Things are a little odd when a Minister for Finance & Public Expenditure and Reform of a nation (Ireland) informs the press that if his government isn’t cautious in its fiscal response to the largest medical and economic crisis in a century then the “bond vigilantes” will turn on them. And this is in the context of governments around the world issuing long-term debt at negative interest rates and the relevant central bank is buying billions of government bonds with its currency-issuing capacity. But that is what the Irish Finance Minister did last week ((Source). Fear of God strategy Number 1. That still works in god-fearing places. He referred to the “the fiscal architecture we are anchored in within the euro area” which will ultimately impose Excessive Deficit Procedures as the medical crisis eases (see his April 23, 2020, Speech on Stability Programme Update). Code for a renewed bout of austerity once people have stopped dying. A wonderful prospect. And while currency-issuing governments around the world are introducing variously large direct fiscal stimulus packages (that is, spending going into the economy immediately), the European Union is once again demonstrating their inability to respond to crisis. Nothing has been learned from the GFC.



The IMF is currently keeping a – Policy Tracker – currently for 193 countries, which I think is a useful source of information – collating all the various ways in which governments are using fiscal and monetary policy to deal with the coronavirus crisis.

It is a fairly time-consuming task to go through all the responses but it is clear that the EU is lagging badly behind the non-EU nations in terms of direct stimulus.

When we consider fiscal policy actions, several criteria emerge that allow for assessment of effectiveness.

I will write a bit more about that later this week as I get close to releasing a 10-point plan (which might have more or less than 10 points).

Some criteria

When assessing the likely effectiveness of a fiscal policy initiative, we can consider the following dimensions:

Implementation Speed – How quickly can the spending enter the economy? For example, an initiative that seeks to build a fast rail service down the East Coast of Australia to join, say, Brisbane and Melbourne, would take longer to get dollars in to the economy than an announcement that the government will offer a job to anyone who wants one (Job Guarantee). To arrest the severe fall in non-government spending and income generation, speed is essential. It doesn’t preclude medium-term projects, but the government has to be careful not to have large expenditure streams coming on tap after the economy is already recovering and no longer needs the temporary fiscal support.

Labour Intensive – Does the intervention target activities that generate lots of employment? With employment growth slumping so dramatically, it is best to target activities that will arrest the employment contraction as substantially as possible.

Multiplier – How much of the initial spending injection stimulate what economists call ‘multiplier effects’, that is further non-government spending. For example, giving low-wage workers cash payments or sustaining their wages, is likely to result in a high proportion of each dollar being spent on consumption goods and services. Conversely, giving loan guarantees to businesses at the time when the economy is entering a deep recession is unlikely to have strong multiplier effects because the latter rely on spending stimulating output and employment.

Spatial – Does the option provide benefits to regions or the social settlement or is it biased to certain spatial locations, especially those that already have relatively deeper labour markets (more job opportunities).

Green – Does the intervention help us move towards a carbon-zero world?

Supply-chain – Is the intervention likely to run up against supply bottlenecks and introduce demand-pull inflationary pressures. This is particularly relevant in the current crisis, which is a combination of a supply and demand shock. Where factories are closed and/or operating on reduced activity levels, it is essential not to be pumping fiscal support into the economy indiscriminately. All spending initiatives will stimulate broad expenditure growth, including for imports. But a carefully designed package can reduce the supply-side strain. For example, in Australia at present there is likely to be some food supply issues as farmers struggle to get workers to harvest the crops (relying typically on ‘back-packers’) with international borders closed. So a stimulus to create temporary public sector jobs for workers locked out of their usual jobs (because of enforced closures) to help ease the supply chain issues would be desirable.

Equity – this relates to fairness. Handing out billions to help shareholders withstand the losses to their companies is likely to be less equitable than ensuring low-paid workers are able to sustain their mortgage/rent and other contractual commitments.

Corruptibility – this is what economists call ‘moral hazard’. How easy is the option able to be hijacked by those seeking to corrupt the intent. For example, a wage subsidy is highly susceptible to abuse from unscrupulous businesses (there is an extensive research literature on this) whereas paying the salary of a worker directly or offering then a public sector job is less likely to be corrupted.

The following graphic shows these options.

A position at 0 means the initiative meets none of the requirements or the relevant criterion, whereas 100 means the intervention is strongly meeting that need.

I have compared four options:

1. A wage subsidy.

2. A Job Guarantee.

3. Deferred charges for business (tax deferrals etc)

4. Business loan guarantees.

My weightings are approximate and open to debate.

But the superior option here is the Job Guarantee when assessed against the above criteria.

The European Union non-stimulus

Now how does Europe stand up in this regard?

Not very well is the short answer.

The President of the European Commission Ursula von der Leyen told the press after last week’s disastrous and divisive European Commission meeting that:

… we are not talking about billion, we are talking about trillion …

I know there are different ways to measure billions and trillions (depending which nation one lives in) but really!

If you do one of those replace letters one at a time to get a new word, it doesn’t take long to get von der Lying (sort of)!

The detail so far released doesn’t even equate to many billions and certainly not in terms of direct stimulus.

First, the Commission is to create a ‘recovery fund’, which appears to be a credit line – that is, loans to crisis torn nations which will have to be repaid.

The interminable debates within the Commission, which always constrain quick action, reflect the massive differences in viewpoints to Europe among the Member States.

While they talk of solidarity, the reality is anything but.

As the world sinks into the deepest crisis in more than 100 years, we have had a succession of demonstrations of what is wrong with the structure of the European Union.

A few weeks ago, we witnessed the ‘coronabonds’ saga, which countries like France leading the way with proposals to have EU-level debt instruments with joint responsibility, which would, in effect, result in permanent transfers to the weaker nations.

With a crazy system, this is effectively the only way forward for them.

But the Dutch put the brakes on with that proposal.

This debate has now morphed into the ‘grants versus loans’, ‘conditions versus no-strings’ and once again the Dutch and other Northern European nations have put the end to any notion that the southern states would be given significant grants to help them in this time of need.

The EC President told the media after the meeting that they were going to temporarily (few 2 or so years) increase the EU ‘budget’ to 2 per cent of union-wide Gross National Income – that is, hardly at all.

Less than 1 per cent of GDP (about 0.6 per cent).

What will this recovery fund provide?

France, Italy and Spain have demanded the Commission provide grants – cash transfers that do not need to be ‘paid back’ – to the weakest nations, that are in rapid decline.

The record of the meeting suggests that German Chancellor claims that handing out grants to beleaugured nations:

… do(es) not belong in the category of what I can agree …

And it appears that any ‘grants’ that were made (albeit miniscule) would come with ‘conditionality’ – the usual structural reform flim flam – cutting pensions, abandoning job security, cutting wages etc. The usual stuff that these characters dream up on a daily basis.

I also would not expect the Commission will be able to get an easy agreement between the Member States about the size and distribution of these grants.

For example, it would make sense to give the cash to Italy, Spain and countries in the worst shape both in terms of their economies and the scale of their health problems.

But, better off nations such as Germany is likely to demand grants.

Why?

Areas such as Saxony have high levels of child poverty and general poverty.

Last year, the Paritätische Wohlfahrtsverband released their – Der Paritätische Armutsbericht 2019 or ‘Poverty Report 2019’, which found that the “Ruhr region in the western state of North Rhine-Westphalia” was mired in poverty (poverty rate 21.1 per cent) and 95 regions surveyed demonstrated increases in poverty rates by 20 per cent over the last 10 years.

So while the German government blocks financial help (grants) to troubled European partners, they are also content to run large fiscal surpluses, which undermine the prosperity of their own citizens.

We expect that the German government, exhibiting their usual hypocrisy, will be out in force to get their ‘share’ of any grants that are handed out, therefore, largely defeating the need for substantial redistribution of financial resources between the Member States (from North to South basically).

The rest will come in the form of loans and guarantees as will the so-called “€540bn rescue package”. that the Finance Ministers were claiming a few weeks ago, was the practical expression of solidarity.

It was mostly credit lines administered via the European Stability Mechanism (ESM), which involve highly conditional loans – austerity-inducing conditions.

Only a small amount was allocated for direct interventions that might help fund workers’ wages if lockdown dictates prevented them from working. But even then this support was in the form of a “temporary loan-based instrument (SURE)” (Source).

The actual immediate fiscal spending intervention is close to zero.

Guarantees and loans for private investment projects in times of severe economic distress are poor fiscal options.

Firms who face collapsing sales are hardly going to want to become further indebted when they face insolvency.

The process of handing out loans is also cumbersome and money may not flow for some months or even into 2021 if any firms choose to draw on the credit lines.

The crisis is now.

Jobs are disappearing now.

A major fiscal intervention is needed now.

Other nations understood this.

The European Commission clearly has not.

It prioritises its ‘process’ and ‘bureaucrasy’, all designed to do very little but to look as if it is actually doing lots (‘trillions not billions’ sort of smokescreens) – over the urgency of the situation.

The European leaders know they cannot agree on important things that deliver prosperity to their citizens. So they play this charade – late night urgent talk fests, lots of coming and going, grand statements about solidarity, and then – a report is commissioned to come back in a few weeks or months – problem deferred. Everyone saves face. No-one admits the whole scam is a massive failure.

In effect, the Commission is looking the other way while the ECB funds the deficits of the Member States – they are all playing along with charade that this intervention is for ‘monetary policy’ purposes.

They know full well that the ECB is effectively funding Member States in violation of the Treaties, even though they have cooked up a European Court of Justice ruling sanctioning the activity.

And when the health crisis is over, the technocrats will be back in force with the Excessive Deficit Mechanisms – punishing the nations severely who had to go the hardest to stop their economies and nations from total collapse.

And as the inadequate GFC response by the European Commission that left millions wallowing in unemployment pushed a proportion of the population away from the ‘European dream’, the current response is accelerating that trend.

In March 2020, the Tecnè opinion poll on European Union membership approval published on April 12 shows that:

1. Remain – 51 per cent (down 20 points on November 14, 2020 poll)

2. Leave – 49 per cent (up 20 points)

3. 67 per cent of Italians questioned in the survey found “EU membership to be a disadvantage”.

Why is this happening?

Because all the weasel words about solidarity will not alter action and the European Union’s response has been pitiful and constrained by the historical and cultural conflicts that have created the flawed European governance models.

No end of late night summits will cover that failure.

There is limited solidarity in the European Union and the self-styled ‘Hanseatic’ nations, ultimately, will not budge to create a more effective fiscal sharing economy across the currency union.

That is why nations such as Italy should reintroduce their own currencies.

The point is that it should be obvious to all that the European Union has run its course and been exposed as a failure.

I think this Bloomberg analysis – Coronavirus Has Exposed the EU’s Creeping Irrelevance (April 25, 2020) – is on the right path.

The author writes:

The Holy Roman Empire also failed to resolve its internal rivalries, especially between Prussia and Austria. Similarly, the EU today is divided by bitter rifts between north and south, west and east. If anything, today’s divisions cut even deeper, because Europe also defines itself as a beacon of democracy, human rights and rule of law. If members become “illiberal,” the EU loses its raison d’etre.

Then cites Orban in Hungary, the refugee crisis in 2015-16 and while all the solidarity rhetoric is about ‘convergence’, the reality is that the EMU has:

… led to “divergence and polarization” between a core of export powerhouses like Germany and a periphery of debt-financed laggards like Italy. A full fiscal union with massive redistribution might fix this, but won’t ever happen, because the core countries reject it.

Conclusion

The Irish Finance Minister is correct in one thing – the European Commission will be champing at the bit to get those Excessive Deficit Mechanism procedures going as soon as they can.

That is the DNA of this operation.

Technocratic processes that lead to austerity and hardship for the citizens, while the ‘leaders’ (euphemism) and technocrats enjoy high pay within their golden cage in Brussels.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.