion, he shifts from his flat Amer­i­can Mid­west­ern accent to a shrill Colonel Klink–style Teu­ton­ic shriek. “If you do not fol­low the rules, you do not eat in Berlin, you do not eat in Frank­furt, you do not eat in Ham­burg, you do not eat in Munich!


Col­lier also vol­un­teered to recite for me the effu­sive intro­duc­to­ry remarks that he deliv­ered when award­ing Paul Krug­man an hon­orary degree at the Free Uni­ver­si­ty. But before he could begin, Col­lier was inter­rupt­ed by a muf­fled noise in the back­ground. “That was my wife,” he said. “She wants me to tell you that she does­n’t agree with any­thing Paul has to say about infla­tion.”

The cre­ation of a sin­gle cur­ren­cy for wide vari­ety of nations was a bold exper­i­ment filled with a lot of poten­tial but even more risks. One thing about com­plex social arrange­ments: There might be a num­ber of ways to suc­cess­ful imple­ment a com­plex social arrange­ment, like a cur­ren­cy union, but there are far more ways to screw them up. That’s entropy for you. This does­n’t mean we should­n’t try to achieve com­plex social arrange­ment (e.g. democ­ra­cy, or maybe even cur­ren­cy unions), but the inher­ent dif­fi­cul­ties of try­ing to make com­plex social sys­tems that make life eas­i­er and bet­ter for vir­tu­al­ly all par­ties involved can­not be over­stat­ed. It’s just hard to do.

Mon­ey, itself, is a tricky enough com­plex social arrange­ment to imple­ment in a closed sin­gle econ­o­my. It’s both a social arrange­ment and a social tech­nol­o­gy. But it’s tricky tech­nol­o­gy. Mon­ey sub­jec­tive­ly rep­re­sents some sort of “val­ue” that gets trad­ed around with­in a larg­er com­plex social arrange­ment. Mon­ey lets us “mon­e­tize” some of our inter­ac­tions with each oth­er so we can sort of keep accounts for who did what. Sort of. In that sense, mon­ey is a means to a desired end: We’d like to be able to live and trade with each oth­er in ways that we can all agree are fair. Using mon­ey instead of barter seems to help achieve that end so we all use it in spite of its flaws. And we’ve actu­al­ly got­ten pret­ty good at it when weird far-right/Or­dolib­er­al doc­trines aren’t get­ting in the way.

Part of what makes mon­ey so tricky to imple­ment is that it binds togeth­er things as vague as “a fair wage” or “val­ue pro­vid­ed” across all the users of the cur­ren­cy with some­thing as absolute as set­tling accounts. You have to pay what you owe or bad things hap­pen to you. That’s part of how the sys­tem works. The set­tle­ment of accounts is part of what’s at the core of why mon­ey works as a sys­tem in the first place: the expec­ta­tion of the set­tling of accounts keeps peo­ple par­tic­i­pat­ing. It seems fair and pre­dictably. But that same expec­ta­tion ends up caus­ing many of the social prob­lems we find today because the accounts that need to be set­tled aren’t actu­al­ly fair. A major dri­ver of the euro­zone cri­sis has been the set­tle­ment of accounts (nation­al debt fol­low­ing a cri­sis, usu­al­ly after pri­vate debt had been nation­al­ized). They’re only approx­i­ma­tions of fair­ness and espe­cial­ly mean­ing­ful approx­i­ma­tions. Again, mon­ey is a tricky tech­nol­o­gy.

And in the case of the euro­zone, shared mon­ey became the foun­da­tion for build­ing a new, inte­grat­ed soci­ety. It might have seem like an obvi­ous choice for a col­lec­tion of nations to use mon­ey as that ini­tial social con­tract lynch­pin but it was actu­al­ly a very risky choice [49]. It was also a choice that inevitably led to a num­ber of future choic­es as the many new sit­u­a­tions that would inevitably arise in a new cur­ren­cy union came to fruition. One of those choic­es was the choice of how to set­tle accounts when an entire nation’s finan­cial sec­tor implodes. The fair answer to that ques­tion isn’t at all obvi­ous. But the cho­sen answer by the Bun­des­bank and the large euorzone/EU/IMF pol­i­cy­mak­er com­mu­ni­ty appears to be that the full set­tl­ment of accounts to for­eign investors will be a core prin­ci­ple of the com­plex social arrange­ment of a con­ti­nent of peo­ple all liv­ing togeth­er. Also, cur­ren­cy sta­bil­i­ty. And there won’t be that many oth­er core prici­ples. Democ­ra­cy won’t be one (e.g. troikas). Those sanc­tro­sanct prin­ci­ples of for­eign investor account set­tle­ment and cur­ren­cy sta­bil­i­ty appear to be what the euro­zone’s design­ers [50] have in mind to uni­fy the vast com­plex social arrange­ment that is the euro­zone. Even if it means installing troikas that unde­mo­c­ra­t­i­cal­ly impose mas­sive unem­ploy­ment and destroyed lives in an effort to some­how “set­tle accounts” with for­eign investors. It’s symp­to­matic of a com­mon prob­lem fac­ing soci­eties all over the world: when account set­tle­ment ends up actu­al­ly reduc­ing the over­all capac­i­ty of a soci­ety by dis­rupt­ing peo­ple’s lives (via unem­ploy­ment, a lack of edu­ca­tion, degrad­ed health, etc.), mon­ey, itself, becomes part of the prob­lem [51]. This is why we have a con­cept of usury. Peo­ple have been learn­ing and relearn­ing these lessons about the poten­tial pit­falls of account set­tl­ment for a long long time. The pri­ma­ry method the euro­zone lead­ers have cho­sen to fos­ters a more har­mo­nious way of liv­ing togeth­er is to imple­ment nation­al usury. Accounts will be set­tled even if the meth­od­es for set­tling those accounts dis­rupts a nation’s abil­i­ty to set­tle accounts.

The grim real­i­ty is that the euro­zone social con­tract is now root­ed in a fan­cy form of usury and a race to the bot­tom. This real­i­ty was high­t­light­ed by an col­umn writ­ten by EU eco­nom­ics and mon­e­tary affairs min­is­ter Olli Rehn last Decem­ber. In the piece(excerpted below), Mr. Rehn argues that not only should the “struc­tur­al reforms” con­tin­ue unabat­ed, but that there’s real­ly no point in coun­tries like Ger­many even try­ing to stim­u­late the economies of their euro­zone neigh­bors because even if Ger­many did engage in stim­u­lus spend­ing, much of that spend­ing would go to the rest of the world because the South­ern Euro­pean economies are too expen­sive and need more “struc­tur­al reforms”. So even if it would help vir­tu­al­ly the entire euro­zone if the wealth­i­er nations inten­tion­al­ly import­ed more goods from their ail­ing neigh­bors in order to set­tle accounts more quick­ly, that won’t hap­pen until “struc­tur­al reforms” make the South­ern Euro­pean economies as “com­pet­i­tive” as the poor­est nations of the rest of the world (which ignores the artif­i­cal increase in their cur­ren­cies that the South­ern economies incurred to join the euro).

Part of the implic­it social con­tract in what the euro­zone’s design­ers envi­sion for the euro­zone is that “mar­ket forces” will play a major role in deter­min­ing what hap­pens in peo­ple’s lives. They will be reg­u­lat­ed mar­ket forces, but the mar­ket forces will still reign supreme. In oth­er words, the euro­zone pol­i­cy­mak­ers have decid­ed that mar­ket equi­lib­ri­ums will deter­mine the qual­i­ty of life if its cit­i­zens. This is a par­tic­u­lar­ly prob­lem­at­ic per­spec­tive to have as the dom­i­nant phi­los­o­phy guid­ing an entire con­ti­nent. Mar­ket­places may nat­u­ral­ly find equi­lib­ri­ums but they also nat­u­ral­ly lend them­selves to “race to the bot­tom dynam­ics”. The mar­ket equi­lib­ri­um that the euro­zone lead­ers are sub­ject­ing their cit­i­zens to may not be the kind of equi­lib­ri­um you’d want to live in [52]:

Decem­ber 10, 2012 7:33 pm
Finan­cial Times
Europe must stay the aus­ter­i­ty course

Con­fi­dence is return­ing as struc­tur­al reforms help rebal­ance the econ­o­my, says Olli Rehn

By Olli Rehn

The euro­zone is liv­ing through lean times, but there is light at the end of the tun­nel. On the one hand the short-term eco­nom­ic out­look remains weak. On the oth­er hand, there are signs that con­fi­dence is return­ing.


The progress made reflects impor­tant deci­sions at both the nation­al and Euro­pean lev­els. These deci­sions have begun to rebuild con­fi­dence, calm­ing mar­kets and coun­ter­ing fears of a col­lapse of the euro. Far-reach­ing struc­tur­al reforms are help­ing to rebal­ance the euro­zone econ­o­my. Progress is tan­gi­ble: cur­rent account imbal­ances among euro­zone mem­bers have fall­en marked­ly, as com­pet­i­tive­ness lost by some mem­bers in the decade before the cri­sis is regained.

It is true that the cor­rec­tion of cur­rent account imbal­ances has so far come pre­dom­i­nant­ly in deficit coun­tries, but this is no sur­prise giv­en the scale of the chal­lenges they face. As John May­nard Keynes not­ed before the Bret­ton Woods talks, such adjust­ment is “com­pul­so­ry for the debtor and vol­un­tary for the cred­i­tor”.

Note that when Mr. Rehn says, “Far-reach­ing struc­tur­al reforms are help­ing to rebal­ance the euro­zone econ­o­my”, what he’s basi­cal­ly say­ing is that there was a group of nations that weren’t poor enough. Now they’re get­ting poor­er. Things are improv­ing.

Also note that when Mr. Rehn says, “It is true that the cor­rec­tion of cur­rent account imbal­ances has so far come pre­dom­i­nant­ly in deficit coun­tries”, he’s remind­ing us of the fact that the pri­ma­ry way the euro­zone has cured itself from the prob­lem of the South­ern Euro­pean nations import­ing from their neigh­bors more than they export­ed back was­n’t for the South­ern nations to cut imports some and export more. They’ve sim­ply been slash­ing imports [53] as a result of aus­ter­i­ty. The exports don’t increase until the South­ern wages get cut quite a bit more. That’s the plan.


This does not inval­i­date the case for a more sym­met­ri­cal exter­nal rebal­anc­ing with­in the euro­zone, involv­ing cred­i­tor as well as debtor coun­tries. The Euro­pean Com­mis­sion has said sur­plus coun­tries should imple­ment reforms to strength­en domes­tic demand. Ger­many could do this by open­ing up its ser­vices mar­ket and by encour­ag­ing wages to rise in line with pro­duc­tiv­i­ty, two of the rec­om­men­da­tions made to Berlin by the EU Coun­cil last July.

But at the same time, we should be aware that the euro­zone is nei­ther a small open econ­o­my nor a large closed one, but a large open econ­o­my that trades a lot with the rest of the world.

This means adjust­ment chan­nels are influ­enced sig­nif­i­cant­ly by glob­al eco­nom­ic inter­de­pen­dence. A reduc­tion of sur­plus­es in the north will not lead auto­mat­i­cal­ly to a cor­re­spond­ing increase of demand for exports by the south.

The prin­ci­pal ben­e­fi­cia­ries of greater Ger­man demand would be the cen­tral Euro­pean economies close­ly inte­grat­ed into Germany’s sup­ply chains. Our analy­sis sug­gests that a 1 per cent increase in Ger­man domes­tic demand would improve the trade bal­ance of Spain, Por­tu­gal and Greece by less than 0.05 per cent of gross domes­tic prod­uct. This would not get us very far, which is why poli­cies to enhance com­pet­i­tive­ness – both struc­tur­al and cost-relat­ed – remain cru­cial for the adjust­ment and rebal­anc­ing of the euro­zone.

The case for a sig­nif­i­cant fis­cal stim­u­lus in Ger­many, as some call for, is also weak. The coun­try will de fac­to have a much less restric­tive fis­cal stance in 2013 than the rest of the euro­zone: the struc­tur­al bud­get bal­ance is expect­ed to be lit­tle changed in Ger­many but to increase by 1 per­cent­age point of GDP in the euro­zone as a whole.

When Mr. Rehn writes “The case for a sig­nif­i­cant fis­cal stim­u­lus in Ger­many, as some call for, is also weak. The coun­try will de fac­to have a much less restric­tive fis­cal stance in 2013 than the rest of the euro­zone: the struc­tur­al bud­get bal­ance is expect­ed to be lit­tle changed in Ger­many but to increase by 1 per­cent­age point of GDP in the euro­zone as a whole”, he’s basi­cal­ly say­ing that Ger­many should not be seen as hav­ing an over­ly restric­tive fis­cal pol­i­cy, giv­en the aus­ter­i­ty mea­sures else­where, because Ger­many itself isn’t engag­ing in aus­ter­i­ty and there­fore not “tight­en­ing” its spend­ing as much as its neigh­bors. It’s an inter­est­ing argu­ment.

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In order to over­come the cri­sis and restore con­fi­dence, we must con­tin­ue to remove struc­tur­al obsta­cles to sus­tain­able growth and employ­ment; pur­sue pru­dent fis­cal con­sol­i­da­tion; and turn bold thoughts into con­vinc­ing actions when redesign­ing and rebuild­ing our eco­nom­ic and mon­e­tary union. In short, we need to stay the course and pur­sue deci­sive reforms in our mem­ber states and deep­er inte­gra­tion in the euro­zone.

The writer is vice-pres­i­dent of the Euro­pean Com­mis­sion, respon­si­ble for eco­nom­ic and mon­e­tary affairs and the euro

Stay­ing the course, no mat­ter what: a lynch­pin of the social con­tract
Olli Rehn end­ed his above col­umn with a phrase often heard from lead­ers, “we need to stay the course”. It’s a rhetor­i­cal course he’s con­tin­u­ing to stay on [54]. In addi­tion to cur­ren­cy sta­bil­i­ty and usu­ri­ous for­eign investor accounts set­tle­ment, “stay­ing the course” appears to be anoth­er appar­ent lynch­pin of the new euro­zone social con­tract. It’s a fas­ci­nat­ing lynch­pin for the euro­zone to have since it’s actu­al­ly “stay­ing the course of con­tin­u­al change of an unknown nature towards a goal of greater inte­gra­tion to be imple­ment­ed by peo­ple like Olli Rehn”.

“Stay­ing the course” is also a fas­ci­nat­ing lynch­pin because it’s a micro­cosm of the glob­al macro­cosm. “Stay the course” has been the unspo­ken mantra of glob­al­iza­tion for decades. The euro­zone is just the most advanced man­i­fes­ta­tion of that glob­al social con­tract to inte­grate our lives economies more and more no mat­ter what. And for good rea­son. Tech­nol­o­gy and end­less march of his­to­ry ensured glob­al­iza­tion. We real­ly are all liv­ing in one giant glob­al soci­ety in ways nev­er seen before. It’s a real­ly real­ly com­plex social arrange­ment and it’s an arrange­ment we’re not get­ting rid of so we sort of have to fig­ure out how to make it work. This is one rea­son why the euro­zone’s tri­als and tribu­la­tions are so much big­ger than the euro­zone itself: the whole world is going to have to fig­ure out how to all live togeth­er in bet­ter ways if we’re going to avoid glob­al cat­a­stro­phe over the next cen­tu­ry. The twin threats of eco­col­lapse and social upheaval are poised to loom large over the next cen­tu­ry. It’s a con­se­quence of our built-to-fail glob­al reck­less­ness and mis­man­age­ment. We have to stay the “stay­ing the course” course. We just need a bet­ter course.

Glob­al­iza­tion real­ly will hap­pen because it’s already hap­pened and con­tin­u­ing to hap­pen. Glob­al­iza­tion, like mon­ey, is both sort of an ends and a means. We want a glob­al “com­mu­ni­ty” with fair rules that make all of our lives bet­ter because that’s win-win. Glob­al­iza­tion is just not a guar­an­teed win. We might mess it up immensly (like we’re cur­rent­ly doing). But we’re going to keep glob­al­iz­ing regard­less of the risks because the alter­na­tive is for every­one to live alone in their own nation­al enclaves. So we need a glob­al social con­tract. It’s just a mat­ter of what kind of social con­tract it turns out to be. The euro­zone is cur­ren­ly offer­ing us an Ordolib­er­al social con­tract that’s sort of a more extreme ver­sion of the social con­tract that has dom­i­nat­ed glob­al trade for decades: an adher­ence to qua­si-reg­u­lat­ed neolib­er­al economics(austerity), for­eign investor account settlement(more aus­ter­i­ty), strict­ly enforced cur­ren­cy stability(and more aus­ter­i­ty), and “stay­ing the course”(presumably the aus­ter­i­ty ends at some point). And, increas­ing­ly, a loss of nation­al sov­er­eign­ty in order to ensure the mar­kets can work their mag­ic [55]:

The New York Times
Offi­cial Urges Greater Account­abil­i­ty by Euro Mem­bers
Pub­lished: Jan­u­ary 11, 2013

BRUSSELS — Olli Rehn, the Euro­pean com­mis­sion­er in charge of the euro, defend­ed the bloc’s aus­ter­i­ty poli­cies on Fri­day and urged leg­is­la­tors to pass a law that would let him push coun­tries even hard­er to shore up their finances.

Sig­nal­ing lit­tle let­up in the need for wrench­ing adjust­ments in Europe, Mr. Rehn also issued warn­ings to a wide range of coun­tries, includ­ing some with the region’s largest economies, to keep to the reform path and con­tribute to over­all growth.


Mr. Rehn acknowl­edged the val­ue of recent stud­ies by econ­o­mists at the Inter­na­tion­al Mon­e­tary Fund sug­gest­ing that the dam­age cre­at­ed by aus­ter­i­ty was up to three times more severe than pre­vi­ous­ly thought. But Mr. Rehn also warned that those stud­ies might not take suf­fi­cient account of the need to restore faith in coun­tries blocked from bor­row­ing mon­ey on inter­na­tion­al mar­kets.

“We have not only the quan­tifi­able effect, which is some­thing that the econ­o­mists like to empha­size, but we also have the con­fi­dence effect,” Mr. Rehn said.


Mr. Rehn, in Brus­sels, also urged mem­bers of the Euro­pean Par­lia­ment to speed up an agree­ment on fis­cal leg­is­la­tion.

Those rules would require mem­ber states to present their pub­lic finance plans to the Euro­pean Com­mis­sion in greater detail, and soon­er, than is required now. The com­mis­sion could then demand revi­sions, as deemed nec­es­sary. For mem­ber states that are already in finan­cial trou­ble, those rules would let the com­mis­sion con­duct reg­u­lar­ly sched­uled reviews and require more infor­ma­tion about a country’s finan­cial sec­tor than is cur­rent­ly the case.

The rules would give “stronger pos­si­bil­i­ties of pre-emp­tive over­sight as to nation­al bud­gets before they are final­ly pre­sent­ed to nation­al Par­lia­ments” in order “to ensure that the mem­ber states prac­tice what they preach,” Mr. Rehn said.

Fail­ing to pass the law, he said, could invite a rerun of events in the mid­dle of the last decade, when Ger­many and France essen­tial­ly ignored their deficit-cap pro­vi­sions, con­tribut­ing to the cur­rent debt cri­sis in Europe.

“It’s a very seri­ous issue,” he said.

Unfor­tu­nate­ly, it looks increas­ing­ly like we’re going to be see­ing more and more pro­pos­als by the Bun­des­bank and folks like Olli Rehn for the world to embrace an Ordolib­er­al mod­el. For­tu­nate­ly, there’s no short­age of oth­er approach­es avail­able. Social con­tracts are pret­ty much lim­it­ed by what we can think of. A diver­si­ty of com­plex social arrange­ments is sort of human­i­ty’s spe­cial­ty on this plan­et. It’s iden­ti­fy­ing and pick­ing the best options that’s the hard part. That’s why learn­ing from his­to­ry is so impor­tant. Recent his­to­ry has been repeat­ed­ly demon­strat­ing the inad­e­qua­cy of Ordolib­er­al­ism as an inter­na­tion­al mod­el. It’s sim­i­lar to the prob­lem with neolib­er­al­ism (the GOP’s crony-Ayn Ran­dism): Any sys­tem that takes our cur­rent econ­o­my too seri­ous­ly — to the point where lives are destroyed because some­one does­n’t have enough mon­ey — is a soci­ety that’s prim­ing itself for fail­ure. Espe­cial­ly right now when we have a plan­et filled with messed up economies that are all inte­grat­ing together...ledger bal­ances — from indi­vid­ual to nation­al debts — just aren’t that mean­ing­ful and with both neolib­er­al­ism and Ordolib­er­al­ism life out­comes are deter­mined pri­mar­i­ly by mar­ket out­comes. And as the finan­cial sec­tor taught us all in the lead up to the finan­cial cri­sis: mar­kets can be eas­i­ly rigged. Neolib­er­al­ism and Ordolib­er­al­ism are just not what we need right now. Cli­mate change, over­pop­u­la­tion, and over­pol­lu­tion are threat­en­ing to cre­ate mass migra­tions and the col­lapse of entire regions of the plan­et so we need a social con­tract that’s real­ly good with deal­ing with lots of poor peo­ple that recent­ly expe­ri­enced mass cat­a­stro­phes. Nature is going to ensure plen­ty of mass death and destruc­tion on its own. Soci­eties are going to need to be oper­at­ing as intel­li­gent­ly and effi­cient­ly as pos­si­ble. Arti­fi­cial­ly stag­nat­ing lives via aus­ter­i­ty induced by eco­nom­ic cir­cum­stance is just not going to be an option for suc­cess­ful soci­eties. If there were oth­er tech­no­log­i­cal­ly advanced species liv­ing on this plan­et that devel­oped the abil­i­ty to over­pop­u­late, over­pol­lute, and gen­er­al­ly implode them­selves we could learn for their expe­ri­ences. But there aren’t any around* so we’re going to have to fig­ure out some­thing new to get human­i­ty through the chal­lenges of the next cen­tu­ry because they are unprece­dent­ed and grow­ing.

Part of what makes neolib­er­al­ism, Ordolib­er­al­ism, and cur­ren­cy unions in gen­er­al so tan­ta­liz­ing a mod­el for inte­grat­ing the lives of large num­bers of peo­ple in vast­ly dif­fer­ent cir­cum­stances is that they all rest on a foun­da­tion of uni­for­mi­ty: there is a sys­tem, it has rules, and the rules are pre­sumed to lead to bet­ter out­comes than if there were no rules. And it’s true that these sys­tems are like­ly bet­ter an improve­ment over com­plete anar­chy. But the uni­for­mi­ty of these sys­tems that makes them so tempt­ing for bind­ing diverse lives togeth­er is also an enor­mous weak­ness. Dif­fer­ent sit­u­a­tions require dif­fer­ent eco­nom­ic envi­ron­ments when you’re using some­thing as imper­fect as mon­ey as the medi­um for inter­ac­tions. There’s just no rea­son to expect the social con­tracts we’re see­ing offerred to the world — Ortholib­er­al­ism or the stan­dard neolib­er­al­ism — to be suc­cess­ful for the vast major­i­ty of of the glob­al pop­u­la­tion. One of the most preva­lent and pow­er­ful lessons his­to­ry teach­es us is that mar­kets sort of work but also sort of don’t work. Eco­nom­ic social con­tracts that allow mar­ket out­comes to destroy lives are not going to work, espe­cial­ly dur­ing this phase of his­to­ry when more and more nation­al economies are becom­ing ever more tight­ly inte­grat­ed. Fig­ur­ing out a fair sys­tem with the kind of flex­i­bil­i­ty that works for every­one is going to require dif­fer­ent approach­es and prob­a­bly dif­fer­ent ways of view­ing mon­ey itself. We’re going to have to get cre­ative if we’re going to fig­ure out a how to live togeth­er suc­cess­ful­ly. It’s an ancient prob­lem that requires unprece­dent­ed solu­tions for unprece­dent­ed* prob­lems.




*There is one oth­er species avail­able that’s expe­ri­enced glob­al col­lapse, but the Wook­ies ain’t talk­ing [56]. And their sit­u­a­tion does­n’t real­ly apply. And in case you’re curi­ous, there was a giant explo­sion that col­lapsed the ecosys­tem when their super duper fail safe Death­Star brand irid­i­um fusion plant explod­ed. Some­one [57] sold them what they thought were mag­i­cal baby Ewok-Chi­huahua hybrids. Nope [58]. It was over fast. The Grem­lin-sized vent lead­ing to the reac­tor cham­ber did­n’t help. It was seri­ous­ly trag­ic [59]. So there are some applic­a­ble lessons to human­i­ty’s cur­rent sit­u­a­tion regard­ing the dan­gers [60] of pow­er plants [61] but, thank­ful­ly, the Wook­ies’ mog­wai infes­ta­tion does­n’t real­ly apply to our cur­rent conun­drum. And to keep it that way, Do Not Dis­turb the space eggs [62] peo­ple [63]! Leave those kinds of sit­u­a­tions to the pro­fes­sion­als [64].

Update 4-20-2013
And it looks like the G20 is offi­cial­ly back­ing away from Olli Rehn’s glob­al devel­oped-economies aus­ter­i­ty dri­ve, where the largest economies in the world all agree to cap gov­ern­ment spend­ing at some arbi­trary debt-to-GDP ratio. For now, at least. Pro­pos­als for a cap on the unem­ploy­ment-to-pop­u­la­tion ratio are sim­i­lar­ly ignored, as such pro­pos­als would nev­er be made in the first place. Class­es at the Glob­al Lead­er­ship Clown Col­lege are in ses­sion [65]:

G20 backs off aus­ter­i­ty dri­ve, rejects hard debt cut tar­gets

By Lei­ka Kihara and Paul Eck­ert

Fri Apr 19, 2013 11:54pm BST

(Reuters) — Finance lead­ers of the G20 economies on Fri­day edged away from a long-run­ning dri­ve toward gov­ern­ment aus­ter­i­ty in rich nations, reject­ing the idea of set­ting hard tar­gets for reduc­ing nation­al debt in a sign of wor­ries over a slug­gish glob­al recov­ery.

The G20 club of advanced and emerg­ing economies also said it would be watch­ing for neg­a­tive effects from mas­sive mon­e­tary stim­u­lus, such as Japan’s — a nod to con­cerns of devel­op­ing nations that those poli­cies risk flood­ing their economies with hot cap­i­tal and dri­ving up their cur­ren­cies.

Russ­ian Finance Min­is­ter Anton Silu­anov said at a news con­fer­ence that offi­cials from the Group of 20 nations believed over­all debt reduc­tion was more impor­tant than spe­cif­ic fig­ures.

“We agreed that these would be soft para­me­ters, these would be some kind of strate­gic objec­tives and goals which might be amend­ed or adjust­ed, depend­ing on the spe­cif­ic sit­u­a­tions in the nation­al economies,” he said.

Rus­sia — this year’s G20 chair — had hoped to secure an agree­ment on set­ting fixed tar­gets for reduc­ing debt by the time G20 lead­ers meet in St. Peters­burg in Sep­tem­ber.

But the Unit­ed States and Japan have firm­ly opposed the idea of com­mit­ting to fixed debt-to-GDP tar­gets, with Wash­ing­ton try­ing to keep the focus of the G20 on growth.

“Quite frankly, the lan­guage could have been stronger but it’s suf­fi­cient to move this for­ward,” said Cana­di­an Finance Min­is­ter Jim Fla­her­ty.



The dri­ve toward gov­ern­ment aus­ter­i­ty has been under­cut by weak­ness in economies that took severe mea­sures to cut deficits, includ­ing Britain, which is head­ed into its third reces­sion in the last five years. The U.S. econ­o­my also shows some signs of strain that econ­o­mists pin on belt-tight­en­ing in Wash­ing­ton.

Ear­li­er this week, the IMF reduced its fore­cast for glob­al growth and reit­er­at­ed its call for some Euro­pean coun­tries to throt­tle back their aus­ter­i­ty dri­ves.

Fitch cut its cred­it rat­ing on Britain on Fri­day to dou­ble-A-plus, cit­ing expec­ta­tions that gen­er­al gov­ern­ment debt will rise to 101 per­cent of GDP by 2015–2016 due to weak growth.

In an inter­view with BBC tele­vi­sion, IMF chief Chris­tine Lagarde said now might be time for Britain to con­sid­er relax­ing its focus on aus­ter­i­ty giv­en the recent weak­ness in its econ­o­my.

Rus­si­a’s Silu­anov also said a greater amount of coor­di­na­tion was need­ed with the IMF on glob­al liq­uid­i­ty, with rec­om­men­da­tions expect­ed by next July.


A lan­guage/­dou­ble­s­peak-relat­ed side-note: The phrase used in the arti­cle “The dri­ve toward gov­ern­ment aus­ter­i­ty” is a phrase worth appre­ci­at­ing as a won­der­ful exam­ple of how ambi­gu­i­ty in lan­guage can par­al­lel and even dri­ve ambi­gu­i­ty in thought. One of the fun things about the term “gov­ern­ment aus­ter­i­ty” is that dou­bles as a phrase one could use to describle an ide­al­ized state of a gov­ern­ment with “aus­tere” finances from a debt and deficits per­spec­tive. Ger­many’s state of hav­ing low-deficits and a relatile low debt-to-GDP ratio could be con­sid­ered a form of “gov­ern­ment aus­ter­i­ty” even though the Ger­man pub­lic sec­tor is quite large by his­tor­i­cal stan­dards.

But the term “gov­ern­ment aus­ter­i­ty” could also describe that Ayn Randian/Grover Norquist Lib­er­tar­i­an gov­ern­ment-free par­adise we hear so much about. Under this inter­pre­ta­tion of the term, “gov­er­ment aus­ter­i­ty” assumes that it’s a soci­ety with very lit­tle gov­ern­ment. Peri­od.

So the use of the phrase “The dri­ve toward gov­ern­ment aus­ter­i­ty” is very appro­pri­ate in an arti­cle dis­uss­ing this top­ic because what we’re see­ing are seem­ing­ly end­less attempts by lead­ers argu­ing that nations can acheive that Ger­many-like state of “gov­ern­ment aus­ter­i­ty” (low gov­ern­ment debt/deficits) by sim­ply cut­ting gov­ern­ment spend­ing. The Randian/Norquist ide­al of an “aus­tere gov­ern­ment” that can’t pro­vide basic ser­vices to its pop­u­lace is being acheived by argu­ing that the low-deficit/low-debt ide­al of “gov­ern­ment aus­ter­i­ty” can be accom­plished if the pub­lic imme­di­ate­ly cuts its gov­er­ment spend­ing and the over­all ser­vices pro­vid­ed by gov­ern­ment to its cit­i­zens. But it’s just tem­po­rary. Once a tran­si­to­ry peri­od pass­es and the mag­ic of low­er-gov­ern­ment debt works through­out the econ­o­my, growth will return and soci­ety will be able to afford more gov­ern­ment ser­vices if it so choos­es. That’s the pub­li­cal­ly advanced the­o­ry for why Randian/Norquist poli­cies are to be imple­ment­ed.

That lit­tle trick of sell­ing tem­porar­i­ly small­er gov­ern­ment in order to afford larg­er gov­ern­ment lat­er is being suc­cess­ful­ly sold to one nation after anoth­er. THAT’s why it seems like near­ly the entire G20, except for the US and Japan, wants to see glob­al gov­ern­ment spend­ing curbs. The Rea­gan Rev­o­lu­tion real­ly has gone glob­al, except it’s a vari­ant of the Rea­gan Rev­o­lu­tion that’s like­li­er to have more wide­spread appeal. Rea­gan’s phase, “Gov­ern­ment isn’t the solu­tion to the prob­lem. Gov­ern­ment is the prob­lem” is an idea that’s only going to have lim­it­ed glob­al appeal. A lot of soci­eties just aren’t crazy enough to embrace that. But the idea that “Gov­ern­ment debt is the prob­lem and there­fore cut­ting gov­ern­ment tem­porar­i­ly is the only solu­tion,” is the kind idea that could appeal to a much broad­er audi­ence around the globe. You get the same “Rea­gan Rev­o­lu­tion” poli­cies but with­out the “Rea­gan Rev­o­lu­tion” ide­al­is­tic fer­vor. There’s an ide­al­is­tic fer­vor alright, but it’s based on a dif­fer­ent kind of idealism...it’s an ide­al world where var­i­ous “crowd­ing out” gov­ern­ment debt the­o­ries [66] regard­ing what con­sti­tutes “too much” gov­ern­ment debt are cou­pled to a the­o­ry that Ger­many’s Ordolib­er­al [67] approach of shock-doc­trine eco­nom­ics to decrease the gov­ern­ment deficits and debt loads real­ly will work well for oth­er nations in vast­ly dif­fer­ent sit­u­a­tions. The “crowd­ing out” gov­ern­ment debt the­o­ries [66] and aus­ter­i­ty solu­tions turn out [68] to be demon­stra­bly wrong [69], so it’s real­ly more of a faith than an ide­al at this point.

So you have to love state­ments like “The dri­ve toward gov­ern­ment aus­ter­i­ty has been under­cut by weak­ness in economies that took severe mea­sures to cut deficits”. Yes, con­trac­tionary [70] poli­cies [71] are [72] still [73] con­trac­tionary [74]. Our lead­ers appear to still be strug­gling to fig­ure that one out. When the Rea­gan Rev­o­lu­tion [75] went glob­al so did [76] stu­pid­i­ty [77].