Money, public debt and the Euro: defences against fragmentation

Roger Scruton (Unreal Estates) argues for a remoralised economy in response to Europe's debt crisis. But this is fully consistent with a strong defence of the Euro, of strong central action against speculators and of political reform and rejuvenation of Europe's institutions
Sergio Bruno
20 September 2011

The article by Roger Scruton (Unreal Estates) has an approach that comes from normative moral philosophy. My article on the current crisis attempted to talk about contingent situations, policy instruments and their effectiveness. Tony Curzon Price (Freedom to re-invent financial reality) has perfectly captured the differences:

“the reality is the human and social interaction; the money is a sort of formalised and reductive representation of it ... The status quo ante is not only unattainable, it is unattractive ... The solution is not to return to that older order, but to make sure that we make a full transition away from it - not the half transition that has been so damaging and so unfair”.

Even at a political level there is no ground for confrontation. Scruton complains about morality, I complain about stupidity; namely the inability of the political leaders to understand what is happening, independently of any ideological positions. Above all I complain about the abdication of states in favour of technocracies who assert (or pretend) to have the “only truth”. They are so convincing that they have persuaded almost everybody of their wisdom, despite the evident failures of the policies and “structural reforms” which have been the legacy of these technocrats to us.

In the meanwhile I feel guilty because I have not been clear enough, as is made evident by some of the comments, which continue to base themselves  - as Scruton also does - upon the idea that public debts are the same as private ones - which they are not - leading to the perception that I am always in favour of deficit financing. Let me be straightforward. We are facing three distinct problems:

  • (A), how to stop the speculative attacks in the face of European financial fragility,
  • (B), how to reorganise the European institutional apparatus in order to avoid in the future financial instability and the continuous deterioration of distributive justice and of social cohesion, by assuring the possibility of practicing an appropriate bundle of policy instruments,
  • (C), what to do in order to get out from recession and/or slow growth and to make of Europe a growing, fair and competitive pole at the planetary level.

A. Financial fragility

There have been four proposals, some alternative some complementary:

  1. a regime of fiscal austerity aimed not only at eliminating the budgetary deficits but at reducing very rapidly the existing stock of accumulated debts;
  2. the constitution of inter-country solidarity funds, with impacts the member states’ budgets, aimed at supporting the purchase of the bonds concerning the roll-over of old accumulated national debts;
  3. the issue of Eurobonds, to be used mainly for doing the same job as in proposal 2;
  4. the abrogation or suspension of the Art.101 of the European Treaty, and a statement that the ECB will promptly and freely buy the national bonds that the speculators and the herds following them want to sell.

I hold that (1) will induce recession, will not improve substantially the ratio debt/GNP (but could deteriorate it), it will not fight speculation but only prepare the basis for new speculative attacks. Solution (2) will not work, since the funds would not be sufficient to fight speculative attacks; it would be difficult to be set up, since it is proposed together with solution (1); moreover it is likely to induce anti-solidarity attitudes everywhere in Europe. Proposal (3) is too vague (who should collect the revenues in order to pay the interests?), too much subject to political discussions similar to those of (2), ultimately too roundabout and slow to allow an effective fight against sudden speculative attacks. Despite this, the idea of the Eurobonds must be conserved and used, but not for objective (A), but within the actions aimed at pursuing the objectives B and C. Solution (4) is the only specific and effective weapon to fight against speculative attacks; if practiced sharply it would not require the printing of enormous amounts of money, since it would truncate the speculative attacks, while there is no reason why the purchases of roll-over bonds would substantially affect the consumption expenditures and trigger more inflation.

Solution (4), however, should be strictly conceived only as a specific weapon to face the speculative attacks. Therefore it should target only the roll-over of bonds covering the old national debt stock. This implies that most or all the member countries should not incur new deficits; this however deserves to be discussed in relation to objectives B and C.

B Institutions, justice and cohesion

Europe is a rare case of a monetary union without a federal budget, while the ECB is probably the only central bank which cannot directly buy bonds issued by the federal center. The ECB lends money to ordinary banks, providing them with the liquidity needed to buy bonds. This makes an extremely fragile system, in which both the banks and the states are subject to speculative attacks, while central bank control of the money supply has become shaky (remember the inability of ECB to keep M3 under control). This must be reformed and the whole system should return to the features which prevailed before the power of seigniorage had been transferred from the states to the central banks. The possibility of incurring deficits, however, should be allowed, to any significant degree, only at the European level; that is it should concern only a true European Federal Budget.

At this level two possibilities should be left open to discussions and cooperation between the ECB and a democratically invested Federal European Economic Policy Authority: (i) that of financing a possible federal budget deficit by printing money and without issuing bonds (as indicated in Tobin-like approaches) and (ii) issuing federal bonds to be sold to private subjects. The appropriate mix of the two should be defined according to the state of the economy.

The aim of the first option is that creating physiologically, out of the presently practiced alchemies, the money which is needed to accompany real-side growth at non declining nominal prices. The aim of the second one is that of offering an allocation option to households’ idle savings – that part of savings attributable to precautionary motives which is not directly or indirectly allocated to real-side investments- providing an alternative to the prevailing options offered by the paper economy. This is needed in order to activate such idle savings, transforming them into suitable real-side demands.

Both forms of public indebtedness might be needed and put at the service of the control of stability and of objective (C).

Here a further clarification about public debt is needed. By allowing deficit spending and the issuing of public bonds only at a European level, most of the new debt would be held by private subjects belonging to the Eurozone; in other words it should be an “internal” debt. Such a debt cannot be considered as comparable with the debt of a household or of a private company. The average citizen would have an average debt and an average credit, with the two matching each other, she would have to pay an average interest and have the right to be paid that interest. The debt should be considered for the whole Eurozone as a particular double counting device which formalises the kind of human and social interactions to which Tony Curzon Price refers. The appropriate analogy is that of a single family, which would not become richer or poorer if the relatives belonging to it lend money each other or vice-versa, but in which the relatives involved take account of the transfers made within the family.

Obviously the choice between financing the public expenditures through taxation or by issuing bonds would make a difference from a distributional point of view. This should be kept in mind when evaluating the alternatives, and taken care of by considering the impact of the burdens and of the benefits (deriving from both, taxation and public expenditures) for the different segments of the population. How the future generations will find themselves, however, will not depend (on average) on how the expenditures have been financed, but on the quality of those expenditures.

In my previous article I said that an excess of debt might create problems, but I did not indicate why. I do it now. The problems may be due to the fact that (a) the existence of a large debt makes the public budget more rigid and (b) the decision to finance public expenditure through indebtedness has smaller political costs and may thus induce more unwise and unproductive use of the money raised. On this, we need hope for a better future, since there is no doubt that most European governments did not make good use of their spending and borrowing capacity in the past.

An “external” debt (when the bonds are held by foreign subjects) has negative consequences upon the present as well as upon future generations. Such negative effects, however, have to compared with the benefits associated to the use which has been made of the extra-money made available when the expenditures occurred; if for example the money has been used to buy investment goods or to save the nation from a catastrophe, may be the future generations might have a net benefit.

What I said in my previous article, and which probably has been misunderstood, was simply that the fact that Italy was bound to transfer abroad something of the order of 2% of its GNP per year did not justify a risk of failure; therefore the ensuing panic was only the result of bad reactions to the speculative attack, bad reactions upon which the speculative attack was counting.

C Escaping recession

Europe is now a demoralised area. Investments and innovation languish. Youth is discouraged. Political forces are everywhere despised. The distribution of incomes and of wealth has deeply worsened. Unemployment and bad employment are growing. It should be evident that this is the end-result of bad policies, inspired by bad theoretical models, married with a deterioration of political consciousness, of the use of reason and of passion. All the intervention in this debate testify to this.

The market and the state are complementary subjects, not rival ones. Systems evolve and face continuous distortions and their complexity increases. Any moving and evolving system works on the basis of a trial and error processes, on the basis of feed-back responses. This is why there is no “unique” good model, which could be defined only if the social and economic systems were motionless. The task of the state and of reasoning political leaders is that of creating and changing institutions and behaviours in such a way as to maintain such a moving system within the boundaries of relative stability, and helping that part of the market which promotes innovation and growth. Money and finance, and even the limited liability corporations that Roger Scruton complains of, have made possible growth, innovation and long spells of relative prosperity. Now, they have evolved in a destructive way; they have produced injustice, lack of security, a muting of the positive forces of the market and a deterioration in human capital.

The economic literature has produced and it’s still producing a lot of useful knowledge that might be used for understanding what is happening and how to react. But the political arena needs to stop believing in “the Washington consensus” , or what we now might more properly call “the Brussels consensus”. If only, in other words, the political sphere would cease to have faith in one single truth, it could confront outmoded ideas and start once again to take decisions, instead of delegating them to technocracies.

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