Times of organic crisis can be frightening, but they can also be incredibly fertile. They throw dominant paradigms into doubt, expose the false claims made by elites and open up new horizons. They set the wheels of history – of which elites always claim to represent the end point – in motion once again. In doing so, they create huge opportunities for change – including progressive change, of course. The current crisis is no different. Jim Stanford provides a poignant example of how the crisis is bringing about an important paradigm shift:
For a quarter-century we were told that monetary policy was a technocratic, rules-driven process, best governed by so-called ‘independent’ central banks, immune from political pressures. Of course, those central banks were never independent: their role, and the policy edifice they oversaw, was always profoundly biased in order to elevate the interests of financial wealth (through strict inflation control) over other economic and social priorities. The global financial crisis and its aftermath, however, laid bare that those supposedly untouchable ‘rules’ were arbitrary, temporary, and discretionary. The advent of quantitative easing policies, in particular, proved what lefty critics had been saying all along: namely that money is created out of thin air every day (by commercial banks and central banks alike); the big issue is who controls that process, and what is the money used for? Now the genie is out of the bottle, and there is new space for progressive visions of unconventional monetary policies to address persistent stagnation and unemployment – like using the central bank’s money-creating powers, for instance, to underwrite useful investments in public, physical and social infrastructure. The idea that monetary policy rules and inflation targets are binding, natural, and permanent has been destroyed.1
The concept of central bank independence – one of the main tenets of neoliberalism – is today openly challenged even by mainstream politicians. During his presidential campaign, Trump claimed that the Federal Reserve had been ‘doing political things’, with reference to its low interest rate policy, and as a result had created a ‘false economy’. More recently, Patrick McHenry, the vice-chairman of the US House of Representatives Financial Services Committee, questioned the right of the chair of the Federal Reserve to negotiate financial stability rules ‘among global bureaucrats in foreign lands without … the authority to do so’.2 The British prime minister, Theresa May, made an almost identical argument with her criticisms of the Bank of England when she warned of the ‘bad side effects’ of the Bank’s monetary policies.3 In all of these cases, politicians are seeking a change in the fiscal-monetary mix: looser fiscal policy, harder monetary policy. This has led Financial Times commentator, Wolfgang Münchau, to claim that the era of central bank independence may be coming to ‘an end’.4 Even though the assumption that central bank independence effectively exists at present is contestable, as we will see later on, and the ideology underlying this shift in public dialogue is essentially reactionary in nature, the fact that the concept is now being openly contested is good news for progressives: as seen in previous chapters, the theory and (to a lesser degree) practice of central bank independence has been one of the most powerful fronts in the fight against discretionary macroeconomic policy interventions by elected governments, by de facto reducing the scope of active fiscal policy (as demonstrated most manifestly in the EMU). Its ‘end’, if that is indeed what we are witnessing, should thus be welcomed by progressives.
The same is true of the neoliberal tenets of fiscal policy: in the wake of the financial crisis, large government deficits – eschewed for decades – became legitimate again, even though that rediscovered flexibility was applied in a biased manner and only insofar as it was necessary to keep the system afloat, as we have seen. The ideology of deficit- and debt-phobia still wields considerable power, of course, but the notion that large government deficits inevitably mean the end of the world as we know it has become untenable. If anything, we have seen that the opposite is true: temporary economic stimulus was ‘probably the most important reason we didn’t have a full replay of the Great Depression’, Paul Krugman wrote.5 On the other hand, various studies have unequivocally shown that the policies of fiscal austerity have led to lower output and higher debt-to-GDP, unemployment, poverty and inequality levels, particularly in Europe, plunging the continent – and especially the countries of the periphery – into the worst social and economic crisis in modern times.6 Indeed, the swelling ranks of mainstream economists, policymakers and commentators that are openly calling for more expansionary fiscal policies indicate that there is a paradigm shift underway in this arena as well, though this has yet to translate into a policy shift in most countries, largely due to the resistance of capitalists (and the political elites that they command).
The most striking recognition has come from the IMF, which in a series of recent works has reversed several of its standard policy recommendations, on the basis of the evidence provided by its own research. In a summary of policy suggestions unexpectedly titled Neoliberalism: Oversold?, IMF authors euphemistically argue that ‘the benefits of some policies that are an important part of the neoliberal agenda’ – first and foremost fiscal consolidation – ‘appear to have been somewhat overplayed’.7 Trump’s approach to trade deals also represents a lesson for progressives:
If there is one crucial lesson from the extraordinary developments … in the North American auto industry (including Trump’s threats against Ford, GM, and Toyota, and Ford’s stunning decision to completely cancel its new assembly plant in Mexico), it’s that politics matter. Nothing about the economy is ever natural or permanent – and the immense resources invested in convincing us they are, are actually trying to disempower and silence the potential power of those being hurt by the current system of globalization. We’ve now seen that when it suits powerful forces, global rules can be rewritten in an instant; decisions of global megacorps overturned swiftly and effectively; provisions of trade deals simply ignored. … [T]he stunning way in which [Trump] is wading into the private investment decisions of enormous corporations, overruling their established global strategies, and simply ignoring the supposedly sacrosanct rules of trade deals, is an important reminder for all of society that the ‘economy’ is nothing more or less than the conscious decisions which human beings make about how to work, produce, and distribute. Those conscious decisions always reflect power and competing interests, they are never ‘natural’ or ‘automatic’ or ‘omnipresent’. If Trump can rewrite international economic treaties on the strength of a few tweets, before even taking office, then we can do the same thing – but only if we build a political movement with the same confidence and power.8
The success of Bernie Sanders’ campaign, which overlapped with Trump’s platform on a number of key issues affecting the economic security of working families – most notably on trade deals such as the TPP, which Sanders argued would ‘undermine US sovereignty’9 – while differing widely on issues such as taxes, immigration and social rights, testifies to the fallacy of the zero-sum approach of the mainstream left and to the possibility of articulating and garnering mass support around a progressive vision of sovereignty and opposition to financialisation and neoliberal globalisation without foregoing ‘an anti-racist, anti-sexist, and anti-hierarchical vision of emancipation’, as Nancy Fraser writes.10
A similar shift in public discourse can be observed in Europe as well. The European elites’ response to the crisis, and the decade-long stagnation/depression that it has engendered, have exposed the brutal, undemocratic and class-based logic of power underpinning the European Union and monetary union in particular, making Europe unpopular as never before – as documented by the Eurobarometer surveys – and shattering many illusions regarding the possibility of achieving democratic reform and economic/employment growth within the boundaries of the current European institutional (and constitutional) architecture. Moreover, there is a growing awareness, even among elites, of the fact that the EU/EMU appears to be set on an irreversible trajectory of fragmentation and balkanisation – symbolised by Brexit – that is bound to lead to its inevitable disintegration. Furthermore, the EU’s crisis of legitimation has been exploited by right-wing forces (such as the National Front in France) to peddle a reactionary vision of national sovereignty, which in turn is exacerbating Europe’s centrifugal tendencies. The mainstream left, on the other hand, continues to see it as its mission to save Europe from itself, by defending the European economic and integration process against the threat of neo-nationalism, in the belief that the European Union, as much as the eurozone, is compatible with a return of social-democratic policies, a Keynesian-style relaunching of the economy and the creation of a fully fledged supranational democracy.
This position, however, presents numerous problems, which are ultimately rooted in a failure to understand the true nature of the EU and monetary union. First of all, it effectively reduces the left to the role of defender of the status quo, thus allowing the political right to hegemonise the legitimate anti-systemic – and specifically anti-EU – grievances of citizens. More crucially, however, it ignores the fact that the EU’s economic and political constitution, analysed in Chapter 5, is structured to produce the results that we are seeing – the erosion of popular sovereignty, the massive transfer of wealth from the middle and lower classes to the upper classes, the weakening of labour, and more generally the rollback of the democratic and social/economic gains that had previously been achieved by subordinate classes – and is designed precisely to impede the kind of radical reforms to which progressive integrationists or federalists aspire to.
Certainly, there are many measures that could be undertaken at the European level to stimulate the economy, reduce social injustice, make debt sustainable, etc., even within the current treaties, as demonstrated by countless proposals put forward in recent years.11 However, these measures – let alone a more wide-ranging reform of the treaties in a more solidaristic and Keynesian direction, which would require the ability of EMU itself to run budget deficits with the support of the ECB (which itself should be subject to sweeping institutional reform), a full mutualisation of the debt, permanent fiscal transfers from richer to poorer countries, etc. – are simply not politically viable in light of the current balance of power, among countries as much as among classes. As Richard Tusk, Frank G. Thomson professor of government at Harvard, writes:
Even if Europe’s left parties do succeed in forging a common program, the EU is not the kind of political entity whose approach to the world can be altered by popular politics. Popular politics is precisely what the EU was designed to obstruct. Like independent central banks and constitutional courts, its institutions are essentially technocratic. Technocracy is not (as some like to pretend) a neutral or rational system of government. Instead, it confers immense power on culturally select bodies whose prejudices will be those of the class their members are drawn from. [Progressive integrationists such as Yanis Varoufakis believe] that the EU may change. … But the kind of shift in European politics that Varoufakis and others want to see is simply not possible within the present structures of the EU: it would require sweeping institutional change of a kind nowhere on the agenda. Without that … the left in Europe is reliant purely on an article of faith – a conviction that the left must prevail, even in the face of all the constraints imposed on popular sovereignty by the EU.12
As Elias Ioakimoglou, economic adviser to the Greek Institute of Labour, sums up the issue: ‘The eurozone is not just a currency area, it is a capital accumulation regime in which certain tendencies prevail – including the tendencies to remove social protections, to decrease wages, and to abolish the social and political rights that are the core of citizenship. These effects are embedded in the architecture and the operation mode of the eurozone. It was built that way. So you can’t fix it.’13 Moreover, even in the unlikely event that an alignment of left movements/governments should emerge simultaneously at the international level, there is little reason to believe that Germany and the other countries of the ‘ordoliberal bloc’ would ever be part of such an alliance, considering that anti-Keynesianism is deeply engrained in Germany’s monetary and political establishment and that ‘it is … hard to see Germany ever giving up on this’, as Wolfgang Münchau wrote.14 In fact, if such an improbable alliance were indeed to arise, the most likely outcome would be a German exit from the monetary union, leading to a likely collapse of the entire currency system (precisely the outcome that such a strategy aims to avoid). This is a reminder of the fact that capital accumulation regimes such as the eurozone only last insofar as they are beneficial to capitalist elites; once they stop being so, they tend to be swiftly abandoned.
Furthermore, the notion that the EU can be transformed into a fully fledged supranational democracy ignores the fact that for the great majority of ordinary European citizens, linguistic barriers and cultural differences impair the opportunity for political participation at a supranational level. This became apparent in the debate over the Spitzen-kandidat system, used for the first time in the 2014 European elections to select the Commission president. Following the elections, many argued that Jean-Claude’s Juncker’s appointment was democratically legitimated by the fact that he was the candidate of the parliamentary group with the largest number of MEPs, the European People’s Party (EPP). Jürgen Habermas and other prominent intellectuals wrote in support of Juncker’s appointment, suggesting that European citizens have the right to choose who leads the European Commission and that the election results showed that Juncker was ‘the people’s choice’.15 From a purely formal standpoint, they were right. But most of those who voted for the national parties that are members of the EPP did not even know what the EPP or who Juncker was. This episode shows that there is a very real risk of EU-level democracy resulting in a form of supranational depoliticised post-democracy.
More generally, any debate about the ‘parliamentarisation’ of the EU needs to take into account the crucial difference between the formal electoral-representative process and true popular control. As argued by Lorenzo Del Savio and Matteo Mameli, further integration, even if accompanied by a strengthening of the electoral-representative component of the EU, is not necessarily equivalent to more popular control. It is assumed that an enhanced version of the EU parliament would suffice for proper democratic control over the EU’s major decisions. But this ignores the question of oligarchic capture, Del Savio and Mameli note:
Oligarchic capture does not just affect regulatory bodies and unelected officials. It also affects elected representatives. Augmenting the powers of elected officials that are vulnerable to oligarchic capture means augmenting the power of economic oligarchies. It means weakening popular control. Elected national parliaments and executives are highly imperfect tools for achieving popular control over decisions that affect people’s freedom and well-being. Supranational parliaments and executives are even more inefficient in this respect.16
The problems relating to lobbying and to the revolving doors issue – not just between big businesses and regulatory agencies but also between big businesses and elected offices – are in fact exacerbated at the supranational level.
It is for this reason that, in general, the transfer of sovereignty to international loci of political decision-making contributes to the weakening of popular control. International loci are in general physically, psychologically, and linguistically more distant from ordinary people than national ones are. This distance means more room for oligarchic capture. International loci of political decision-making are usually designed in such a way as to make it extremely difficult for ordinary citizens to understand how decisions are taken and to be able to influence and contest such decisions in an effective manner. This enhances the effectiveness of the mechanisms of oligarchic capture.17
The bottom line is that a progressive reform of the EU/EMU is not only impossible in practical terms – as acknowledged by a growing number of mainstream economists such as Joseph Stiglitz, Paul De Grauwe and others – but also undesirable in popular-democratic terms. Reality would appear to be slowly dawning on Europe’s radical left as well, which has traditionally been supportive of European integration. In this regard, the rise and fall of the Greek left-wing party SYRIZA was a watershed moment for many European progressives. SYRIZA’s election, in January 2015, reawakened hopes of the possibility of a different Europe, one of solidarity and democracy instead of competition and top-down decisions – ‘another Europe’ of social justice and popular participation. These hopes were soon dashed, as the Greek government was made to accept, by means of blackmail and coercion (such as forcing the Greek banks to close for five days preceding the referendum), the onerous terms of yet another loan agreement conditional on further austerity and deregulation measures. In particular, the experience of SYRIZA proved that the ECB can easily paralyse a country’s banking system by cutting off its banks’ access to central bank liquidity, thus effectively bringing a defiant government to its knees without actually expelling that country from the monetary union. Many, even on the left, took this as the confirmation of the fundamental impossibility of reforming the EU. As a result, we are witnessing more voices, movements and political parties and events calling for a dismantling of the eurozone and a return to national currencies, seen as a necessary precondition for achieving meaningful progressive change in any given country.
Opinions differ (wildly) as to the best way for countries to regain their monetary (and thus fiscal) sovereignty. Some favour an orderly and coordinated dismantling of the single currency. This would arguably be the most painless solution, but it appears implausible for the very same reasons that a progressive reform of the eurozone is implausible: because it would require a level of solidarity and coordination that is nowhere to be seen at the moment and is not likely to emerge in the near future. Others propose a unilateral exit from the monetary union and possibly even from the European Union. Politically, this would be easier to achieve, requiring only the will of the exiting government. The mainstream viewpoint commonly associates the prospect of a unilateral exit of one or more nations with predictions of devastation, catastrophe, hyperinflation, financial market lockout, etc. Even though such catastrophic prospects are largely overblown, based as they are on mainstream assumptions about the economy and particularly about the ability of governments to determine the outcome of the exit process and the opportunities provided to countries that were to regain their full monetary and fiscal sovereignty, there is no denying that the transition to a new, state-controlled currency would present serious economic and technical challenges and involve significant costs, especially in the short term.
Several models have been put forward to describe how a nation such as Italy or Greece might unilaterally exit the monetary union. Any exit scheme has to address the same issues: how to handle the euro-denominated public and private debt that is outstanding; how to handle bank deposits denominated in euros within the exiting nation; how to ensure financial stability is maintained; how to introduce the new currency (for example, unilaterally or as an interim dual currency); how to manage the inevitable large currency depreciation and to minimise the resulting inflation risk and protect real living standards; how to reduce speculative capital flows (for example, by using capital controls); how to deal with any changes to the legal framework governing cross-border trade if the nation is also expelled from the EU, among other issues. The estimated likely overall consequences that have been put forward crucially depend on the economic framework that underpins them. Neoliberal macroeconomics, which downgrades the importance of fiscal policy and currency sovereignty, not surprisingly provides the basis for catastrophic predictions. These economists project massive and ongoing currency depreciation leading to an uncontrollable surge in inflation, which debases the currency. They predict that the nation’s banking system would collapse in the face of large capital outflows, debt delinquency and the state’s incapacity to defend the capital base of its banking system. They predict that there would be massive outflows of skilled labour, which would undermine the future productivity of the nation. They predict that the nation would have to default on its debt obligations, which would not only force the country into a costly, drawn-out legal morass, but would also see it being shunned by international capital markets. As a consequence, they claim that the government would not be able to fund itself and would run out of money. Further, they predict that credit would also become unavailable to the private sector, and businesses and the housing market would collapse. This catastrophic scenario sees the nation mired in depression, poverty, social disintegration and isolation. Civil anarchy would erupt and give way to authoritarian regimes. This future, it is argued, would surely be many times worse than a future within the eurozone. All of these predictions have been rehearsed in the recent literature. Almost every day someone writes something along those lines.
Conversely, adopting a heterodox macroeconomic framework as the basis for analysis leads to dramatically different projections. It should be made clear that no one really knows for sure what would happen. It is hard to project the costs of an exit. But we can deduce several things based on historical experience. It is highly likely that the benefits of exit would outweigh the costs, if the exit decision is simultaneously accompanied by a decision to reject the current flawed neoliberal approach in favour of a fiscally active policy stance that seeks to maximise the well-being of the citizenry. If the exiting government refuses to free itself of the various self-imposed external constraints characteristic of neoliberal regimes and continues on the path of austerity, privatisation and wage restraint, then the exit is likely to be even more costly than continued euro membership. If, on the other hand, the government chooses to use its regained currency and fiscal sovereignty to bring idle resources (including the unemployed) back into productive use – while at the same time re-establishing a degree of control over capital, trade and labour flows as well as over the national financial sector and other key sectors of the economy – full employment and economic growth could be achieved relatively swiftly, without the country in question necessarily incurring disastrous balance-of-payments or inflationary problems.
Analysing in detail the minutiae of a progressive euro exit is clearly beyond the scope of this book (though it has been described at length in previous works by the authors, such as the book Eurozone Dystopia by William Mitchell).18 The point that we wish to make here is that the current crisis of the EU and monetary union should not be seen as a cause for despair but rather as an opportunity for the left to embrace (once again) a progressive, emancipatory vision of national sovereignty. This needn’t necessarily come at the expense of European cooperation. On the contrary, there is ample evidence that the vice-like grip of the single currency, by exacerbating intra-European divergences, causing widespread social devastation and fuelling national resentments on a scale unseen in the post-war era, is now endangering European multilateral cooperation on crucial matters such as immigration and other issues. Abandoning the euro would not undermine that sort of cooperation. On the contrary, by allowing governments to maximise the well-being of their citizens, it could and should provide the basis for a renewed European project, based on multilateral cooperation between sovereign states.
The fact that many taboos are falling as a result of the crisis of the neoliberal order – on issues such as central bank independence, fiscal deficits and free trade – provides a further opportunity in this respect. Many false myths, however, persist. These continue to prevent many progressives – even those that are ideologically in favour of enhancing national sovereignty – from fully embracing a progressive vision of sovereignty, in the eurozone as much as in those countries that already possess their own currency. It is these false myths that we analyse in the following chapters, by relying on the insights provided by modern monetary theory (MMT), a macroeconomic theory that describes and analyses the way in which ‘money’ works in monetarily sovereign countries.