by Glenn Fisher
Posted 8th March 2017
I first came across Steve Keen a few years back when he gave a speech at a Financial Times event in the City.
It had been a long day and I’d seen a lot of speakers and, frankly, I was getting a bit tired of people spouting the same old generic stuff.
However, when Steve started speaking I sat up.
Unlike those who had spoke before him, Steve was passionate. He was angry. He wanted to get his point across and no one was going to stop him.
Here was a proper thinker.
The speech was about Hyman Minsky’s financial instability hypothesis. It wasn’t something I’d come across before but Steve’s presentation was clear, concise and had me thinking about it long after the speech had finished.
Ever since then I’ve kept a close eye on Steve’s work, enjoying various speeches and articles he’s written since.
So, it is with great pleasure that we recently had Steve into the Agora offices to sit down with our own resident economist and editor of the Daily Reckoning, Ben Traynor.
The two experts spoke at length covering a vast range of topics and touching on some very interesting insights.
Today, I’d like to share one particular section of that interview, which I found very illuminating…
Indeed, we drop in with Ben asking Steve about Brexit:
BEN TRAYNOR: I want to ask you about – obviously a very big topic here at the moment for anyone reading – and that’s obviously Brexit.
Now you said before that you think Britain leaving the EU, it’s the right thing for Britain to do, and you’ve talked about the EU in terms of whether it’s a club Britain should even want to be a member of at all.
Is that because you just think Britain and the EU just aren’t a very good fit for each other, or do you think all members should be looking to get out of the EU because perhaps it’s in some kind of existential crisis, which some people are saying.
STEVE KEEN: It was a crisis right from the beginning of forming the euro.
That was the major problem.
You can take it in a political angle further and say just how much commonality do you have between these states, and was it ever feasible to try to get the United States of Europe, which really was the vision that was behind, and still is behind the European Union.
But my point really comes down to the creation of the euro, and what a monumental disaster that was, and the impact of that disaster is, of course, mainly felt for those who are inside the euro region itself.
But because the European Union was based on the four principles of free movement, including free movement of labour and capital, that’s fine as long as people move for episodic reasons, if they move because they prefer the weather in London to the weather in Spain for example.
Well, actually they’re leaving because there’s a systemic breakdown of the Spanish economy, courtesy of the euro, and that’s why they’re coming over here.
And rather than getting episodic levels of migration you get systemic breakdown levels of migration, and that causes social frictions which are now leading to a rise of xenophobia in Europe in general.
So the actual design of the euro was disastrous, it’s caused some economic crisis. Thank God England made the decision not to surrender the pound and take up the euro, but even after that’s been done, while the European Union is still a dysfunctional economic system, then because you’re part of that free movement thing you cop people escaping systemic breakdown.
And that’s where the rise of UKIP came from.
BT: Do you think part of the failing on the part of successive British governments was not to address that properly?
Because if you’ve got lots of people arriving, because as you say they were escaping a systemic breakdown at home, they’re finding jobs in a lot of cases, they’re paying taxes.
The argument is often made is that that tax revenue could and should have been used to make sure there wasn’t a strain on public services.
SK: Well, the real problem was at the same time as you had that happening, the Conservatives were going in for total austerity.
And Labour as their rival bought the argument that their spending caused the crisis, which is total crap, but that meant that as well as having people, you know, systemic levels of migration turning up and putting pressure on your services you were destroying the services at the same time.
So it was a double whammy.
BT: But here’s the question: so had that other mistake not been made, and had services provision been adequate, would it just have kept things going on a bit longer, or could we – I’m thinking just of Britain here – have managed inflows of people in such a way that you didn’t get the rise in xenophobia, that it didn’t become a social problem?
But there’s a whole lot of interacting elements…
BT: And there’s a lot of ifs, buts and maybes in that as well.
SK: I think it was always on a hiding down to the breakdown.
My favourite article on the European Union was written in 1992 by Wynne Godley – I mentioned this numerous times.
BT: I read that after I saw you recommend it a couple of years ago. It’s very good.
SK: And he just basically says that because the people who designed the euro, because they establish a central bank, must believe that’s all you need for economic union, they therefore must believe capitalism is inherently stable.
BT: Do you think that’s true though – I’m sorry to interrupt, but I’ve never – my own read of it, and you may disagree, but my own read of it is that they always knew you needed more, they just thought that that was as far as they could go with this.
SK: I think there’s a potential belief that could have been part of it. That it would have been too difficult to build a treasury, easier to build this common currency, and then…
BT: But the assumption was that eventually it would become self-evident they needed one, and it would just happen. Which hasn’t happened.
SK: But the trouble is, you see, they didn’t have to have a single currency combined with the 60% limit on government debt and the 3% limit on government deficits.
If they simply had a currency and made no rules whatsoever about that, then it would have been feasible, potentially, to say okay, well it’s not working as well as we would like it to, but not imposing austerity on economies in a downturn, which is what they ended up doing courtesy of those rules.
Maybe we need a treasury to make it work better, but it wasn’t just the fact that it was only the central bank, it was also the rules on government spending.
BT: Do you think there’s a paradox there, because those rules, I remember when all that harmonisation was happening in the late 90s, in the run up to the launch of the euro, and the idea was that, well, probably this is not anything close to an optimum currency area, we probably need to get our economies to converge, and that way we’re not going to have a problem, but paradoxically, by trying to do that, it created a situation that when a crisis did occur they couldn’t actually do what economies tend to do.
SK: Well they diverged dramatically.
And this is – the Growth and Stability Pact. That’s a funny one. Tell me something else. There’s actually been a stagnation and instability pact. So the rules have actually made the outcome far, far worse.
And it is not just founding an inappropriate currency union, it’s also founding inappropriate rules.
But another part of it, which is quite intriguing, I heard in Berlin just recently, is that also, one of the other rules they agreed to, or one of the other objectives they agreed to, not a rule, was to target a 2% rate of inflation.
Now what you actually had happen was that Germany hit about 1%, France actually hit about two, Italy hit about three, the three major trading partners of course on the block.
Well, that means, as a result, over every year, German manufacturers were gaining a 2% cost advantage over Italian manufacturers.
Which ultimately means of course that people don’t buy Lamborghinis and Fiats anymore, they buy Mercedes, because for the same features they’re cheaper.
It’s not about labour productivity alone, it’s about the rate of inflation, which comes down to the rate of wage change, because the Germans suppressed the rate of wage change, the rate of inflation was lower, and that was 1% below the level they agreed to.
Now, if they’d agreed to 2%, and France did 2%, and Italy maybe suppressed its wage change and they hit 2%, you wouldn’t have these imbalances.
But they’ve built up over 15 – going on close to 20 years now – and those level of imbalances mean that, fundamentally, Italian industry can’t compete with German industry, not because of productivity differences so much but wage costs combined with that.
BT: So that’s a dynamic which obviously leads to the trade surplus that Germany has…
BT: But on top of that, and this is something I think I’ve seen a few people say – I think you’re one of them – is that when you have the euro, everybody in that single currency has, Germany is exporting to the rest of the world, they’re exporting within the eurozone on a flat currency, so they’re enjoying the benefit you’ve just described, of having lower inflation, and year after year after year opening up this gap, which makes them more competitive…
But you’re not getting what you might have had if they had the Deutschmark, an adjustment whereby their currency gets stronger, and not only does it perhaps offset some of that dynamic vis a vis Italy, but also vis a vis the rest of the world.
SK: Absolutely. That’s why Trump’s complaining about Germany having an undervalued currency, and he’s bloody right on that front.
If you can run a 9% of GDP trade surplus, which is the level Germany’s now hit, a lot of that is with the rest of the world, the EU itself overall is balanced, so there’s a huge imbalance – Germany’s got a huge trade surplus with the rest of Europe, but it’s also got it with the rest of the world, and on that scale I think Germany’s trade balance now is the same scale as China’s.
Now that’s ludicrous.
BT: Because you can’t really argue that this is export-led growth of an economy.
SK: No, it is devalued currency-led growth. And the rest of the world is paying a price for that, as well as Europe itself. So yes, that’s another reason why you should break it down.
Good stuff, right?
I found Steve’s take on the Brexit question very interesting and I hope you did too.
As I say, the entire interview was great and both Steve and Ben covered a great many interesting subjects.
So, if you’re interested in hearing more, make sure you tune in tomorrow when I’ll be revealing how you can listen to the whole interview for free.
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