Germany and the two-tier EU

Plans for a fiscal-stimulus programme will open old wounds.

Tarric Brooker

Topics Politics World

Ever since the Eurozone debt crisis began in 2009, Germany, as the most powerful EU member state, has consistently asserted that austerity is the only way forward for deeply indebted EU nations. If such nations want to revive their economies, so the reasoning goes, they have to get their budget deficits under control.

In the years since the Eurozone crisis broke, member states on the southern periphery have undergone varying degrees of social upheaval and political turmoil as a result of EU-enforced austerity policies. Indeed, with EU citizens growing tired of cuts to everything, from government-pension payments to essential health services, populist political parties, such as Italy’s Five Star Movement (M5S) and Greece’s Syriza, have ridden into government on the back of anti-austerity messages that have resonated strongly with their electorates.

In recent months, however, Germany has encountered economic problems of its own. Its manufacturing sector has entered recession and analysts predict that the slowdown in growth may drag the German economy as a whole into recession by the end of October.

Given the potentially severe effect of the slowdown on the German economy, there have been growing calls from within Chancellor Merkel’s own ruling coalition, and across the political spectrum, for the deployment of a fiscal stimulus programme to insulate the economy from the impending downturn. There are even suggestions the programme is already in play.

Berlin certainly has the means to run a large government stimulus programme. After five years of budget surpluses, and one of the lowest levels of sovereign debt in Western Europe, it has built a substantial fund ready for just this sort of eventuality.

But for the citizens of southern Europe still reeling from almost a decade of austerity enforced by the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF), German politicians’ claims that ‘we are different’ are likely to ring hollow.

To many observers of German or EU politics, Berlin deploying a government stimulus is rather the non-event. Which it is. No rules are being broken, EU or otherwise. A nation as wealthy and powerful as Germany is obviously going to try to protect its economy.

But in a Europe that has become increasingly divided by austerity, accusations of a ‘two-tier’ EU are likely to grow even louder. After all, Germany is planning on doing what it has told poorer EU members they cannot do: spend vast sums of public money.

Italy, for example, is in recession. And the Italian government isn’t allowed to protect its economy in the same way as the German government can, due to EU regulations on budget deficits. Berlin’s actions, therefore, will only rile the economically weak members of the EU.

Yes, the EU is meant to be a union of equals. But Germany, as the preeminent political and economic power in the EU, has continued to drive policy on everything from Eurozone debt to the response to the ongoing migrant crisis. As a result, it isn’t hard to understand the anger and frustration of those nations that didn’t sign up to consistently follow wherever Germany led.

German plans for a stimulus programme ought not to be a problem. But in the context of an austerity-ravaged Eurozone they could quite easily become one.

Tarric Brooker is a journalist.

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Francesco Lucibello

19th October 2019 at 6:35 pm

It is not so much the EU as the euro which is the problem. EU economic policy in adopting the euro mean’t that some states, Germany, Holland, Sweden, had an advantage over the less economically developed states of the southern periphery. The northern core economies had higher levels of productivity and unit labour costs than the states of the southern peripheries. Therefore trade between these nations at different levels of economic development meant that the northern core continued to run up trade surpluses and the southern members continued to run up deficits. Countries with different levels of development and using the same currency will run into precisely this problem. The traditional solution was for countries to print their own currencies and trade in their own currencies, with devaluation as a safety valve for the less productive. Unfortunately for Spain, Portugal, Ireland, Greece and Italy they were stuck with the euro and couldn’t compete successfully with the northern core. This really was trade policy 101 and it was incredible that the euro experiment was touted as something new and trendy, when it was nothing of the sort.

Modern Money

17th October 2019 at 10:44 am

When you look at the Treasury select commitee submission from 1999. It is from November 1999 and describes the accounting and function changes that occurred as a result of Maastrict and with Bank of England independence.

The thing that was illuminating was the explanation of how the Ways and Means account worked pre-1997.

(paragraph 37 onwards), the government simply spent according to direction from Parliament and this was expressed as money injected into the economy via the Bank of England. Then the Bank of England issued gilts (though always a liability of Treasury) solely with an eye on monetary conditions. In cases where not all of the government spending was drained – because the monetary objectives didn’t require it – then Ways and Means account simply acted as a balancing item. The Ways and Means account was therefore basically analogous to an overdraft, an IOU of the Treasury. So even in this case, we have Treasury IOUs backing central bank money creation, but as explicit, overt, unequivocal money creation by government spending. And the only concern in this system is the monetary target, i.e. inflation. Everything else is subsumed into that. All completely consistent with the claims of MMT.

Post-1997 we have the system that we have now. The Treasury (DMO) is now responsible for cash management which means it has to clean up after itself by issuing gilts to neutralise its spending. This leaves the Bank to focus on regulating the economy only with respect to prevailing conditions rather than the additional complication of government cash flows. So now when the BoE needs to add more money to the economy it cannot use any of the government’s direct spending (i.e. only drain part of it off) as before because the DMO has already drained it all. So now it has to buy back some of the gilts that the DMO sold. Again, we have net money added to the economy backed by a Treasury IOU, though this time it is a gilt rather than an entry in the Ways and Means account.

There are now two targets in the system: (1) the Treasury’s balanced cash flow target; (2) the Bank’s monetary target. In many cases the Bank will have to undo what the Treasury has done, instead of both simply acting together under one target as they did before.

The changes in 1997 really did just obfuscate the reality of money creation and government spending. That was the whole point of Maastricht to impose self imposed constraints on elected governments.

1. that the spending happens first following Parliamentary direction
2. that spending creates money via accounts being credited as the central bank
3. that the only concern ultimately is monetary conditions (inflation not budgets)
4. that gilts are a monetary instrument

The truth being we live in a spend and then tax economy not a tax and then spend one. Even the Romans knew before anyone could pay their taxes. The Roman authorities had to issue the coins first. After they issued the coins then they could use those coins to pay taxes.

The Euro is the largest example of spending first and then collecting taxes when it was created. The ECB didn’t say to the European countries give us your Euro’s so we can spend, because no country has any Euro’s. The ECB spent the Euro’s into existence and then taxes were collected from that spending as it flowed around the Eurozone as your spending is someone elses income.

We spend first and then collect taxes to control inflation. Taxes do not fund government spending. They destroy broad money and take it out of circulation after governments have put money into the economy via government spending.

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