The Crisis, The Reinvention of a Vision and the Re-engineering of the
Treaties of Europe: The Double Dilemma
The idea that had inspired
generations, the United States of Europe, is ALMOST dead. The euro is the
currency of a country that does not exist [1] and it has become the unit of
account of differential misery in a crisis that has been expected since 2004.
THE CRISIS
Phillipe Legrain, a former
independent economic advisor to Barosso (I do not address him as President
since I regard the Commission as a non-democratic illegitimate body), gave
an inspiring speech last month at a conference in Athens. He began his
assessment of the crisis by saying that,
"first and foremost
it is a banking crisis. It originated with the bad lending of Eurozone banks,
mostly French and German ones."[2]
Today, more and more people
begin to realize that the systemic defect that needs to be fixed is inherent in
our debt-based monetary and financial architecture. While experts suggest that
there is a “financial cycle of credit booms and busts … which has a larger
duration … [and] is not always easy to detect” [3], organizations are
campaigning throughout the European Union raising the awareness that money
comes into existence as loans through credit creation by private commercial
banks; the very same enterprises responsible for the crisis.
If something holds true, it is
that neither the financial deregulation nor the supranational regulatory
supervision in the form of capital requirement accords or independent
unaccountable companies such as credit rating agencies have had any whatsoever
positive effect in the prevention of the 420 systemic banking, sovereign debt
and exchange rate crises since the 70s. [4], [5] Was the leadership
of the European Union unaware of the crisis that was coming? The
European Council of Ministers meeting in Barcelona on the 15-16 March 2002
obviously anticipated the idea when they
“requested the
Commission to present a report on the consequences of the Basel deliberations
for all sectors of the European economy with particular attention to SMEs.”
The European Parliament has
also sought a similar report. [6] The requested report was finally submitted on April
8th 2004, a very long time before the sign of any crisis
either in the United States or Europe and elsewhere.
“In principle, it might be
acceptable to lose some economic output over the current cycle as a result of a
tighter regulatory regime if that regime reduces the risk of catastrophic loss
at some time in the future.”[7]
What a gross
understatement! What a
coincidence that the same year the Commission issues the 2004/C 244/02
Guideline on State Aid for Rescuing and Restructuring Firms in Difficulty [8],
that eventually became the legal bedrock for bank bail-outs under the 2008/C
270/02 [9] Communication from the Commission for The Application of State Aid
Rules to measures taken in relation to financial institutions in the context of
the current global financial crisis. Chapter 3.1 art.25 (a) of the 2004/C
244/02 guideline states that aid
“consist[s] of liquidity
support in the form of loan guarantees or loans [but] an
exception may be made in the case of rescue aid in the banking sector, in order
to enable the credit institution in question to continue temporarily carrying
on its banking business in accordance with the prudential legislation in force.”
Banks are
special and above the Treaties!
Subsequent
decisions to rescue the Too Big to
Fail through the emergency liquidity mechanism were based:
1. On
Article 14.4 of the Statute of the ESCB and ECB that states:
“National central banks
may perform functions other than those specified in this Statute unless
the Governing Council finds, by a majority of two thirds of the votes cast,
that these interfere with the objectives and tasks of the ESCB. Such functions
shall be performed on the responsibility and liability of national
central banks and shall not be regarded as being part of the functions of the
ESCB.”
2. On
the suggestions of the 2001 Brouwer Report. [10]
“The report gives extra
attention to the institutional mechanisms for information sharing and emergency
liquidity assistance in the euro area …"
Section 4.4 informs us of the
existence of Memorandums of Understanding but
“in most MoUs, however,
crisis management procedures are not explicitly foreseen. Therefore, supervisors
should further develop these MoUs, and make them more concrete on crisis
management issues …”
A “Memorandum of
Understanding on high-level principles of co-operation between the banking
supervisors and central banks of the European Union in crisis management
situations” was released on March 10th, 2003. [11] The Press Release
states:
“The MoU, which is not a
public document, consists of a set of principles and procedures for
cross-border co-operation between banking supervisors and central banks in
crisis situations.”
The MoU was revised on May
18th 2005 [12] and included the finance ministers as well.
Paragraph 6 reads:
“An MoU is a non-legally
binding instrument for setting forth practical arrangements
aimed at promoting co-operation between authorities in crisis or potential
crisis situations without overriding their respective institutional
responsibilities or restricting their capacity for independent and timely
decision-making in their respective fields of competence, notably with regard
to the conduct of day-to-day central banking and supervisory tasks, as set out
in national and Community legislation.”
In addition section 5.3 of the
Brouwer Report states:
“Central banks generally do
not lay down explicit and publicly known guidelines for liquidity support. Yet,
any central bank will, where possible, want to secure its lending with
acceptable collateral and take an appropriate margin to protect itself against
credit risk. Such collateral requirements also help to limit moral hazard. For
the same reason, penalty rates, i.e. above-market rates, on liquidity
assistance could be used, and conditionality could be imposed.”
What a forceful
presentation of unaccountability!
3. On the
decisions of the ECOFIN on October 7th 2008[13]
So what exposed
the bad lending practices of commercial banks and triggered the crisis? It was the implementation of Basel II rules
under the directives 2006/48/EC [13] “relating to the taking up
and pursuit of the business of credit institutions” and 2006/49/EC [14] on
the capital adequacy of investment firms and credit institutions.” Subsequent
revisions to both directives as the crisis was deepening due to the financial
apocalypse resulted in a catch-22; the more rules (Basel III), the further the
exposure of the financial toxic waste, the deeper the crisis. [This is not a
statement supporting an ideology that regulation is by definition unwanted.]
So there was a crystal clear
common perception of the coming crisis and it is very hard to conceptualize
that intelligent people could not foresee the effects. Yet, what are
the solutions that the European Union has engineered to overcome the crisis?
In short two solutions stand
out in the thousands of pages of ECB and EU regulations and decisions to deal
with the crisis.
First, at the core of the EU
countless decisions have been approved to support the failing banks.
For the periphery the Troika has been engineered as
Europe's attempt to rescue the Too Big To Fail and eventually save the euro
from Europe's institutional inefficiencies. The Troika was the
"solution" that failed to resolve any aspect of the expected banking
and the resulting fiscal and sovereign debt crisis. The Troika epitomizes
the failure of every single citizen and taxpayer in Europe to understand the
root causes of the crisis and represents the best example of throwing good
money after bad money. In the self-fulfilling 2004 prediction of the expected
recession, it couldn't have happened otherwise if TBTF were to be saved.
The Troika has socialized the losses and privatized the profits.
Second, the European Union,
after the “successful experiment” in Cyprus, is engineering a banking
union and resolution mechanisms baptizing the depositors as investors and
threatening the very essence of an open liberal society. None of the
above arguments are in support of the view that countries, like my country,
Greece, did not suffer from chronic economic mismanagement. However what
exactly does Ireland prove with the recent successful bond issuance? At a
combined 650% private and public debt to GDP ratio, the confidence has been
restored? What a gross misunderstanding of the root causes of
Ponzi capitalism is heralding the signs of recovery!
The results of the Economic
Adjustment Programs, bank bail-outs and future bail-ins, and the "there
is no alternative" approach are radicalizing the electorate. There is
a civilized silent anger and if we cannot see in the coming elections a clear
vision for the future the anger will be, rightly so, directed to uncivilized
alternatives. The taxpayers of the core are sharing a burden and rightly accuse
the periphery for mismanagement while the taxpayers of the periphery have been
devastated and rightly accuse the core for the destruction of the social
fabric. The whole of the European Union is in a deadly debt-driven
deflationary spiral and is racing hopelessly for the rock bottom.
THE DILEMMAS
The European Union and the
Eurozone must reinvent a vision for the future and must reengineer both the
Treaties establishing the European Union and its monetary and financial
architecture if we want the European Union not to be dismantled in the coming
years; but at what direction?
THE FIRST
DILEMMA: DO WE WANT A UNITED STATES OF EUROPE OR NOT?
I am not going to attempt to
evaluate the yes or no. I choose and take the yes for granted but at the same
time I couldn’t care less about anyone's proposal for a Banking Union,
resolution mechanisms and solutions to overcome the social problems that the
Troika has created.
What I ask for, and probably
what many are in search of, is a clear vision and a timetable for the United
States of Europe based on the principles of democracy, liberty and justice.
Even change the name into United Civilizations of Europe to instill into a
reinvented identity the cultural diversity. What I am looking for is the
democratization of all unaccountable institutions:
- I want a Constitution for the United Civilizations of Europe reforming the institutional structure.
- I want a Presidential democracy with an elected President and a government for Europe abolishing the Commission.
- I want a European government to be held accountable to an empowered European Parliament as the legislative body of the Union.
- I want a Senate for the United Civilizations of Europe.
- I want a centralized defense and foreign policy.
- I want to reform the objectives of the ECB and include full employment.
- I want the ECB to remain completely independent.
- I want to be able to elect who becomes the President of the ECB and Attorney General of the European Court of Justice!
- I want decentralized decision making for local issues.
- I want European wide referendums when constitutional issues are at stake and important decisions must be made.
- I want you to put your national allegiance at backstage and behind a vision.
- I may be wrong but Reengineer all Treaties, Reinvent Europe!
What do I have to offer?
Nothing more than the recognition of the power granted to the representatives
to make decisions within the institutional framework! That is however the very
principle that differentiates political power from authority isn’t it?
Political parties and candidates should take nothing for granted and should
they fail yet again to deliver a vision and plan for the future, they must
remember that Europe already in the eyes of many of us resembles more and more
a fascist bureaucratic super state that must be dismantled. Europe will have to
present an alternative vision other than banking resolutions and centralized
unaccountable decision making. Can any vision engineered through the use of
coercive power, even in the case of a benevolent dictatorship, unite people
behind any purpose?
THE SECOND
DILEMMA: MONETARY REFORM, SHOULD THE EURO BECOME A DEBT-FREE CURRENCY OR NOT?
I have started by saying that
the euro has become the unit of account of differential misery. Yet there were
and there are alternatives but these alternatives require hard to be made
decisions that transcend any proposals put forward so far.
Prof. Richard Werner, an acclaimed academic who has coined the term
quantitative easing in 1995 [16] – although none of what he wrote actually was
ever implemented never mind the fact that the term has been misused - and who,
to my knowledge, is also a member of the shadow council of the ECB, had
submitted proposals in the form of a To-do list for the ECB [17] to overcome
the current crisis:
“1. The ECB should
purchase all non-performing assets from all Eurozone banks at face value,
in exchange for banks agreeing to comply with a new ‘credit guidance
regime’ run by the ECB.
2. The ECB should introduce and operate
this new ‘credit guidance’, whereby the ECB via its national central banks
(NCBs) requires banks to meet monthly and quarterly quotas concerning the
growth of total credit outstanding AND the credit outstanding in each
of the sub-categories of credit, on which banks have to report on a monthly
basis as well, namely:
A. bank credit for GDP
transactions … [productive credit]
B. bank credit for non-GDP transactions … [credit
to the financial sector]
whereby the ECB via its NCBs
restricts credit to type B sectors and sets positive year-on-year percentage
growth targets for credit of type A.
3. The ECB should institute a loan guarantee
scheme for the most desirable types of loans, i.e. to the manufacturing
sector implementing new technology, environmentally enhancing and sustainable
energy producing sector, as well as in R&D and education. Loans are
guaranteed by the ECB.
…
5. Until above scheme has got traction, the
ECB, via its NCBs introduces a new direct lending facility
whereby the NCBs extend credit to type A sector borrowers.
6. The ECB should introduce a new scheme, whereby
the ECB and NCBs meet with the national finance/treasury ministries and debt
management offices in order to end the issuance of government bonds in
the markets and instead fund all public sector borrowing requirements (that
must meet unchanged Brussels budgetary requirements) through direct
loan contracts from the national banks. This reduces borrowing costs sharply,
as the prime rate is lower, helps banks as their business expands without
further capital adequacy requirements (risk weights are zero), while the loans
do not need to be marked to market, but can be used for ECB refinancing. (The
Werner-Siekmann proposal).
7. The ECB should meet with national bank
regulators, the European Banking Authority and the Basel Committee on Banking
Supervision (BCBS) in order to negotiate release of eurozone banks from
the Basel capital adequacy standards for the coming three years, until bank
credit growth and hence nominal GDP growth is back to full employment levels.”
The advantages of his
proposals address the core underlying problem of slow nominal GDP growth,
increasing employment and tax revenues, pushing countries back from the brink
of a deflationary contractionary downward spiral back into a positive cycle
that prevent harmful speculative credit creation. The framework doesn’t place
the burden on taxpayers to bail out banks. Yet Prof. Richard Werner, in a
conference on “The Future of Money” held in Athens in 2013 [18] has
recognized the advantages of monetary reform and the issuance of debt-free
state currency.
Prof. Joseph
Huber, a visionary economic
sociologist, recently wrote:
“In the EU a number of
sovereign prerogatives have partially been ceded to EU institutions and
partially retained by the individual nation-states. The sovereign prerogatives
of legislation and jurisdiction have to a certain extent been communalized, as
have policies related to the common market. … By contrast, the monetary
prerogative – i.e. the monopolies of the currency, money issuance and
seigniorage – has completely been ceded to the European Monetary Union (EMU), de
jure, while in actual fact money issuance and seigniorage have almost entirely
been surrendered to the private banking industry.” [19]
So what options do we have in
Europe? There are 5 options according to Prof. Huber.
“1. Keep the euro and
conceive of monetary reform within the framework of the Eurosystem.
2. Stop worrying about the
euro. Implement monetary reform in any euro country by introducing sovereign
digital money denominated in euros regardless of what other euro countries and
the ECB would do.
3. Keep the euro but introduce
sovereign money as a parallel domestic currency in one or other euro country.
4. Temporary exit from the
euro.
5. Final exit from the euro.
Conceive of monetary reform as an organized return to the former national
currency.”
Prof. Huber continues that by
saying that the first option,
“accepts the euro as a matter of fact. Like it or
not, we now have the euro and until further notice we can assume that we are
going to keep it. Thus, not least for pragmatic reasons, we ought to conceive
of monetary reform within the framework of the Eurosystem.
The delegation of the sovereign
monetary prerogative to the eurosystem is not necessarily as inimical to the
national interest as some people believe, all the more considering that all
national governments anyway have ceded the privilege of money creation and
seigniorage (advantages and profits from money creation) to the banking
industry, to which they have become deeply indebted and on which they are
dependent.
In particular, replacing bank
money (sight deposits) with digital sovereign money (central-bank money) offers
the opportunity to reduce public debt significantly through the ensuing one-off
transition seigniorage. This would definitely end the over-indebtedness of the euro
states. This applies to the entire eurosystem as almost all euro countries,
like almost all other industrial countries, are over-indebted, the differences
being merely gradual.
Implementing a sovereign money
system in the euro area can actually be expected to strengthen the eurosystem
and contribute to stabilizing euro countries' finances. It would be paving the
way for, and in itself be part of, the banking union and maybe even some sort
of fiscal union.”
Central to monetary reform is the abolition of Art.123
of the Treaty on the Functioning of the European Union that prohibits Member
States to directly fund national government budgets. [20] In addition Prof.
Joseph Huber favors the creation of a fourth branch of government, the monetary
authority, complementing the legislative, executive and judicial branches. [21]
Various organizations
throughout Europe and the world [22] are campaigning to put an end to our
debt-based monetary system. To mention but a few, Positive Money in the UK,
Monetative in Germany, Sensible Money in Ireland. Vollgeld in Switzerland is
gathering signatures to support a referendum on monetary reform.
In one way or another there is
unanimity that something must change in Europe. Prof. Michael Hudson said, “Debts
that can’t be paid, won’t be paid.” [23] Prof. Hans Werner Sinn recently
suggested that among other things the first measure that is needed to
reconstruct the euro is a debt conference. [24]
Is the way Out of the
Crisis the Debt-End or is the vision of the United States of Europe a Dead-End?
“The euro is
the currency of a country that does not exist” [25] and “if we are serious
about deepening European integration, we must recognize that there is no credible
alternative to reforming the euro from the ground up.” [26]
A failure to reinvent the
vision of the United States of Europe and reengineer the Treaties is not fatal.
We can always revert back to our national currencies and the politics of
national interest. The double dilemma must become priority number one in the
coming elections. Should the Euro become the debt-free currency of the United
States of Europe? If the answer on any of the two dilemmas is no, then the
European beasts of Brussels and Frankfurt must be dismantled. If the answer on
both dilemmas is yes, then there is a cause worth fighting for.
PUBLISHED:
www.analyst.com.gr, 24.01.2014
Global Economic Intersection, 26.01.2014
sovereignmoney.eu, 30.01.2014
PUBLISHED:
www.analyst.com.gr, 24.01.2014
Global Economic Intersection, 26.01.2014
sovereignmoney.eu, 30.01.2014
SOURCES
6. p.6 MARKT/2003/02/F
7.p.112 http://ec.europa.eu/internal_market/bank/docs/regcapital/studies/2004-04-basel-impact-study_en.pdf
25. ibid. 1
26. ibid 24
26. ibid 24
