The Euro Crisis

I don’t have much new to add to what is surely the key economic issue of the hour beyond pointing to useful commentary by Larry Elliott  in the Guardian and Martin Wolf in the FT.

I think Wolf is right that the key to resolving the crisis is to make the ECB the backstop for euro area sovereign debt, just as the Bank of Canada ultimately stands behind Canadian government debt denominated in Canadian dollars. Only a central bank has truly unlimited “firepower” vis a vis the bond markets.

The alternative of joint government responsibility for all euro area government debt through an expanded or levered financial stability fund may work for a while, but means that any worsening of the crisis would bring down the relatively strong countries (like France) along with the relatively weak. Moreover, it implies that the stronger countries will de facto be given the power to set the fiscal policies of the weaker countries. Greece has already effectively lost the power to determine its own fiscal policies, and Italy does not seem too far behind. This fundamentally undermines democracy in the name of financial stability.

Too bad that making the ECB a true central bank seems to be a political non starter in Germany. I can understand fears of inflation, but what about memories of the Great Depression?






  • demcracy and history allowed for the building of EU, but essentially that democracy means building an undemocratic monetary institution, that democracy was not willing to engage and hence the downfall. Is this incomplete or is this the limits of democracy faced with extraordinary demands within the age of the era of nation states. We have come a long way from clans, tribes and fiefdoms, but imitations of such democratic notions of the economic surplus potentially are still within the clutches of nations and there elites ( I would say electorate but that would mean democracy was a serious concept in actually existing democratic capilatism see Wolfgang Streect for well done peice on that notion)

    It is a strange space for a progressive like myself to feel the need to create an undemocratic institution to be filled with neo cons in some money printing presss like an empowered ECB as a plausible solution. But else can be done? I guess filling that institution up with progressives? Or how about changing the system so that we do encounter such extraordinary economic catastrophes. I like the latter but the former seems more realistic. We need to ensure at least the progressive forces within the EU are engaged in such a process. uuhhhh more neo cons with printing presses is the last phracking thing we need. Globalized green socially sustainable keynesian pathways are a bit more of what I had in mind.#

  • let me rephrase that opening line.

    democracy built the unification project but potentially would not allow the EU to empower the ECB as it would mean the nondemocratization of one its most powerful abilities- print unlimited money. Maybe that is a good thing most of the time. But not in this case as democracy just is not up to the task of allocating losses in a manner that is as skewed as that which the EU was hoping to minimize but failed. Does this mean a failure, no- I think we need pragmatism to get us over this hump and then once over the hump find different more democratic solututions. However, we need more than the shadow bankers sitting at the table of an empowered ECB.

  • Mr. Tulloch, one part of the problem you describe seems to be the modern custom that central banks are considered as independent bodies outside the democratic process. I’ve never understood what it is about central banks that’s supposed to make them a good candidate for not being democratically controlled, aside from the obvious that wealthy, technocratic elites don’t want them to be democratically controlled because the more important something is, the more they don’t want democracy involved with it. Why the rest of us should be buying it, though, I don’t see.

    Incidentally, I understand that in Venezuela they have explicitly done away with the idea that central banks should not be controlled by the will of the people. So far it seems as though this has allowed them to force the central bank to be more useful than central banks normally have been of late years.

  • German memories of the period from 1933 to 1939 would be very different from Canadian memories of that same period.

  • PLG,

    I do agree, the central bank should be subject to a democratic process- which I can hear the neo cons hooting, hollaring and throwing briefcases at me.

    Howeevr in this case I am thinking, given the current political design of the EU and process, whereby some notion of demcoracy guides the unification project, those in Germany and France might not be in favour of bailouts or teh ECB be given an unlimited printing press that many feel is needed. I am not sure democracy could sort this out given that Germany has a fairly hefty chunk of representation albeit they are no USA vis a vis NAFTA, but there are democratic roadblocks that do hold sway.

    However, to what extent demcracy under democracy actually guides such elite technocratic machinations is another question that indeed factors into this.

    Hence my conclusion that democracy may actually fail in this situation.

    Potentially a better question is, how will this affect democracy, if again, private banks are bailed out under a process that favours transferring public wealth to private interests again. And how could this effectively managed to prevent meltdown while respecting democratic goals??

  • I’m not sure if posters on this site have cited Randall Wray on the Eurocrisis, but he and Dimitri Papadimitriou have a useful discussion of it at, with a few options, including default and withdrawal from the Euro.

    I welcome Wray pointing out the futility of imposing a single exchange rate on economies with fundamentally different cost structures and fundamentally different fiscal policy. And then compounding the error by turning over monetary policy to a country that implements policies suited to its own national interests, and which slaughter the Latin periphery. And there is nothing more galling when they turn around and scold the victims for profligacy.

  • The struggles of trying to maintain a failed economic system makes for great comedy.

Leave a Reply

Your email address will not be published. Required fields are marked *