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Central Banks Seal Europe's Economic Suicide Pact

Economics / Euro-Zone Jul 05, 2013 - 11:05 AM GMT

By: Andrew_McKillop

Economics

RISK OFF FOR THE MARKETS
Through a probably linked and coordinated decision, the two former Goldman insiders – the ECB's Mario Draghi and the BOE's Mark Carney – acted to further destroy the need or desire for personal savers to have savings at all, by holding interest rates at extreme lows. And they went further.

Also probably coordinated, both the ex-Goldman insiders now running European central banking took an “unprecedented step”. They both promised – or threatened – further rate cuts.


Market reaction was instant. Within minutes Britain's FTSE was up more than 3% outstripping the same blind euphoria on other European markets. US markets were shut for Independence Day.

Mario Draghi's statement to the press included the key phrase that sent markets on a rocket trip. He said: "What the (ECB) Governing Council did today was to inject a downward bias in interest rates for the foreseeable future." Described by the press as a radical or unprecedented departure from ECB policy since it started operating in 1999, under which it never pre-committed to any level of rates in advance, Draghi promised – or threatened - QE Forever.  The BOE's Carney did exactly the same.

Taking Draghi at his word, which is not obligatory, his statement that the ECB can cut any of its key interest rates including those for its deposit facility - which currently stands at zero percent – means that a cut to this rate would effectively charge banks for holding reserves at the ECB. As a means to force the banks to finance the casino gambling tables of the playtime economy, nothing else could be more powerful, except perhaps allowing Goldman Sachs to print the chaff money itself.

As for the ECB's main refinancing rate, which determines the cost of nearly all ECB loans to Europe's troubled banking system – troubled by its suicide mix of greed and incompetence -  Draghi said that the current 0.5% rate "does not represent a lower bound."

MORE EUROPE?
Europe's central banks, unlike the US Fed with its taper-down talk are doing what they can to speed the economic suicide of the continent, but in the ECB's case, this action is also driven by its “federalizing mission”. The former Chief Economist and Member of the Board of the ECB, Otmar Issing in no way agrees with, or approves the Goldman-inspired Monopoly money approach to “solving” Europe's worst-ever banking, public finances and economic crisis. In Europe, these have been bundled together with political federalism into a no-way-out trap.

Published, and republished by several sites since first appearing in late 2012, Issing's arguments, and critique of the ECB and the Federal European ideal ('The Risk of European Centralization') is that European QE has “manufactured” and added new crises, to a set of crises that certainly do not need any more, additional or new crises. Basically he says - Why make bad things worse?

While at the ECB, Issing was obliged to toe the party line. This line can be summarized as being the “powerful conviction” of European deciders that the Eurozone crisis shows “the need for more Europe”. Due to this, the logic continues. the creation of a fully-fledged Federal political (and of course monetary) union is the only possible way to solve the Eurozone crisis. Issing stays away from head-on criticism of “European federalist ideology”, but notes this heavily draws on war-fear and the continent’s history of all-out wars fuelled by political division, joined by more recent fears of globalization, energy crisis and climate change. European federalism, its proponents say, is the only way to maintain a peaceful, prosperous, and united Europe.

Issing focuses Europe's strange history of attempts at monetary union – with this union always set as the route to political union and very specifically a united, common European foreign policy. He cites the first policy push for a European single money – by French economist Jacques Rueff in the 1950s, a close adviser to Charles de Gaulle. Since that time, political conformity with that strategy has remained diamond bright and rock solid – in Brussels. Most recently, Chancellor Angela Merkel, like President Francois Hallande have asserted that “if the euro fails, Europe will fail.”

Belief is fine, and sincere belief is even finer, but the epic crisis confronting Europe today is not so much about political union as the unanticipated, damaging and real effects of European Economic and Monetary Union. As Issing points out, efforts to hold EMU together are almost certainly not helping the achievement of a common foreign policy, inside Europe, because the North-South or Club Med-Rest of Europe split or divide is now massive. The proven powerlessness, or even refusal to act of Europe's powerbrokers in the face of atrocious and stupendous rates of unemployment in the PIIGS countries is only one reason to believe, like Issing, that the crisis can or will re-ignite nationalist anti-European sentiments.

As he says, this will be regardless of whether they give or receive financial aid. The losers will blame the winners, and vice versa. This is made even more dramatic by Germany at present and in fact, being the only real winner inside the Eurozone.

ONE SIZE DOESN'T FIT ALL
Issing's knowledge of the European economies (now numbering 28 with the adhesion of Croatia) is impressive. Federalist-minded politicians launched full monetary union in 1999, with the euro, despite warnings that the continent's economies are much too diverse to operate with a single money. Among the Eurozone-17 it took only a few years before several states had violated the Stability and Growth Pact, which in its earlier versions had a “no bail-out” clause – which was soon abandoned. The political response to these failings, however, were the constant calls for further, faster and greater economic integration, including such steps as creating a “European finance super-minister” or EU Finance Czar with almost untrammeled powers to force closer integration.

To be sure the headlong quest for “More Europe”, in the monetary case, as in others, soon throws away the tinsel trappings of citizen agreement and support. What's democracy got to do with it? The central issues of national sovereignty and democratic decision were soon, and repeatedly, under attack from the federalists. Specifically this concerns the “privilege” of national elected governments and parliaments to set their own taxes and public spending. For the federalists, these “outdated trappings” of the bad times have to go. The fact they have not been removed, Issing notes, is used by the federalists as another argument - that because sovereign member states do not deliver on their European commitments this means they “must give up sovereignty now”.

This is the type of tortured logic that is worthy of Kafka or Orwell, but Issing does not stop there. As he says, the federalist quest using the single money – supposedly to support political union – has already turned out to be inconsistent, divisive and dangerous. It has generated, or vastly increased pre-existing financial and bank sector risks for Eurozone states - and for the 11 other EU states, who have “played the game” and operated Europe's continent-wide free trade zone and coordination of interest rate policies with the ECB.

Certainly since 2010-2012 and the constant mix of austerity, bank bailouts and mass unemployment - now seemingly permanent features of Europe - the blowback on public opinion from this economic suicide pact has been powerful. Apart from fueling tensions among member states, the most important impact has been the constant sapping of the basis on which political union rests – European Union citizens no longer identify with “the European idea”. As Issing says, public support for “Europe” depends on its economic success. When this disappears, Europe disappears. Incredibly, the federalist pretend they don't know this.

GERMANY'S UNWANTED ACCIDENTAL EMPIRE
Economic reform in the EU, despite all claims to the contrary and as Issing shows, has always come from national governments, not top-down from the Commission. In other words, decentralization works – as well shown by Germany with its own states and regions, and a relatively weak central federal government. But as Germans know – if not its politicians at least public opinion in Germany – there is no possibility at all that Germany can or will bail out all the rest of Europe, simply because of the enormity of the problem.

Put another way, centralized failure is always bigger and more dangerous than the opposite.

Issing argues that in earlier centuries, competition within Europe generated dynamism and prosperity across much of the continent, but the economic actors in play, at the time, were vastly more numerous and more diverse. No trace of economic centralization existed – with at times several dozens of local, regional and national currencies circulating. To be sure, this was also a time of  'decentralized wars'.

Present EU leaders have responded to serial failures of their federalizing quest - by concluding that more centralization is needed. Called “harmonization, coordination, and convergence” in Eurocrat coded language, centralized decision-making is still regarded as the silver bullet for all of Europe’s problems. For well-educated Germans like Issing this may recall the country's philosophers and playwrights, who studied the themes of the Super hero and the Lust for power over the centuries.

Economist Friedrich von Hayek, cited by Issing, called the centralized economic version of this quest “a recipe for constraining freedom and ensuring mediocrity”.

The danger signals caused by the centralizing obsession of the federalists are flashing in the deteriorating relations between the 17 current Eurozone members and the 11 non-member EU states. As the former press on with their suicide pact of greater integration, the negative economic impact and consequences of this make the 11 non-member states harder in their refusal, even obdurate refusal, concerning any bail out operations they might subscribe to, for saving the EMU. As Issing wryly remarks, at least in this domain – monetary policy competition – centralization does not rule!

The Eurocrat federalists, sooner rather than later, will be forced to admit that a top-down federalised economy cannot work in Europe. How they do this “coming out” is not possible to define at this time – but we can hope they do it without waiting for total economic collapse, before they admit they were wrong. As Issing concludes, simply because economic centralization does not work, there is no need to “abandon Europe”. There are plenty of areas in which common action at the EU level is appropriate, does work and is efficient, for example environmental, cultural and science policy - but for the economy, denial of reality has been intensified by the federalists to the point of obsession and idiocy. And this must cease.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2013 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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