Tiny changes, big implications? August 13, 2007
Posted by franklittle in Business, Economics, European Politics, European Union.trackback
Very interesting story in the EU Observer today about a small change to the draft revised EU Constitution that could have major implications for economic policy in the European Union if not reversed.
The European Central Bank is concerned at a small change made to the new draft that eliminates the special status it has separate to the other EU institutions and has, according to the head of the bank Jean-Claude Trichet, the possibility to make the bank “legally open to pressure from EU leaders to follow certain political goals.” Perish the thought that economic policy should in anyway be affected by the democratically elected representatives of the people.
One of the main criticisms of the bank and argued strenuously by Sarkozy recently is that it is too obsessed with inflation. The primary objective of the Central Bank is “to maintain price stability” within the euro area. In other words to keep inflation as low as possible with a current target of around 2%. The bank is also obliged to support the economic policies of the EU but only if those policies do not jeopardise inflation levels. In other words the policies set by the EU, mostly undemocratically and very rarely with some sprinkling of democracy, can be set aside by the bank in the interests of maintaining low inflation whatever the social cost.
A good example of this can be found close to home with EU interest rates being a factor in the continuing expansion of the Irish property market and the ‘one size fits all’ approach to a euro zone inflation rate can have negative repercussions for smaller countries.
As can be expected the secretive mandarins in charge of the ECB have already begun to campaign to ensure this change is taken out of the new draft and any threat, however small, to their ability to decide, in secret and without consultation with the people (Or the national elites to be more frank about it), how the economy should be run is ruthlessly stamped out.
According to the EU Observer, the heads of member states have been written to in order to solicit their support for the bank’s position. One wonders what Messrs Ahern and Cowen will make of it.
I see the independence of central banks as being almost as important as that of the judiciary. Why do we enforce the split between executive and the judicial process? Because justice is too important to leave to electoral whims. The same applies for the integrity of the currency. In neither case is their independence absolute – both operate in a context and by a national elite.
For an alternative approach, see Zimbabwe.
‘For an alternative approach, see Zimbabwe.’
Hmmm. Doesn’t have quite the same ring as ‘go back to Russia’.
By the way, what’s your perception of the origins of the current crisis in Zim?
They can speculate all they want, but I doubt the Germans are ready to throw in the towel on this one. This was fundamental when they abandoned the Mark.
Pavement Trauma, I know what you’re getting at, and yet… both the left and the right for much of the 20th century would have found your proposition quite counter-intuitive. Now whether that led to economic chaos is a different issue, and I don’t disagree that there is something in what you say about electoral whims being put in second place. However, it is the way in which those within central banks consider or frame economic decisions that is significant, and from a left perspective it is disheartening to see how these are increasingly seen from a – if not neo-liberal – position certainly one which seems antithetical to concepts such as the social market etc, etc…
Haven’t the Germans already ‘wriggled’ a bit on these issues Eagle?
The Zim reference was more a pointer to an (extreme) example when a government attempted to print their way out of an economic crisis and made a terrible situation even worse. The origins of the crisis can be mostly put down to a piss poor, corrupt government.
Idris is right with regard to Ireland & the ECB, it has been detrimental to us because of the one size fits all policy and we’re frankly too small to matter. But that is an argument against being in the Euro rather than whether the ECB should be independent or not.
How is inflation a left-right issue? It benefits no one. Since Labour in the UK made the Bank of England independent in 1997 a boom-bust cycle has been avoided.
The justice system is distinctly “legally open to pressure from leaders to follow certain political goals.” Politicians can pass legislation which forces the justice system to act in certain ways and they regularly do so. The difference with the ECB is that there is currently no space for elected politicians to affect their goals, which are defined in economic terms without reference to social goals. Now some people may believe that there is a perfect line of rationality linking economic policies which focus on controlling inflation and all conceivable socially positive outcomes, but they are enormously ideologically blinkered people and to the rest of us, there are all sorts of nuances and different contexts in which other focuses would be more sensible.
“Since Labour in the UK made the Bank of England independent in 1997 a boom-bust cycle has been avoided.”
You could only begin to say that if you assume that the cycle must have a period of less than 18 years or so, with a peak in the first half of the cycle. Even if you could show such a thing (which you couldn’t as I know of many economic theories which postulate a 25 year and longer underlying boom-bust cycle period), you’d be merely talking about a coincidental correlation and not a causation, unless you could show that the UK’s financial stability markedly improved compared to comparable economicies which did not undergo the same event in that period (ie making their central bank independent), or even that every economy which made it’s central bank independent tended to see an increase in economic stability relative to those that didn’t in any particular period.
‘Idris is right’ – I’m glad you think so, but I didn’t actually say anything at all about the ECB in my post above, as I think you’ll find if you look closely at it.
The origins of Zimbabwe’s crisis are many, and the corruption of Mugabe’s regime is just one of them – and the political degeneration of that regime has its roots in both the wider international situation of an IMF run Africa and in the distorted politics inherited from the liberation struggle. To insinuate that anyone who doesn’t think that the controllers of the ECB are a race of demi-gods sent here to save us from ourselves must automatically be in favour of e.g., the savage beating of those opposed to the government, the closure of opposition newspapers etc., is actually a pretty contemptible level to stoop to.
Eh, that last comment of mine should have been ‘Smiffy is right’ not ‘Idris is right’.
There seems to be a bit of confusion as to what the ECB actually does. It is concerned with monetary policy – setting interest rates and controling the money supply. It does not control European fiscal policy – government revenue, borrowing and spending. It is the Stability & Growth Pact that Eurozone countries entered into that set limits on how they conduct their fiscal policy. This was necessary for the introduction of the Euro – you don’t get German style interest rates, with Italian style spending. The pact is administered by the European commission which can recommend the European Council to take action against errant countries (which it never has, so far). Nothing to do with the ECB.
I think the point is that those who are in favour of democracy in principle, are therefore against technocracy – also in principle.
Idris, that is an insinuation you have chosen to take rather than one I have made.
Governments, markets, events work themselves into financial and economic crises of various sorts on a regular basis. Cranking up the currency printing presses for some sort of temporary relief invariably turns those crises into complete disasters – as has happened recently in Zim. That was what I was referring to, nothing more.
Am I missing something, what was smiffy’s part in this?
That’s it, I’m installing a breathalyser on my web browser. To correct my correction, it was franklittle that was right, not smiffy. Or Idris.
Incidentally, meant to say congrats on exams… I tried to post a comment to your site, but for some reason it didn’t come up.
Thanks WBS, the relief was palpable – though the study does appear to have addled my brain. I’ll check what’s up with the comments.
“The origins of the crisis can be mostly put down to a piss poor, corrupt government.”
The good old corrupt natives argument eh? As Idris said at the heart of the much more complex source of Zimbabwe’s inflation and ‘economic mess’ are the restrictive and defective Western economic prescriptions. Mugabe, has implemented, since 1989, an impeccable neo-liberal economic programme. He has slashed taxes on the top income bracket and on corporations. Government revenue has declined as a share of national income. He has pursued this programme at the behest of the IMF and their SAPs or Structural Adjustment Programmes. Which are sold as assisting growth….
IMF tightens the screws on Zimbabwe
“Although there have been a number of studies on the subject over the last decade, one cannot say with certainty whether ‘programs’ have worked or not…. On the basis of existing studies, one certainly cannot say whether the adoption of programs supported by the Fund led to an improvement in inflation and growth performance. In fact it is often found that programs are associated with a rise in inflation and a fall in growth rate” (Mohsin Kahn, The Macroeconomic Effects of Fund Supported Adjustment Programs, IMF staff papers, vol. 37, no. 2, 1990, pp. 196 and 122, emphasis added).
‘For an alternative approach’ of state run Banks moving to liberalisation..see the East Asian economies prior and after the crash. Or Argentina. etc
Financial liberalisation is ok when used abroad it seems.
Yes it was must have been the IMF that forced him to invade the DR Congo, to oversee the massacre of thousands of villagers in Matabeleland in 1984 and to institute a land grab for his supporters under the guise of land reform that destroyed one of the most successful agricultural economies in Africa. Don’t know about you but that counts as piss poor government – native or not – in my book.
BTW I love this line from the 1999 article on the World Socialist Web Site you link to: “The military might of NATO rode roughshod over the national sovereignty of Serbia”. It accurately sets the tone for much of what is to follow.
“Yes it was must have been the IMF that forced him to invade the DR Congo, to oversee the massacre of thousands of villagers in Matabeleland in 1984 and to institute a land grab for his supporters under the guise of land reform that destroyed one of the most successful agricultural economies in Africa. Don’t know about you but that counts as piss poor government – native or not – in my book.”
That’s a straw man argument. Pax did not put forward an argument that Mugabe’s regime is a good government, he pointed to the, still undisputed, fact that there are other actors at work in the Zimbabwean economic collapse, actors whom s/he claims are central to the mess. You haven’t even made the slightest attempt to address his/her argument. Indeed, s/he is obviously being critical of Mugabe’s part in it all by refering negatively to the economic policies that he has employed. Painting it as Mugabe-apologetics really doesn’t wash.
I think that all of the evidence backs him up too. Land redistribution and the British economic / diplomatic war against Zimbabwe are really not that important because:
a) land redistribution has been only extremely partial
b) Britain is not really an important economic player in the region any more and Mugabe has enjoyed the backing of SADC and the IFIs in all of his major economic policies in recent years (including the plunder mission on behalf of south african mining inc into Congo-Zaire).
If you look at the really damaging policies which kicked off the inflationary cycle, only a blinkered ideologue could ignore the negative influence of the IFI’s. For example, the food problems and associated social unrest really began to get bad in the Autumn of 2000 when Mugabe removed price controls over bread and other staples, sparking huge and destructive riots all over Harare and elsewhere and spinnig the inflationary spiral out of control.
And before you accuse me of engaging in Mugabe apologetics, I will point out that I participated in MDC events in Highfield, Harare in the immediate aftermath of the major rioting in 2000, when smoke still lingered in the air – which represented a non-negligible health risk – in order to express my opposition to his regime.
“BTW I love this line from the 1999 article on the World Socialist Web Site you link to: “The military might of NATO rode roughshod over the national sovereignty of Serbia”. It accurately sets the tone for much of what is to follow.”
It’s a bald statement of fact. You might believe that the use of military might was justified, but the above statement is still entirely factual. It’s a testament to the rigidity of the ideological framework within which most political discussion takes place that bald statements of fact can be seen as absurdly counter-ideological.
And on the subject of land reform . . . Mugabe’s interest in the land issue was entirely cynical and was purely and simply an exercise in populist demagogy that used gross violence to help secure his grip on power.
But – and THIS IN NO WAY JUSTIFIES OR EXCUSES WHAT MUGABE DID, so no insinuations please – Mugabe was only able to exploit the land problem because it was a genuine problem that needed a genuine solution. At the time of Zimbabwean independence in 1980 there were still huge numbers of people trapped in the trust areas where their ancestors had been shifted after the colonial land grab in the late 19th century. And their needs had to be dealt with one way or another. The tragedy is that there had already been pilot exercises in land reform via peaceful, legal methods which appeared to show increases in productivity and equity. That option could have been taken up successfully – but it would have been no use to a demagogue trying to dig himself out of the hole his IMF-led policies had dug him into.
In respone PT, I think Chekov covered it! I’d probably have left it at ‘That’s a straw man argument.’…
(oh and it’s a he)
It is not a straw man argument. The first line of Pax’s comment was “The good old corrupt natives argument eh?”. That sounded pretty ‘apologetic’ to me. There is not a lot in Pax’s comment that suggest Mugabe is to blame – the bad actions were forced upon him by the IMF, not his fault.
I presume we can agree that Mugabe is not going to win any good governance awards. The question to address is whether it his government that is primarily responsible for the woes of the country or is it something else? The fact is Mugabe is in power since 1980. During that time economic policy in Zim has swung from a corporatist / Marxist approach in the 80s (result: a fouled up economy, dependent on foreign loans) to the partial and too quick an implementation of the IMF liberalisation agenda in the 90s (result: an even worse economy) to the the land invasions, hyperinflation anarchy of the 00s (result: meltdown). Consistently running through this time is a seam of patronage, violence and Zanu PF rule. In 1980 Zim was ahead of most other African countries, now it is almost bottom of the heap. To pick out the IMF as the main culprit is perverse.
To return to the original point: does anyone think that cranking up the currency printing presses and adding zeros to the denominations have helped the situation?
“I presume we can agree that Mugabe is not going to win any good governance awards”
I agree with this, which negates your first paragraph. What I meant by “The good old corrupt natives argument eh?” was the frequent use by the right, the mainstream media and even some on the left to characterise all the ills of Africa with the corruption in Africa. As if it didn’t take two to tango in the game of corruption. Or an outside corrupting Western/US Treasury controlled cabal of institutions of finance seeking an internal corrupt minority. That’s a macro-view and not a specific Zimbabwe view, but it’s generally used across the board. A process pointed out by Stiglitz, ex-chief economist of the World Bank.
The Globalizer Who Came In From the Cold
...Each nation’s economy is individually analyzed, then, says Stiglitz, the Bank hands every minister the same exact four-step program.
Step One is Privatization – which Stiglitz said could more accurately be called, ‘Briberization.’ Rather than object to the sell-offs of state industries, he said national leaders – using the World Bank’s demands to silence local critics – happily flogged their electricity and water companies. “You could see their eyes widen” at the prospect of 10% commissions paid to Swiss bank accounts for simply shaving a few billion off the sale price of national assets….”
“too quick an implementation of the IMF liberalisation agenda”
That’s a new one for me. I’m familiar with the “incomplete implementation” and “implementation lacking in political will” failure modes, the “too quick implementation” failure mode is an interesting addition. It’s interesting that the agenda, even according to its supporters, is destined to fail in all real world situations – there are almost never real-world situations where economic agendas can be applied formulaically according to a highly orchestrated time-scale. Of course, the complete lack of any evidence that it works in any meaningful way in even theoretical situations is another plus.
“too quick an implementation of the IMF liberalisation agenda”
That’s a new one for me. I’m familiar with the “incomplete implementation” and “implementation lacking in political will” failure modes, the “too quick implementation” failure mode is an interesting addition. It’s interesting that the agenda, even according to its supporters, is destined to fail in all real world situations – there are almost never real-world situations where economic agendas can be applied formulaically according to a highly orchestrated time-scale. Of course, the complete lack of any evidence that the agenda works in any meaningful way in even theoretical situations is another plus.
In post number 21, PT can’t even get his chronology right. The land seizures were a feature of the 1990s in Zim. They occurred for reasons I’ve already given.
And while we’re on the subject of PT’s ignorance of African realities, what’s a ‘corporatist/Marxist’ economy when it’s at home? Explain yourself, young man.
Please forgive me for not completely summing up the economic history of the last 27 years of Zimbabwe in sufficient detail in five lines.
The land grabs may have started in the 90s but the vast majority have taken place since 2000.