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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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  • Is There A Chance For A "European Spring"? No. 1 comment
    Sep 9, 2013 10:40 PM

    "Mr Tajani said the crisis is compounded by the tight monetary policy of the European Central Bank, which has failed to alleviate a serious credit crunch for small firms. 'We need a real central bank, like the US Federal Reserve or the Bank of England, willing to promote growth,' he said, in an unusually blunt criticism of a fellow EU institution.

    Guy Verhofstadt, leader of the European liberals, said it is time to broaden the ECB mandate to include growth, warning that the eurozone is at risk of chronic stagnation and a 'Japanese winter' unless the central bank goes beyond short-term measures."

    --Ambrose Evans-Pritchard, Daily Telegraph, Sept. 8th, 2013

    A little background: Antonio Tajani, the EU commissioner for industry, is an Italian politician close to Berlusconi which in eurospeak makes him a "liberal". (In Europe, liberal means capitalist.) Guy Verhofstadt, a former prime minister of Belgium, heads the liberal faction in the European Parliament. He is touted as the next president of the European Commission. It sounds like both of them are reflationists.

    I wrote previously that, if an uprising ever comes in the eurozone, it would have to come from the left, except for the fact that the European left doesn't understand monetarism. Maybe I was wrong. Not about the left being ignorant of monetarism, but about the right's embrace of deflation. There are now stirrings of reflationism on the right, which is potentially good news for unemployed and/or starving Europeans. If the right starts openly pushing against austerity and deflation, I have little doubt that the left will jump on the bandwagon. The left has never had its heart in Austrian economics.

    The Social Democrats' problem has been their desire to maintain credibility as a responsible governing party, and to be seen as as willing to make "hard choices" even if it hurts workers. The socialists' ignorance of monetarism has left socialists such as Francois Hollande with the false choice between austerity and utter collapse. In the US, respected left-wing economists such as Paul Krugman and Joseph Stiglitz can call for fiscal and monetary stimulus with impunity, but there is no such freedom on the left in Europe. In today's Social Democracy, to advocate inflation is a personality disorder, or crypto-communism. Wealth confiscation, government defaults, bank failures: yes! Reflation: no. Eat your gruel.

    It looks like the eventual leadership of the revolution against austerity and deflation will come from the right. Perhaps this is not so surprising, considering that Sarkozy, Berlusconi and Rajoy have criticized the "hard euro" policy in the past, and that the new head of the BofE is a closet inflationist. Hard currency is not a tradition in Latin Europe, nor in Anglo Europe.

     

    The challenge for Europe is whether these murmurs can be forged into an outright revolt, as opposed to banter at the kaffeeklatsch. Europe needs a statesman like William Jennings Bryan who understands economics and can forcefully articulate the need for a revolution before it is too late.


    But I think it is already too late or, rather, that the cause is hopeless. Let me explain why:

    1. Fear of Germany

    Europe has an irrational fear of alienating Germany. Aside from the small matter of 20th century history, the fear emanates from the fear of being "cut off" from the German Treasury. In other words, the fear of not getting bailed out. What is irrational about this fear is that Germany has already decided to cut off the rest of Europe. Weidmann's "No Bail-Out Principle" means no bailouts.

    2. The Single Mandate

    It will be difficult for the revolutionaries to get control of the ECB as long as its mandate is unchanged. To change the mandate will require treaty revision, which is next to impossible so long as Germany is in the EU. It is true that, if the ECB board were to vote to reflate, that could be an end-run around the mandate, but Germany would object.

    3. ECB Independence

    Even if the reflationists win political control of the EU, that does not change the independence of the central bank. New governments could appoint doves to the ECB board, but that would take years. At present, board members are prohibited from taking direction from their home-country governments. They do not represent their home countries, unless they are German.

    While I would like to convince myself that there could be a light at the end of the eurozone tunnel, I really doubt it. It will take a lot more than a few off-hand comments to the Telegraph to make a revolution. It is deeply ironic that the Italian left succeeded in destroying Berlusconi, the only man who could have saved Italy from becoming Greece. And ditto for France, which rejected a right-wing reflationist (Sarkozy) in favor of a left-wing austerian (Hollande).

    I'm not going to hold my breath waiting waiting for a European Spring.

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  • phil from Edmond
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    Never thought I would see William Jennings Bryan discussed in a favorable light regarding his economic policy. But considering where we are today he certainly was ahead of his time.

     

    Also had the conviction to leave Wilson cabinet after Wilson's decision to enter WWI.
    22 Sep 2013, 08:39 AM Reply Like
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