Eurozone Crisis: was Cameron right?

From Gaian Economics blog

Tuesday night saw me at our monthly Green Party meeting at Star Anise - well while we were there it was being wall papered with woodcuts by local artist Simon Packard - I am a bit of a fan of his work and love this latest - very worth a visit to Star Anise to see (see Simons work at Ruskin Mill here). Anyway I digress - our meeting is usually divided into half business and half discussion and this week it was the Eurozone.

Stroud District Councillor Molly Scott Cato, who is also the Green Party's Economic spokesperson presented a report then fielded a barrage of questions which developed into more discussion - you can see her brief summary below and more about her views re Camerons decision here - Molly says Cameron was right not to sign but for the wrong reasons - it is not about protecting the city but about the potential loss of sovereignty. 

I have to say none of that sat easily with me - as Molly's blog noted I was one of those hoping for Europe to restrict some of the powers of the City - how can we sit outside the rest of Europe and not have influence? Of course we don't know the details of any new treaty yet and of course agreeing with Cameron now doesn't for a moment mean we agree with his economic policies.....

Eurozone Crisis - Mollys briefing

It is said, although the story may be apocryphal, that Friedrich Hayek founded the Mont Pelerin Society in 1947 because he was in despair at the low level of support for ideas of the market as the ideal form of economic organisation and the international dominance of Keynesian ideas. The crash of 1929 and the economic dislocation of the 1930s, culminating in the bloodbath of the War, had convinced politicians that free floating currencies, competitive markets, and trade wars were socially destructive. Although Keynes died in 1946 he bequeathed us a system of political constraint on markets: globally through the Bretton Woods system, and nationally through social democratic political systems and redistributive economic systems with supportive welfare states. It was this system, a system involving the political management of market economies, that led to 30 years of stability and security.

Keynes had become an advisor to the British government as a result of his ability to explain and find solutions to the collapse of the economy in the Depression of the 1930s. His theory revolved around the concept of aggregate demand and can be illustrated by what he called the ‘paradox of thrift’. Keynes noticed that people’s natural response to be cautious in times of crisis could actually make the problem worse. While saving at the individual level may be entirely noble, at the level of an economy as a whole, and especially one with insufficient demand, it can be devastating. Japan is often taken to be the paradigmatic case. The validity of Keynes’s position was proved by the disastrous figures for the UK economy announced by the Chancellor in the autumn statement: cutting public sector spending on the scale announced in April can only push us into the ‘death spiral’ of falling demand, leading to falling confidence, leading to reduction in investment, and so on.

So what does this have to do with the Eurozone? Well the admirable Keynes was less strong on the question of money, or perhaps he just didn’t like to be so explicit. The problem is that capitalist money systems work like pyramid-selling schemes: all money is based on the creation of debt and so long as you can persuade somebody to borrow you can create money. But when confidence fails, all money is sucked out of the economy and you have a credit freeze. The first time this happened (2008) politicians responded by spending out moneys to fill the debt holes. It appears to be happening again but there is no more money to spend.

Two solutions to the Eurozone crisis are proposed: a system of Eurobonds, where national debts are consolidated and backed by Germany, which is an attempt to rebuild confidence and restart the debt merry-go-round. Second, the creation of money by the European Central Bank which can then be used to fill the black holes. Either could work in the short term, but in the long run we need to restructure the global system and find ways of creating money that do not involve debt. For more info you can check out my Ten Point Stabilisation Plan and other posts on my Gaian Economics blog.