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Christopher Mahoney
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I spent eight years at Bank of America in New York (1978-86) covering Wall Street, then moved to Moody's Investors Service where I worked for 22 years, covering banks, sovereigns and corporates. I chaired the Credit Policy Committee for four years. I retired in 2007 as vice chairman.
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  • France: Socialism Meets Deflation 0 comments
    May 3, 2013 10:06 AM

    Much of European academia was captured by marxist thought in the postwar era, including many European economics departments. There are many European "economists" today who know quite a bit about the labor theory of value and the internal contradictions of capitalism, but know very little about money, banking, and monetary economics. Macro- and micro- economics were seen by the marxists as the obsolete texts of a doomed system. Studying them was like studying a dead language. Consequently, marxism and the marxist perspective are to a great extent the only tools that the European Left has to work with as it seeks to reverse the economic devastation wrought by monetary union.

     

    The hapless products of the marxist economics departments of the past now find themselves in leading roles in the eurozone. Yesterday's student radicals are today's statesmen. Americans need to understand the importance of the socialist Left in Europe: in every European country, the Social Democratic party plays a major role in parliamentary politics; every European country has had one or more socialist governments; and many European countries currently have governing socialist majorities in parliament. These marxist members of the European political class now confront a problem for which they were not educated: disastrous monetary policy.

    While Marx did indeed have a theory of money, it is not terribly useful in sorting out today's travails:

    "The general price level will move in medium and long-term periods according to the relation between the fluctuations of the productivity of labour in agriculture and industry on the one hand, and the fluctuations of the productivity of labour in gold mining, on the other."

    ---Eric Mandel, "Marx's Theory of Money"

    Today's socialist finds himself quite at sea when he looks to Marx for a solution to the eurozone crisis. This certainly hasn't stopped many eurozone politicians from trying to fit Europe's problems into a marxist construct. The recent president of Cyprus (and of Europe) was only able to understand the crisis in the comic-book terms of greedy capitalists and oppressed workers. This is what his own party had to say about the Cyprus bailout negotiations:

    "We will not accept terms that will destroy the popular strata, abolish working peoples' gains, and sell off for pittance public property to big capital. We shall stand on the side of the class-based trade union movement in the mobilisations it is planning if the Troika insists on its policies. We shall not enter into a procedure that will be in complete contradiction with our ideology and history."

    Takes you back to Petrograd, doesn't it?

    You might say, "Well, that's just Cyprus". No it isn't. There is a sympathetic story in Monday's New York Times about France's new finance minister, Pierre Moscovici, and the many difficult challenges he faces. The headline is "Steering France's Economy, and Attacked From All Sides". The headline should be "Socialism Meets Deflation".

    Mr. Moscovici is not a believer in free-market economics; he is a socialist. His iPhone cover is a picture of Leon Blum. He told the Times: "There is a mainstream view in the European Commission that is neoliberal. But I'm a socialist." We also learn that Mr. M was a member of the Revolutionary Communist League until he was 27. In other words, he was a Stalinist as an adult.

    Mr. Moscovici's boss, Francois Hollande, was elected on an anti-austerity agenda. The French people, confronted with a choice between "reform lite" and "no reform", chose no reform. They voted to maintain the French social model, and to avoid the structural changes being imposed on the other members of Club Med. However, this won't in practice be possible because France's fiscal deficit exceeds the limit set by the eurozone's "fiscal pact" which requires all eurozone countries to bring their deficits to 3% or below. Despite Hollande's comforting election promises, France's budget is on the chopping block.

    Mr. M is in a tough spot. The French economy is shrinking and unemployment is now 11%. Hollande has promised Europe that he will reduce France's fiscal deficit ratio from the current 4% to 3%, which will require an estimated budget cut of EUR 5B. It will be hard for Moscovici to cut government spending at a time when the economy isn't growing and unemployment is at 11%. Mr. M explained: "We must reduce deficits to keep our sovereignty and our credibility."

    QED: the bankruptcy of socialist economics. Because no one taught them about monetary policy, all the European leftists understand is austerity versus deficits. They have drunk the German Kool-Aid and believe that if they just tax a little more here and cut a little more there, all will be well. That way, they will keep their "credibility". Even though Hollande and Moscovici ran on an anti-austerity platform, they are implementing austerity because "there is no alternative".

    The tragedy is that the European Left see its only choices as austerity or the abyss. They appear satisfied with (or resigned to) the ECB's Zero Growth Policy. Maybe they believed it when Mario Draghi proclaimed this week that "the ECB's monetary policy has been extraordinarily accommodative throughout the crisis". How would they know differently? Is there any official in the eurozone who has bothered to discuss ECB policy with a reputable anglosphere economist? Mark Carney is just across the Channel, and I'm sure he can be made available to talk to Mr. Moscovici.

    I think it is unlikely that it will be the European Right that will force the ECB to end its Zero Growth Policy. This will have to come from the Left, if only it understood economics. Time is running out, and unemployment is already in the red zone.

    Lars Christiansen, who seems to be the only economist on the Continent who understands the problem, has recommended that the ECB issue the following statement:

    "Effective today the ECB will start to undertake monetary operations to ensure that euro zone M3 growth will average 10% every year until the euro zone output gap has been closed. The ECB will allow inflation to temporarily overshoot the normal 2% inflation. The ECB has decided to undertake these measures as a failure to do so would seriously threatens price stability in the euro zone - given the present growth rate of M3 deflation is a substantial risk - and to ensure financial and economic stability in Europe. A failure to fight the deflationary risks would endanger the survival of the euro.

    "The ECB will from now on every month announce an operational target for the purchase of a GDP weighted basket of euro zone 2-year government bonds. The purpose of the operations will not be to support any single euro zone government, but to ensure a M3 growth rate that is comparable with long-term price stability. The present growth rate of M3 is deflationary and it is therefore of the highest importance that M3 growth is increased significantly until the deflationary risks have been substantially reduced.

    "The announced measures are completely within the ECB's mandate and obligations to ensure price stability and financial stability in the euro zone as spelled out in the Maastricht Treaty."

    Unfortunately, such a statement would have to be issued over the dead bodies of Jens Weidmann and a number of other ECB board members. It is not imminent because, after all, "the ECB's monetary policy has been extraordinarily accommodative throughout the crisis".

    France won't be the ultimate savior of the eurozone because it isn't sick enough yet. The savior will have to be Spain or Italy. It will fall to one of them to be the country whose imminent collapse forces the ECB to relent and flood the continent with money. It's a shame that so many millions will have to lose their jobs before that fateful day comes. And it's a greater shame that when all the dust settles, capitalism will be blamed and socialism, which offers no answers, will advance.

     

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