Book Review: Eurozone Dystopia

In the book Eurozone Dystopia: Groupthink and Denial on a Grand Scale, the Australian[*] academic Bill Mitchell (one of the "founders" of Modern Monetary Theory - MMT) gives the history of the euro, and argues that its underlying problem is groupthink. The mental rigidities that have built up around the euro are similar to those that surrounded the Gold Standard, and pose the greatest risk to the common currency when the next global recession hits.

Book Details

The book was published by Edward Elgar in 2015, and is available in hardcover and in ebook format. The book is priced like other academic texts, but Professor Mitchell does have a rebate available on his web site (detailed at the bottom of this article).

The hardcover version is 520 pages, and divided into three parts.

1. The Early Years. The history of earlier attempts at monetary union in Europe, and the process to creating the euro.
2. The Path To Crisis. Covers the history from euro unification to the crisis.
3. The Options For Europe. What can be done?

The Preface states that the book "is written for laypersons that are interested in economic ideas, but haven't studied the subject in any formal manner." This is true, but I would note that the historical sections are lengthy, and so it would not be considered light reading. The first two parts of the book are economic history, similar to Eichengreen's Golden Fetters (the history of the Gold Standard). The last part of the book acts as an introduction to Modern Monetary Theory (MMT), and discusses the options for euro nations that wish to escape the grinding recessions that are generated by the common currency framework.

Unfortunately, the cost of the book is probably going to limit its distribution. It will be pigeon-holed as a textbook for libraries, not as a book for a general audience.

Why Read This Book?

At the time of writing, there is very little clarity about the details of will happen in the Greek negotiations. However, concentrating on Greece alone misses the bigger picture: the euro area in aggregate is growing extremely slowly, and is highly vulnerable to the next global downturn. It is unclear that even a "Grexit" would have a great impact on the rest of the euro area in the short run, as the ECB may be able to "quarantine" the contagion. The importance of Greece for the other economies comes from the the precedents that are being set. For example, if Greece exits the euro, speculative attacks on other countries' pegs to the euro would not necessarily happen immediately. But those attacks will certainly happen once the other economies start to roll over again. Nevertheless, enough damage has been done to the idea that the euro is irrevocable, those attacks will happen whether or not Greece stays in the euro. In my view, analysts need to focus on those later attacks, and this book offers such a view.

I found that the most valuable part of this book was the historical analysis. There is a huge amount of analysis that is churned out by "experts" explaining how complicated the situation in the euro area is. In fact, the underlying economics is straightforward; the complexity is the result of euro area policymakers almost invariably following policies that have no chance of meeting their purported aims. Bill Mitchell argues that this futility comes from groupthink amongst the European elites, across the political spectrum.

This is a line of thought that will not win Professor Mitchell any friends amongst the European elite. If you are a member of said elite, or attempting to enter into it, I would not recommend the book, as it might lead career-limiting analysis. However, for everyone else, the "groupthink theory" provides the best explanation for what has been going on.

A Very Short History Of The Euro

European states have been entering into fixed exchange rate systems for some time; the book starts with discussing things like the Latin Monetary Union of 1848. These monetary unions failed as they were not accompanied by political union, and so they were suspended during crises or wartime. The Bretton Woods exchange rate system allowed for a global system of currency pegs, but it was dismantled by the 1970s. Although the rest of the world moved towards floating exchange rates, Europeans aimed to keep their currencies pegged, as part of the "European Project."

The Primer Minister of Luxembourg, Pierre Werner, was the head of an expert group charged with creating a plan to create a common European currency. The Werner Report of 1970 represented the Keynesian economic thinking of the time. Mitchell highlights that the Werner Report saw a requirement that fiscal policy would be controlled at the European Community level. This was not politically feasible, and the plan was shelved.

However, the plan was revived by the late-1980s, and it eventually led to the introduction of the euro. Having a common fiscal policy was still politically infeasible. The solution to the economic problems foreseen by the Werner Report was to ignore them. "Monetarist" economics assumed that monetary policy was sufficient to stabilise the economy. (Within the book, Professor Mitchell lumps mainstream economics, including "New Keynesians", under the label "Monetarist". This is theoretically justifiable, but it might be confusing for some.) The issue of chronic unemployment, which was before viewed as an economic failure, was redefined to be the result of the personal failures of the unemployed. Importantly, the development work was done by a small group of "Monetarist" economists from central banks, allowing for the maximal amount of groupthink. Politicians, who are susceptible to worrying about the best interests of their voters, were excluded from key discussions. By this process, the euro was born.

In order to cut a deal, some form of treaty limits on government debt were needed. The Stability and Growth Pact enshrined two largely nonsensical limits - 3% of GDP for annual deficits, and a 60% ratio of the debt stock to GDP. The book explains how these numbers came out of back-of-the-envelope calculations, and then European economists working at official bodies came up with models to justify these completely arbitrary numbers. The limits were breached in 2003 by France and Germany, and funnily enough, the big countries were able to ignore them then. However, the politically weaker periphery were crushed under those limits after the crisis. The Stability and Growth Pact is the key driver of incompetent European policy.

The summary above is a rather brutal simplification of 11 chapters of the book. There were a lot of steps along the path to the euro. But Mitchell's theme underlies the modern history: the difficulties faced with monetary unions were "solved" by ignoring them. The disaster that is post-crisis euro area growth is the corresponding result.

I do not claim to be an economic historian. Professor Mitchell's account of the history matches my understanding of the history of the euro, but I imagine that others might dispute his interpretation of some events. He holds traditional left views, which he does not attempt to hide. Although that could offend some readers, I prefer to read authors who do not attempt to hide their views by burying them under loads of waffle.

Going Forward?

The third part of the book discusses the future. It is the part of the book that may be of the greatest interest for many readers, but I would not recommend skipping over the back history. Without understanding the tortured logic of how the Europeans ended up where they are now, one would end up with a hopelessly utopian view of possible solutions.

It should not be forgotten that the title of the book is Eurozone Dystopia. A dystopia (an "anti-utopia") is an incredible bad political system that has the power to reproduce itself indefinitely. (Oceania  in Orwell's 1984 is the best known literary dystopia.) No matter how badly the euro damages the economies of the eurozone nations, there is no reason to believe that the euro must fall apart. As recent events show, European elites are quite content to watch the rest of their population spiral into chronic unemployment without doing anything useful about it.

It is easy to ridicule clueless pronouncements made by conservative European economists before 2008; Professor Mitchell has plenty of examples of such. But it would be a mistake to view the groupthink of European policymakers as being solely the result of "neoliberal" politics. For example, Yanis Varoufakis (recently departed Finance Minister of Greece) is an intelligent academic economist who has been denounced as a "communist" by a good portion of Northern Europe. Yet even he was largely trapped by groupthink.

1. Within the book, Bill Mitchell dissects the "Modest Proposal," a plan to deal with the debt problems within the eurozone. (Version 4.0 of the article was published in 2013, co-authored by Varoufakis, S. Holland and J.K. Galbraith.) The proposal itself contained a number of proposals. However, Mitchell argued that the common theme was the proposal was too modest - it would do very little to deal with the fundamental problems. Financial engineering is proposed to allow the ECB to effectively fund government debt, supposedly in a fashion that will not run afoul of European treaties that banned "monetary financing" of governments. These proposals accomplish little that was not already accomplished by the ECB's OMT programme, and it would be just as vulnerable to legal attack. The "Modest Proposal" includes a welcome expansion of investment spending at the supranational level, but the size of the new spending would be a drop in the bucket relative to the hole in aggregate demand. In summary, spectacular amounts of political capital would have to be expended to enact programmes that will probably fail to ignite growth, and would be blown away by the next downturn. Although ingenious, the thinking was not far enough away from the European consensus to do any good.
2. During his tenure as Finance Minister, I would argue that Varoufakis was well-served by his biases. (These events were too recent to be in the book; the comments within this bullet point are my own, not Professor Mitchell's.) In February, I drew the parallel between Greece's current situation, and the Canadian province of Alberta during the 1930s. Syriza's strategy of attempting to create a wider political coalition made sense, but they also had to realise that this would be opposed by their partisan opponents elsewhere. A sensible person would have realised within a few weeks that this coalition was not going to form any time soon, and the only choices Greece would have is to submit or exit. However, Varoufakis apparently refused to prepare for euro exit, as he has exaggerated fears about the consequences of that action. Exiting the euro would cause Greece some hardship and inconvenience, but it would have only been about the same order of magnitude that Greece is facing right now. If Greece threatens to break ties, it has a considerable stick - all the Greek debt (and the contingent liabilities of the TARGET2 balances) would be uncollectable. It can trade off future debt servicing for short-term transition aid. And once Greece has control of its currency, it will once again have the ability to service its new debt. Exporting nations are desperate for destination markets; vendor financing would be forthcoming in exchange for the considerable goodwill it would generate. 

Professor Mitchell outlines two possible ways in which the eurozone could function properly. (He also notes that fiscal federalism would do the job, but it as politically plausible as the Greeks paying off their debts by taking up unicorn ranching.)

1. Overt Monetary Financing. The ECB underwrites national budgets, eliminating default risk. This would probably require treaty changes.
2. Exit by some or all nations. The difficulties of exit are incredibly over-rated by analysts who focus too hard on details, and not the underlying principles.

One could argue that European policymakers have come around to agree with this assessment. They are moving towards Overt Monetary Financing for the eurozone ex-Greece, and they tried to get the Greeks to exit. (The Greeks have not yet taken the hint.)

The problem for the euro going forward is that Overt Monetary Financing runs counter to the principles of "Monetarist" economics. Its usage may be too constrained to be useful. Moreover, pro-austerity politicians have whipped themselves into incoherent outrage about budget deficits. It is unclear what policy errors will be committed when the next global downturn hits euro area aggregate demand. During the crisis, European policymakers did act in a counter-cyclical fashion. With debt near their farcical treaty limits already, one could imagine that there would be a push for pro-cyclical policy this time.

Finally, parts of the book act as an introduction to Modern Monetary Theory, including the concept of a job guarantee. Since he wanted to keep the complexity of economic theory within the book limited, these parts are at an introductory level, similar to what he has already written. This would be most useful for those who are unacquainted with MMT already. 

* Not "Asutralian"! Thanks to an eagle-eyed reader for spotting that one.

(c) Brian Romanchuk 2015