This essay assumes the reader has some knowledge of Modern Monetary Theory (MMT). For a primer on MMT please refer here.
Taking Ireland as an example, how would Modern Monetary Theory (MMT) fix the Problem?
Let’s review a definition, from Wikipedia:
A country is a region identified as a distinct entity in political geography. A country may be an independent sovereign state or one that is occupied by another state, as a non-sovereign state.
The key words in this definition are Sovereign and Non-Sovereign. We’d argue that when Ireland had its own currency, the Irish pound, it was Sovereign; it had its own Central bank and its own executive branch of Government, especially in monetary and fiscal matters. When it entered the European Exchange Rate Mechanism (ERM) and adopted the Euro, it surrendered its monetary and fiscal Sovereignty to the European Commission and European Central Bank.
Surrender of a country’s sovereignty, and hence control over one’s own Destiny, usually occurs for one of two reasons:
- A foreign invasion (with the usual English invaders replaced this time with Europeans)
- To acquire significant subsequent benefits to the Irish people.
For Ireland, there was no invasion, and to us the real benefits of the Euro Zone are not very evident. However, there was a conquest by an Imperial Power.
Ireland uses the Euro; it has no control over the value of its currency, to the cut it trade deficit it must increase exports ( LMAO), or cut wages (aka: Internal Devaluation), which cuts taxes.
But you say, if you cut taxes, then the Government Deficit could become worse. Therefore, to maintain the EU-demanded-ratio of Government Defect to GDP, the Government spending would also have to fall, so making the private sector deficit worse. This is a death spiral. Taxes fall, GDP falls, the Bonds must be retired to maintain the “correct” deficit to GDP ratio, Government Spending gets cut further, making the private sector deficit worse, resulting in higher unemployment and loss of skilled people (leading to the loss of the export-led solution, because the skills leave), which cuts taxes – or alternatively, receive huge EU Transfer Payments, aka: Free Ride (hated by the Germans).
That’s the Austerity Dilemma, aka: Grinding down the Vassals. Played out in the PIIGS. Proven not to work by the PIIGS’ example. Austerity merely privatizes the Commons, at the cost to the People, and benefits only the 1%. No wonder the IMF & World Bank like it! Austerity guarantees the financial destruction of countries tricked into it.
The Euro, and currently only the Euro, is accepted by their Governments for settlement of taxes in the Euro zone. However, the Governments also issue bonds, denominated in Euros, to fund Government deficits.
MMT considers Government bonds to be a form of interest-bearing deposit accounts at the central bank. In the Euro zone, this would mean that a Government has interest-bearing deposits at the central bank, and only it is responsible, and as the Government cannot create Euros, it must pay the interest due from its tax revenues.
In MMT a country Sovereign in its own currency sets the value of its currency by the Government’s taxation.
The problem facing the Irish is the creation of bonds in Euros, where it is not sovereign in its currency. This means is has little “good faith and credit” upon which to rely, because others define and control its “good faith and credit”, and these are the troika, the European Commission (the European executive), the European Central Bank (a master not a servant of the Irish state), and the IMF (the 1%’s poodle). This creates a constitutional nightmare, which renders Ireland a Vassal state of opaque interests.
Vassal States Can Escape.
Ireland is able to issue bonds, interest bearing accounts. These could be new Irish Pound Bonds, which float against the Euro, and held as an interest-bearing account at the Irish Central bank. This changes little.
In general, we need to break the stranglehold the Banking system has on the issue of money. We need to remove the mechanism where the only way to inject money into the economy is through the central bank funding the banks. We need to end the “debt driven,” broken economies we have today, and the reason is highlighted by the student loan explosion in the US. The graduates do and will have large student loans to repay, which will cause a demand drag on the economy, in cars, housing, and all consumer products. The Student loans are an obscene use of loans, encumbering both the people and the economy, when the cost of higher education is better paid by Government as an investment in the commons.
For the Irish, this step is accomplished by having the Irish Government (The Treasury, not the Central Bank) pay all its bills and salaries in bonds, denominated in Irish pounds, and have the Irish Government accept only Irish Pounds to settle tax debts. At this point there are two legal mechanisms to pay tax bills in Ireland, Irish Pounds and Euros. While theoretically possible to manage such a transition, we would expect violent reaction for the Vassal state’s imperial power, up to and including military coup and assassination of the Vassal’s states political leaders. Such actions would have to be carefully considered, and would begin the migration to a country Sovereign in its own currency. We will not consider this further, as such an important consideration fall into the realm of Tactics, and the current discussion is about goals and strategy.
The newly-Sovereign Government remits money to the European Commission in Euros, and receives European Transfer payments from Europe as Euros, if indeed the Euro zone can survive such a shock. If several PIIGS did this, the Euro might not survive. Poor Germany. How sad.
As far as we know, no EU citizen pays “European taxes,” consequently no tax in Euros is due from any Irish Citizen directly to the EU. The UK is an example, since they kept Pounds, consciously deciding not to become a vassal state. The Euro is only acceptable money because its vassal states accept the Euro for settlement of tax Debts. The Euro countries maintain the value of the Euro, but have lost the power of a fiat currency. In effect, they become provinces, or sub-domains of the European super-state – very much like individual states in the US. As long as the provinces continue to hold the Euro as their medium of exchange, the Euro Zone remains. The strength of the Euro Zone as a political entity relates directly to the strength of their currency and their ability to enforce their laws.
Ireland can repay much of its debt to Europe’s Banks (debt stupidly acquired to protect non-Irish banks) by slowly drying up the use of Euros in Ireland, paying off its debts over the long term, and paying off the debts in Euros collected. It can further negotiate with its creditors on a take-it-or-leave-it basis, to exchange the Euro debt for Irish Pound debt when the debt matures. Alternatively the ECB can just write off the Irish debt (piigs may fly too).
The UK kept its sovereignty and Ireland did not. This is a method for Ireland to regain its sovereignty. Vassal states really CAN escape. Courage and tenacity are required; however, the results are less catastrophic than the overarching austerity preached by the IMF and the World Bank. And, in the end, the Irish have their country back!
If the Irish Pound to Euro exchange rate is left floating, this may remove the need for capital controls; however this is an area for further study, because the re-introduction of the Irish Pound could result in a sudden transfer of Euro-denominated capital out of Ireland. Such capital control regimes were a feature of Europe in the ‘60s, so the required methods are known.
A further method to eliminate unemployment in Ireland could be to create a program in which the government becomes the Employer of last Resort under a Job Guarantee program described by MMT, coupled with a reversion to state-owned enterprises. (State-owned enterprises can sometimes be much more efficient than privately owned enterprises.) For example, the overhead of a national health system is 3-5% for a single government payer, versus at least 25-30% for a private enterprise because of the need for profit and executive demand for high salaries.
While some creation of state enterprises occurs naturally, some nationalization is best achieved by taxing profits, and can be supported by the state’s ability to issue almost unlimited fiat money to acquire distressed private businesses. Of course, a country moving to its own currency may want to move slowly in that direction; there will be enough to accomplish in rebuilding its sovereignty by re-creating its own money. Building state-owned enterprises can occur gradually.
Alberta, a province in Canada, issued a depreciating scrip during the Depression of the 1930′s, to boost its economy. Depreciating scrip has built-in inflation, and holders of the scrip are motivated to spend it quickly; as a result, it combats deflation, and provides a direct stimulus to the economy by increasing the velocity of money. This mechanism could become an additional feature of the Irish Pound bond, in that it could carry negative interest rates, so making its value decline over time. This is the Alberta Social Credit Party’s proposal; although the Alberta social credit party bills itself as conservative, it’s neither Neo Conservative nor Neo Liberal in its manifesto.
We’d note that this mechanism is also possible for States in other Federations, and could provide a mechanism to reduce the grip a Central Government has on its associated sovereign states.