Austin Mitchell and the economic woes of Europe

Found an amusing post on left-wing British Labour MP Austin Mitchell's blog, where he wonders what John Maynard Keynes and John Kenneth Galbraith would make of the current economic organisation of the EU, or more specifically, the Stability and Growth Pact and the dominance of bankers in setting monetary policy.

"Bankers Rule. Not OK. Never could be in fact. The priority of bankers is to fight inflation not get growth, which they fear as destabilising. Their instincts are deflationary. Their aims are to keep interest rates high (bankers love that, can't think why) and keep the exchange rate as high as possible, like a phallic symbol: proud when it's hard."
...
"Enthrone all that lot and what do you get? Europe today. There are benefits for small countries because the interest rate premium they paid for smallness is gone so Ireland Greece, even Spain, are bowling along. Yet for big, grown up, economies and the great majority of the people the result is disaster. The French can riot, the German unions demand, the Italians switch from one set of crooks to another, but no one can bring down unemployment, simply because they can't boost demand, borrow or spend. The only real strategy open to governments is "reform". That basically means cutting welfare, wages and public spending, firing workers and generally embarking on Merkel deflations."

"In the good old days of full employment and high growth the Germans kept the D Mark low to keep exports pounding out. Can't now. France and Italy periodically devalued to boost demand and accelerate growth. Can't now. Business invested and expanded production for export led growth. Can't now. In fact the smarter capitalists, rather than sit around to face the limitless future of misery Bankernomics offers them, are shifting as much as possible overseas. The interests of bankers are quite distinct from those of capitalism, workers, politicians or the people."

Mitchell then makes a comparison between the so called "battle against inflation" and another recent example of a declaration of war on an abstract concept.

"Of course all we losers can't be told that. So we're enrolled in a "battle against inflation". This excuses misery by a fight against a dead enemy in the same way as the politicians proclaim the "war against terrorism" to excuse repressive measures and the loss of civil liberties. So here we all are then, just as Orwell described life in 1984, mobilised to fight unwinnable wars against invisible enemies in order to distract attention from the misery, unemployment and alienation all around. That's Bankers' Europe. The two Johns would have had fun pointing all that out but it just makes me want to cry."

Personally I am not as Euro-sceptic as Austin Mitchell, but in terms of identifying one of the euro-zone's key economic problems I believe Mitchell hits the nail on the head. I have long thought the Stability and Growth Pact is a unworkable and inflexible monetarist piece of nonsense. Member states of the EU are forced to restrict annual budget deficits to 3% of GDP, and to make matters worse this restriction is calculated from year to year, thus making it impossible to take into account any wider economic cycles. In essence, it attempts to outlaw Keynesianism.

The fact that the Pact has been applied inconsistently since its introduction is another demonstration of its impracticality. The EU Council of Ministers did not apply any sanctions against France and Germany when they exceeded the budget deficit "limit" year after year.

At the time the Masstrict Treaty was being negotiated in the early 1990s Europe was dominated by centre-right governments with sympathy to monetarist reductionism, who held a simplistic view of the economy where inflation was the only evil worth worrying about. Yet when Europeans later decided to elect centre-left governments, plans for greater social spending were hampered (in some cases) by the restrictions of the Stability and Growth Pact.

While some form of economic agreement is needed to maintain a multi country currency like the Euro, this should not be used as an excuse to write extremist economic assumptions into "law" at the expense of democracy.