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The democractic insolvency

by rz Thu Jul 16th, 2015 at 05:14:36 AM EST

Disclaimer: I really want to write a few more diaries. But I do not have the time to got through the web and search for the references. So you have to trust me! Let me also credit 'some story written somewhere' with the idea for the title where the Following was pointed out.

The democratic deficit of the EU has turned into a democratic insolvency

Now the lack of democracy on the EU level has been discussed quite often. But I have always found this discussion to be to imprecise. Democracy can not mean 'my ideas should be implemented'. Very often it can absolutely mean the opposite. Now I want to try to point out several clearly undemocratic feature of the EU.

A lot could be said about this. For example the nature of the Eurogroup meeting, where ministers seam to meet to conspire against the democratic will of the European people. However all this is relatively ill defined. I want now to focus on two key features which make any change in actual policy basically impossible.  No matter how large the majorities.

The European Central Bank

Independent central Banks are all the rage toady. But the European central Bank is quite unique in the sense that its independence is protected by something akin to a constitution. In all other countries the independence of the central bank is established by law. Which means in principle independent central banking can be abolished by the normal majorities need to pass a law.

The question of the nature of our central Bank has today become  quite urgent. The central Bank has failed now for at least three years in a row to fulfill its inflation Mandate and the German representative on the ECB board openly advocates to abandon the inflation mandate as a means to force specific policy choices one the EU member nations.

In Cyprus and Greece the ECB went even a step further. While in principle its duty is 'to guarantee a functioning payment system' the Banks in Greece have now been closed for almost three Weeks. The destructive impact is massive. While the ECB tries to hide behind the problem of Greek banks holding Greek debts, this action is clearly unlawful. The ECB could wind down Greek bank if they are insolvent. But stopping the payment system completely is a very extreme act.

I already wrote a diary about the actions of the ECB in 2011, when they enforced a specific set of policies on Italy and similarly on Spain and other countries.

The ECB is the most powerful tool in the Hand of the EPP and its affiliates. While Draghi might not toe the line of the Christian Democrats in quite the way Trichet did, in the end the ECB Governing board see itself as a enforcer for the EPP.

Without getting the ECB under full control of the European Parliament including the ability to order direct Government financing the democratic decision making within the EU is highly constraint.

The inability to tax capital gains

You heard it all, the rich get richer, and they get richer by taking the surplus value of our work. In general the quota of the amount of GDP going to capital gains is extremely  high. Yet at the same the tax income from capital gains is low. Instead the IMF recommends to 'broaden the base' which means to make the effective tax system even more regressive by increasing VAT.

And there is no way out. The structure of the EU makes taxing capital gains on the level of a single nation basically impossible. At the same time taxing it EU wide is also impossible, since the there is no actual way to do this.

Therefore: Within the EU the possibility to tax capital gains has been abolished.

This is quite a crass situation for everybody who wants to create a somewhat fairer wealth distribution. The combination of not being able to print money and not being able to enforce tax laws makes every national democracy in the EU basically impotent against the power of moneyed interest. At the same time no supranational body exist which could actually do anything about it.


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 Here  a more nuanced few of the ECB actions:


Ordinarily, in a bank run the correct action for the central bank is to increase liquidity to accommodate the desire of the private sector to convert bank deposits into physical cash and/or move their money somewhere safer. But this is when the reason for the bank run is concerns about bank solvency. In the Greek case, the bank run was due to concerns about sovereign solvency, and in particular about the growing possibility of redenomination of deposits into a new, devalued currency. Since the reason for the bank run was political, therefore, I find it hard to criticise the ECB. It was in a cleft stick. If it increased liquidity, it was arguably supporting the Greek government. If it reduced it, it was supporting the Eurozone creditors. It therefore did neither. Maintaining ELA at its existing level was a politically neutral decision.

The real mistake was made by the Greek government. It was always obvious that the talks would be difficult, and the Greek government's "strength in weakness" approach meant that it had to allow itself to be pushed dangerously close to Grexit. Bank runs were inevitable. So allowing Greek banks to become totally reliant on a central bank controlled by its Eurozone creditors - and itself a creditor - was a fatal flaw in the Greek government's strategy. It should have imposed capital controls long before. Had it done so, monetary conditions in Greece would still have been very tight but the banks could have remained open.

My major point remains: Without democratic control of the ECB a different Europe is implausible.

by rz on Thu Jul 16th, 2015 at 09:20:59 AM EST
Meh. The worst month of the bank run was January. The ECB's bank supervisory arm should have demanded a recapitalization of the banks as early as February 4, when instead it shifted half of the liquidity provision (and any further liquidity) to ELA. If that was already called politicised mission creep at the time, imagine the politics of shutting down the banks with the Syriza government barely sworn in.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Jul 16th, 2015 at 09:43:21 AM EST
[ Parent ]
"Without democratic control of the ECB a different Europe is implausible."

Yes, if only the eurogroup controlled the ECB...

by IM on Thu Jul 16th, 2015 at 01:21:44 PM EST
[ Parent ]
No, the Parliament, of course.

But at least it should be possible to impeach central bankers for egregious misconduct. As it is right now, the monthly sessions by the ECB Prasident with the EP's ECON committee are a pure courtesy.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Thu Jul 16th, 2015 at 01:25:20 PM EST
[ Parent ]
If you let the EP members from eurozone states control the ECB, would be result so different?
by IM on Thu Jul 16th, 2015 at 01:30:44 PM EST
[ Parent ]
My key argument is not that any particular type of control would be automatically better. No way of organizing a gouvernment is automatically good.

The key point of democracy is not that it creates automatically good outcome, but that it provides a path to change a given situation. With the current EP in charge would be no better then it is now. But it would create a pan-european way for democratic change.

You yourself have criticized the nationalized discourse on this site. But there is a reason for this. On the level of the nation we know how to create democratic change.

by rz on Thu Jul 16th, 2015 at 01:37:34 PM EST
[ Parent ]
My argument is that the composition of the governing council of the ECB and especially the majority of the government council is not independent from the political majorities in the Eurozone countries. With some lag it tends to reflect the majorities.
by IM on Thu Jul 16th, 2015 at 02:09:15 PM EST
[ Parent ]
I am sorry that due to lack of time I can not fully engage in this debate. Your argument has certainly merit.

But Euro or not, in the present economical situation I fear that radical monetary action will be necessary to stave of disaster. This will require a different set of rules for the ECB or any national central bank, with article 123 being the most important rule which needs to be changed.

Democratic control of the ECB might not actually produce my desired outcome of course. And I might be wrong on the economics, too!

But then let me also say that on a very fundamental level I think that the ECB needs to be an institution which is established by a law/directive of the EP.

It can in fact be established as independent. But the final say should be with the EP. I believe this fully independent of outcome. If we want to have a true pan European economy we need pan European democracy.

issues we fight over should not pit countries against each other, but political movements.

by rz on Thu Jul 16th, 2015 at 02:35:52 PM EST
[ Parent ]
Except if the ECB and Eurogroup is allowed to depose member state governments, then they control who is appointed.
by fjallstrom on Mon Jul 20th, 2015 at 11:52:05 AM EST
[ Parent ]
It begins to sound like the loop of power in the Iranian Republic.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Jul 20th, 2015 at 03:45:47 PM EST
[ Parent ]
Not that again.
by IM on Thu Jul 23rd, 2015 at 07:54:15 AM EST
[ Parent ]
No counter argument then?
by fjallstrom on Fri Jul 24th, 2015 at 05:26:21 AM EST
[ Parent ]
You are imagining things. Your buddy Berlusconi had already lost his parliamentary majority. In parliamentary democracies the parliament can remove governments. And so on.
by IM on Fri Jul 24th, 2015 at 05:53:45 AM EST
[ Parent ]
Berlusconi is no friend of mine, and I don't see why you would suggest that.

Anyway, I was not refering to Italy, but to Greece. With the current deal in place, the Greek parliament is reduced to a rubber stamp department of the Troika.

The Euro-Summit `Agreement' on Greece - annotated by Yanis Varoufakis | Yanis Varoufakis

The government needs to consult and agree with the Institutions on all draft legislation in relevant areas with adequate time before submitting it for public consultation or to Parliament [i.e. Greek Parliament must, again, after five months of short-lived independence, become an appendage of the Troika - passing translated legislation mechanistically.]

And, furthermore the Greek government must own their austerity:

The Euro-Summit `Agreement' on Greece - annotated by Yanis Varoufakis | Yanis Varoufakis

In this context, the ownership by the Greek authorities is key [i.e. the Syriza government must sign a declaration of having defected to the troika's `logic'], and successful implementation should follow policy commitments.

Taken together, this limits the possible governments of Greece to governments that are pro austerity and accepts the Troika writing the laws of Greece. On pain of economic blockade through a banking system made illiquid.

by fjallstrom on Fri Jul 24th, 2015 at 02:03:07 PM EST
[ Parent ]
Are you in the wrong thread?
by rz on Fri Jul 24th, 2015 at 03:25:53 PM EST
[ Parent ]
No.
by IM on Fri Jul 24th, 2015 at 04:10:02 PM EST
[ Parent ]
The man said "democratic control".

The Eurogroup is democratic?

I used to be afew. I'm still not many.

by john_evans (john(dot)evans(dot)et(at)gmail(dot)com) on Thu Jul 16th, 2015 at 02:24:50 PM EST
[ Parent ]
Wlected governments taking over from unelected bureaucrats. That would end central bank independence or not?
by IM on Thu Jul 16th, 2015 at 02:30:04 PM EST
[ Parent ]
What it would end is central bank unaccountability.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Jul 16th, 2015 at 02:33:03 PM EST
[ Parent ]
I did not argue about that. I asked that if a independent central bank is a bad idea and the independence should be abolished, wouldn't eurogroup control - like say at the ESM - achieve that?
by IM on Thu Jul 16th, 2015 at 02:36:01 PM EST
[ Parent ]
I want also discus the Eurogroup at some point. And why it is undemocratic. But indeed this is quite complicated. On purely formal level the Eurogroup is democratic. Just a year ago I also would have been inclined to leave it there. But the shocking events of the last few month have made me reevaluate my point of view.
by rz on Thu Jul 16th, 2015 at 02:39:26 PM EST
[ Parent ]
Then at least it would be explicitly political rather than faux apolitical.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Jul 16th, 2015 at 04:34:34 PM EST
[ Parent ]
Independent central Banks are all the rage toady.

Fine typo. I approve. :)

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Jul 17th, 2015 at 03:36:38 PM EST


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