David Dayen reported yesterday on the statement Mario Draghi, the head of the European Central Bank, made about the “unsustainable” state of the single-currency Euro Union. As David noted, Draghi’s remarks were widely interpreted as implicit criticism of the European political leadership — as though he were not part of that — in effect telling them that they can’t really solve the hydra-headed economic and financial crises in the Euro zone until they decide what they want the Euro Union to be if it ever grows up.
I think that’s correct as far as it goes. The Euro-zone is at best a half-baked idea with a lot of missing ingredients, and what’s missing is everything that matters. They either need to add the missing ingredients, and soon, or start cleaning up the mess they’ve made in everyone’s kitchen.
But if that’s true, it also means Europe’s financial elites are implicitly conceding they’re incompetent bakers who ought to be not only expelled from the kitchen but held accountable for a massive fraud on the suffering citizens across southern Europe.
The Troika’s policies are predicated on the claim that even though the Euro zone nations were inside a monetary straight jacket that lacked elements that would make the system workable and worth keeping, the recipe of crushing austerity and removing protections for the working class — claimed to reduce labor costs — would restore business confidence and eventually make them more competitive. That in turn would lift the weaker economies and their citizens out of recession.
When (as predicted) this turned out to be a recipe for creating depressions — in Ireland, Portugal, Greece and Spain — the elites fell into denial, assuring voters that if they didn’t continue to support this brutal punishment, their economies would collapse into chaos and the elites wouldn’t save them.
The voters in these nations now know the theory is dead wrong and the meal they’re being served may kill them. Elections in France, Greece, a German state, etc, tell us that. But voters are still being lied to about what they need to do.
What Mario Draghi just admitted at the European Union is not merely that Europe’s leaders need to define a sustainable future end state. What he’s really saying is that much of what the voters have been told about the sustainability of the current state was a lie, which means they’ve been asked to make horrendous sacrifices to achieve an outcome that won’t and can’t work. When did he realize this?
As Paul Krugman just pounded into an unlistening British panel, austerity won’t reduce deficits/debt, let alone revive an economy in the middle of a recession. It will instead cause further unemployment — now up to a record 11 percent in the Euro zone. If pursued relentlessly it will produce depression conditions, as in 20 percent unemployment (Spain), the collapse of private investment (in Europe and the UK here) and public services and . . . higher long-run deficits (see Brad DeLong). Krugman implies the elites are still lying about this to cover an agenda of dismantling the safety net.
Even if you’re the head of the ECB, focused mostly on the banking sector, you’re bound to notice austerity policies didn’t restore business confidence and investment or renew confidence in each nation’s banks. Instead, they destroyed the demand businesses need to make it worthwhile to invest and hire workers. As for the banks, Draghi and friends surely knew that any banking system that destroyed itself through its own reckless lending while fomenting asset/housing bubbles could not easily recover and recapitalize when the economy was still tanking; no central banking system could save them without unlimited lending authority and either the courage or a clear mandate to use it.
Mario Draghi now tells us that while he and his Troika buddies were assuring European citizens that they had the matter in hand, they couldn’t even keep their banks functioning properly or stop an incipient bank run. Why? Because they didn’t have national deposit insurance, didn’t have a common bond authority to pool risks, didn’t have capital controls in place to stop local/regional bank runs, hadn’t clarified whether it’s a national or Euro-wide responsibility to rescue the system, and didn’t have a clear resolution mechanism to take out or recapitalize failing banks. It’s one thing to claim unemployment is not your charge, but these are the responsibilities of central bankers.
And yet all this time, with all these ingredients missing, Draghi’s ECB, the “pay your taxes” IMF and the European Union (“don’t forget to force the Spanish regions to implement austerity too”) insisted they knew how to make an economic pie and that the essential instruction in the recipe was to keep draining the fluids until everyone was gagging on what’s left on their plates.
It’s obvious someone needs to fire the chefs. But don’t bet on it. Yesterday, Irish voters got the privilege of voting whether to continue this insanity. Unlike America, where we’re permitted only to choose between two parties that both believe with different degrees of insincerity in the same policies that are crushing Europe, Ireland voted yesterday on whether to accept Angela Merkel’s proposals to lock all Euro nations into a binding fiscal pact that ensures they have to impose budget austerity even when it’s nuts to do so.
The Irish Government urged a yes vote, and it now appears they got it. So the Irish Government’s fear mongering about the risks of not giving the creditors whatever they want convinced enough voters to approve a pact that will prove, after much more suffering, that the entire structure is still “unsustainable.”