Bottom up reform in the EMU requires the abandonment of the Treaties

January 6, 2022

Regular readers will know that I have written a lot about the topic of European integration. My 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015) – was a detailed study of the evolution of the Economic and Monetary Union (EMU) from the origins of the ‘European Project’, as peace came in the late 1940s. I have argued that the creation of the EMU, after several failed attempts in the 1960s and 1970s, was only possible because of the emergence of Monetarism in the academy and its related socio-political manifestations which we call, generally, neoliberalism or market liberalism. If France had not succumbed to the neoliberal myths and believed it could dominate the currency union with a ‘franc fort’ then its traditional rivalry with Germany would have continued to prevent the adoption of the common currency. What I have been arguing since the ECB introduced the Securities Market Program (in May 2010) is that despite the success by the EMU architects (Delors and his gang) in embedding neoliberal principles into the legal structure of the European Union and its institutions the reality has overtaken them and a dysfunctional dystopia is only maintained by the ECB and other institutions defying the ‘rules’ established. We are now starting to see other researchers take up that angle, which is progress.

I read a paper last week – Technocratic Keynesianism: a paradigm shift without legislative change – which was published on December 31, 2021 in the journal – New Political Economy by Belgian researcher Jens van ‘t Klooster.

The argument he makes is:

1. “The policy paradigm that informed the 1992 Economic and Monetary Union (EMU) remained the dominant framework through which the EU navigated the financial crisis of 2007–2008 and the eurozone Crisis.”

2. “A broad consensus emerged that the crisis had not resulted in a paradigm change in macroeconomic policy.”

3. “ideational changes, accelerated by the COVID-19 Pandemic, did lead to a clear shift in Europe’s monetary arrangements.”

4. “As the past decade of crises brought the EMU project to its existential limits … a new regime of Technocratic Keynesianism emerged.”

5. “The new paradigm is a technocratic Keynesianism because it is driven by, and assigns more power to, technocratic actors at central banks and independent regulatory agencies.”

6. “Compared to mid-century Keynesians and the turn to market liberalism in the 1980s, democratic contestation and changing preferences of electorates play at best subordinate roles. Instead, technocratic actors enact this shift while seeking to avoid overt politicisation and minimising the need for legislative involvement.”

7. “The technocratic nature of the paradigm shift leads its agent to practice strategic ambiguity … allows monetary technocrats to suggest continuity and minimise legislative involvement, while also successfully addressing new problems.”

8. “As the law lags ideational shifts, this profoundly shapes the ways in which monetary financing and credit guidance take place today.”

So this argument is the same argument I developed in my 2015 book, but which has not been widely accepted because it challenges the very tenets that were used to create the dysfunctional monetary union.

It also points the way to dissolve the union, although that is not the intention of the article I am considering here.

Further, it reflects on the debate as to what happens next?

At present, the bureaucrats have allowed the Stability and Growth Pact rules and surveillance and corrective mechanisms (Excessive Deficit Procedure, etc) to lapse under the extraordinary event or ‘general escape clause’ within Article 126 of the Treaty of the Functioning of the European Union.

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That clause was adopted by the European Commission on March 20, 2020.

They had no choice in allowing the Member States the flexibility to pursue higher deficits given the impact of the pandemic.

So that decision did not represent a ‘paradigm shift’, which would have to require a rejection of the entire rules framework, given its ideological origins.

The question is when will Brussels seeks to reinstate the Stability and Growth Pact.

Many progressives are claiming that the reinstatement will not come.

But what we have to remember is that the European Commission was clear in its – Omnibus report under Art 126(3) (published June 2, 2021):

The general escape clause does not suspend the procedures of the Stability and Growth Pact. However, its activation has granted Member States budgetary flexibility to deal with the current crisis, by allowing for a temporary departure from the adjustment path towards the medium-term budgetary objective of each Member State, provided this does not endanger fiscal sustainability in the medium term.

In that Report, the Commission also noted that fiscal deficits “in 23 our of the 26 Member States, but Luxembourg” were “above and not close to the 3% of GDP Treaty reference value.”

And that means:

The observed deficit for 2020 provides prima facie evidence of the existence, in those Member States, of an excessive deficit as defined by Article 126 of the Treaty.

So the activation of the ‘general escape clause’ does not in some way stop the procedures.

The question is whether the shift in ‘ideation’ that the Belgian researcher argues is going on will be sustained.

I doubt it.

Jens van ‘t Klooster talks about ‘strategic ambiguity’, which he says means that:

To ensure both legal permissibility and political feasibility, policymakers strategically justify their policies in terms of the older market liberal paradigm, while also putting forward novel justifications …

By suggesting continuity while also successfully addressing new problems, monetary technocrats minimise legislative involvement and avoid politicisation.

I think this understates the problems that the EMU faces.

I argued in the 2015 book that the ECB was the principle institution that had shifted out of its neat EMU box that the Delors gang had defined for it.

The necessity for the ECB to engage in this way can be traced back to the initial decision by Member States to surrender their currency sovereignty but at the same continue to accept the primary fiscal policy responsibility.

But with the onset of the GFC, the ECB was caught betwixt.

In the early days of the GFC, bond yields rose rapidly for the Member States most impacted (Spain, Italy, Portugal, etc) and the ECB had little choice other than to suppress the discretion of the private bond markets to set yields for fear that the already recessed nations would find it difficult rolling over funding for the deficits that the recessions had created.

In May 2010, the ECB introduced the Securities Markets Program, which was the first of several large-scale government bond purchasing programs that persist today.

These programs purchased large quantities of government debt in secondary markets and effectively took away the credit risk facing private dealers.

They allowed the Member States to continue to issue debt into the primary markets and fund their deficits.

Without these on-going ECB purchases, several Member States, including Italy, would have become insolvent during the GFC and beyond.

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But, the ECB was still part of the neoliberal system and its officials and economists were all entrenched in that paradigm.

Which meant that the ECB joined the Troika against Greece and its bond-buying programs were only activated for nations that imposed the necessary austerity under the fiscal rules.

It is in that sense that I said it was caught betwixt.

And because it knew it was caught in this sort of netherland – a key institution in the neoliberal architecture with the only fiscal capacity to save the architecture from its own dysfunctional design – it had to lie about what it was doing.

Jens van ‘t Klooster calls it strategic ambiguity, I call it outright deception.

The ECB justified the bond-buying programs as being necessary in the words of Executive Board member at the time José Manuel González-Páramo to maintain:

… a functioning monetary policy transmission mechanism by promoting the functioning of certain key government and private bond segments

See his speech – The ECB’s monetary policy during the crisis (October 21, 2011).

The ECB was trying to say that they were buying massive quantities of government bonds in the open markets as a legitimate monetary policy operation to ensure there is sufficient liquidity in the banking system.

However, the reality is that they were (and still are) buying government bonds in the secondary markets in exchange for euros, which the ECB creates out of ‘thin air’, in quantities far beyond anything that would be required for purely operational reasons.

The purpose has always been to lower yields on government bonds as bond investors knew they could offload securities from distressed states onto the ECB.

The ECB has been effectively funding the Member State deficits and acting contrary to the spirit, at least, of the no bailout clause in the TFEU.

The problem with that policy is not the fact that the ECB has been funding the deficits despite the misgivings the mainstream economists might have about that practice.

Rather, the problem has been that up until the pandemic, the purchases were conditional on Member States obeying the fiscal dictates of the European Commission and, in that vein, while they avoided the collapse of the Eurozone, they also perpetuated the austerity bias.

But it is ironic that despite all the efforts of Delors and those that followed to limit the fiscal function in the EMU and impose no bail out restrictions on the ECB, the central bank they created has effectively been maintaining a type of fiscal function which fills the void left by the Treaties and maintains the solvency of the Member States.

This irony exemplifies the poorly contrived architecture that the Maastricht process pushed onto the European nations.

Jens van ‘t Klooster considers strategic ambiguity to occur where:

… the aims of financial market participants, technocrats and governments are deeply entangled, financial policy must be acceptable to each of these constituencies.

I would not describe the situation in Europe as some sort of cosy consensus in this way.

The reality is that the governments of the Member States in the EMU have limited capacity to withstand a bond market onslaught in a recessionary environment.

They have to continue to issue debt to fund their fiscal deficits (given they use a foreign currency – the euro) and are at the mercy of the bond markets.

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That is why they went along with the ECB blackmail that unless they imposed European Commission enforced austerity, the ECB would leave them to the bond markets – which meant they would have gone broke – quickly.

The key EMU institutions thus treated the Member States with contempt and forced millions to endure joblessness and the rest of it as an exercise in ideology enforcement.

The ECB played the fiscal role because it knew the union would collapse and there were too many highly-paid officials who had built their whole careers and reputation (and personal financial situations) on the euro being retained.

Giving the ECB some sort of humanitarian aspiration is far fetched.

They just wanted the euro to survive and the costs imposed to the Member States was not the consideration.

Further, the financial markets knew they were onto a good thing with the ECB bond-buying programs.

I have stated before that the ‘traders’ are not the ideologues.

Their motivation is pure greed – to exploit margins wherever they can find them and make profits.

So, for them, the fact that the ECB broke with the Monetarist taboo against central banks funding treasuries, was irrelevant.

For them, the higher demand in the secondary markets for the government paper delivered them handy and guaranteed capital gains and so the central bank was just helping them do their job for them.


The question is whether this all represents a paradigm shift.

Jens van ‘t Klooster thinks Europe is now in a state of Keynesian technocracy, which he thinks represents such a shift.

I doubt it.

My dealings with economists in Brussels, for example, do not inspire any confidence that they have fundamentally abandoned the New Keynesian framework.

Further, he is right to say that this temporary state of technocratic defence of capitalism (saving it from itself) violates democratic values and:

… changes in economic thinking must move from their current technocratic bastions to the democratic institutions of the member states.

Which means to make progress – to align our thoughts of responsible government with democratic legitimacy with fiscal capacity – the Treaties have to change.

Which means root-and-branch change that would be acceptable to all the Member States.

The neoliberalism is embedded in the entire legal structure.

It is not just a shift in political flavour that is required.

The whole edifice of the EMU has to be abandoned.

I thus disagree with the assessment of Jens van ‘t Klooster that restoring democratic legitimacy – “such a development would not necessitate a bottom up revision of the EU’s foundations”.

And ‘pigs might fly’.

That is enough for today!

(c) Copyright 2022 William Mitchell. All Rights Reserved.

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