An open letter to the leaders of Europe: abandon the Euro's 'gold fetters'

European leaders need to abandon the fetters that chain them to the interests of private wealth, and threaten European disintegration.

On May 15th, in what can only be described as an act of coercion, an impoverished and effectively insolvent Greece acceded to the handover of a bond payment –  €436 million – to  private financial ‘vulture funds’. The Greeks had little choice. However, in acquiescing to this handover -  facilitated by its paymasters,‘the Troika’ -  impoverished Greeks protected reckless private wealth from the consequences of their risks. Namely: losses and bankruptcy, and the discipline of market forces.

This is a perverse distortion of free market capitalism because, as Professor Kunibert Raffer has argued: “the most basic precondition for the functioning of the market mechanism (is) that economic decisions must be accompanied by (co)responsibility: whoever takes economic decisions must also carry financial risks. If this link is severed – as it was in the Centrally Planned Economies of the former East – efficiency is severely disturbed…. At a time when riskless decision making by bureaucrats is abolished in the East, there is no reason why it should be preserved in the West”.

Today this new, distorted economic order is enforced, on behalf of private wealth (hedge funds, offshore ‘investment funds’ and private bankers) by unelected  EU, IMF and ECB officials and  elected EU politicians. They insist that Greek and EU taxpayers should shield private sector risk-takers from the consequences of their risks, and guarantee compensation for losses incurred by financial speculation.

This economic order is the very antithesis of both democratic but also free market principles. However, it is at the heart of the neoclassical monetarist statutes of the European Union, the Eurozone and the ECB – and now the new EU Fiscal Compact.

The leaders of Europe must wake up to the threat these discredited ‘barbaric’ 19th century economic policies pose to the noble ambitions of Europe’s founding fathers: economic policies that are legally entrenched and enforced by the EU’s treaties.

These economic policies and statutes mimic the Gold Standard of the 1930s, and deny economic and democratic sovereignty to the people of Europe. This is the central purpose of neoliberal economics: to strip democratic states of sovereign economic power and transfer these powers to private markets.

The EU’s protection of private wealth from the discipline of the market has been made possible, by effective lobbying by financial elites; but also by the absence of fair international law governing relations between sovereign debtors and their creditors.

Above all, EU statutes deny European states the public goods obtained from an accountable central bank; and a sound monetary and debt management system.

Instead, the (Lisbon) Treaty on the Functioning of the EU, which lays down the ECB’s mandate, and in particular Articles 123 – 125, obliges EU states to rely on the private, globalised bond markets for finance. Britain, Japan and the United States – who all enjoy the services of nationalised central banks – do not share Greece’s or Europe’s full exposure and vulnerability to the predations and parasitic behaviour of private wealth.

Articles 123-5 achieve the goal of the Gold Standard of the 1920s and 30s: namely to capture economic sovereignty from democratic states; enforce their dependence on private wealth, and then use taxpayer resources to protect private financial elites from the wrath of market forces.

As a consequence of what can only be described as a blatant financial “coup d’etat”  financial vultures are not just circling and threatening Greece, Spain and Portugal. They now threaten Europe as a whole with the consequences of disintegration.

By the capture of European policy-making, governance and financial assets, private wealth is weakening the European peoples’ deeply-held commitment to, and yearning for European convergence, unity and peace. A commitment rooted in the huge costs of the economic failure of the 1920s and 1930s; and in the uncountable human costs of the Second World War.

That yearning is reflected in the poignant commitment of Greeks to the European ideal – and to EU membership. Sixty-six per cent of respondents in a recent poll said their country should keep the single currency but pursue an economic policy different from the one set out in the bailout deal, and entrenched in EU statutes and treaties.

Private wealth is unconcerned by such yearning. Where EU politicians and their peoples were aiming at convergence, financial vultures are forcing divergence. Where Europeans were painstakingly building inter-governmental collaboration based on democratic governance and moderation, private wealth’s parasitic behaviour is fuelling anti-democratic fanaticism and bigotry.

All the while Europe’s elite policy-makers and politicians – at the ECB, the EU and the IMF – stand aloof from EU taxpayers that fund their salaries and lifestyles. Instead they collude with financial predators in the growing divergence and disintegration of the European project, and in the economic degradation of the poorer, peripheral members of the European Community.

So when some financial firms simply refused to participate in the losses that the official sector and Greek private banks were forced to take in March this year, EU and IMF officials provided full compensation for the economic risks that private wealth had dodged.

The ‘Troika’ – officials and politicians from the EU, the ECB and the IMF –  administer an ‘escrow (arms-lenth) account’ – well beyond the reach of the democratic Greek state, or indeed Europeans as a whole.  Yet European taxpayer-backed funds are deposited into that account and used to compensate private speculators and bankers.

According to the New York Times, 90% of the €436 million in the account was

"delivered to the coffers of Dart Management, a secretive investment fund based in the Cayman Islands, according to people with direct knowledge of the transaction.

Dart is one of the best known of the so-called vulture funds, which have a track record of buying the distressed bonds of nearly bankrupt countries — and if they do not get paid, suing the governments for the money. Dart and another big vulture fund, Elliott Associates, perfected that strategy during the various Latin American debt crises in years past.

By accumulating the bulk of these bonds at prices that traders estimate to be from 60 to 70 cents on the dollar, Dart stands to make a hefty profit, having received 100 cents on the dollar — an outcome likely to be especially galling to the Greek banks and other local institutions that were forced to take a 75 percent loss on their Greek bond holdings."

The big winning bet by Dart could presage a more aggressive tack by vulture funds, if Greece is forced to restructure its bonds a second time.

Robert Schuman’s founding Declaration for European unity began with a clear vision:

World peace cannot be safeguarded without the making of creative efforts proportionate to the dangers which threaten it. The contribution which an organized and living Europe can bring to civilization is indispensable to the maintenance of peaceful relations.

Today Europe’s politicians and officials are not proving ‘proportionate to the dangers which threaten’.

No surprise then, that Europeans have a profound distrust of politicians. This is in part because elected politicians prioritise the interests of private wealth and global bond markets over ‘the European project’.

First they removed regulation and constraints on capital mobility and credit creation.

Next politicians, lobbied by private financiers, hobbled the ECB’s powers to provide affordable finance to sovereign states.

Now, and in order to shore up taxpayer resources, politicians, led by Chancellor Merkel, demand fiscal consolidation so that savings can be accumulated with which to prepare for the next financial crisis, and to bail out and/or compensate “too-big-to-fail” banks.

‘Austerity’ policies are hurting the people, and mirror the economic and political incompetence of Germany’s Weimar Republic under Chancellor Heinrich Brüning. As  Peter Temin has  persuasively explained,  under Brüning “the move toward highly restrictive government budgets came at the beginning of 1930” following the dictates of the gold standard. …”With a series of austerity decrees…the “iron chancellor” exerted a constant downward pressure on the German economy” he writes on  page 30 of Lessons from the Great Depression (The Lionel Robbins Lectures for1989).

The Weimar Republic flattered global financial elites by maintaining capital mobility and borrowing excessively from international bond markets, simultaneously printing money and enforcing austerity on a war-weary and exhausted populace. The result was predictable: massive unemployment, bankruptcies and rampant inflation.

Tragically, officials at the ECB and Bundesbank have drawn the wrong lessons from the disaster that was the Weimar Republic’s economic strategy. Instead they should turn to, and draw on lessons learned by Britain and the US in the 1930s, the first countries to abandon the dictates of private wealth under the Gold Standard.

Under Keynes’s tutelage, Britain’s currency, Sterling, was in 1933 revived as a money managed by the Bank of England and protected from speculative and vested private financial interests. Then in 1934, President Roosevelt freed the dollar, and with it, the people of the United States, who then embarked on a period of sustained recovery. Sadly, Germany maintained the dictates of Gold Standard economic policies throughout the 1930s – and we all know the political consequences of that incompetence.

If Europe were now to abandon the Gold Standard-type policies that underpin the Euro, Europeans would feel the full force of private wealth’s anger, through allies in the media, academia and politics. But this will follow from fear – not reason.

So, European leaders, be as bold as Keynes and Roosevelt. You have nothing to lose but the ‘gold fetters’ that deny the people of Europe economic and democratic sovereignty, and that chain you to the interests of private wealth.

There is however, everything to gain from European convergence, prosperity, unity and peace.

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About the author

Ann Pettifor is a Director of Policy Research in Macroeconomics (PRIME). In 2003 she edited ‘The Real World Economic Outlook’ (Palgrave) with a prescient sub-title: ‘the legacy of globalisation: debt and deflation’. In 2006 Palgrave published her book: “The coming first world debt crisis”. In 2008 she co-authored “The Green New Deal” and in 2010 co-authored an essay with Professor Victoria Chick: “The economic consequences of Mr. Osborne.”