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Home > Blogs > Ian Fraser > ECB becomes Europe’s “feudal overlord”

ECB becomes Europe’s “feudal overlord”

The ECB | European Central Bank becomes Europe’s “feudal overlord” Ian Fraser

Europe faces a terrible future, with the “welfare socialism” that characterized the post-war years being swept away and a possible return to European feudalism, the economists Simon Johnson and Peter Boone have warned.

In  a thoughtful piece published in the Daily Telegraph, Johnson, a former chief economist at the IMF and professor at MIT Sloan, and Boone, principal in Salute Capital Management and research associate at the London School of Economics, argue that the European Central Bank is Europe's new feudal overlord, and that its serfs and vassals are countries and, of course, voters.

In taking on the debts of the weaker eurozone governments, the Frankfurt-based ECB has gained massive new powers, Johnson and Boone say. National sovereignty, and even democracy itself, will be among the victims.

Johnson and Boone argue that the current European sovereign debt crisis is bringing a “sea change in the post-war system of property, power and prosperity across Western Europe, just as [Austrian-born economist] Friedrich von Hayek feared. An overwhelming debt burden will bring down even the proudest people.”

In his “The Road to Serfdom” Hayek warned against the dangers of state control, arguing that collectivist tendencies often lead to tyranny. Johnson and Boone also suggest the ECB-EU approach to tackling the sovereign debt crisis will stultify economic growth in most EU member states for many years, as their debt overhangs are simply so immense.

“The southern and western periphery of the eurozone cannot grow out of their debts under these arrangements and so will stumble from stabilization programme to stabilization programme—as did Latin America in the 1980s. This is bound to lead to hostile politics, social unrest and more economic crises.”

“The old days when all member countries got presents from the eurozone are long gone; now it is all instructions and austere requirements. But enough resources will be provided to keep everything rolling over.

Boone and Johnson believe the ECB-EU measures, including the austerity packages forced on the more profligate EU member states, make zero economic sense. They describe them as “a series of crazed improvisations.”

They abhor European politicians' habit of lashing out at “evil speculators” for damaging the European dream. It would have be more grown up to acknowledge that European Monetary Union, as constructed in the late 1990s, was fatally flawed. Boone and Johnson describe Europe’s crisis as at risk of causing global contagion.

“The whole fiasco is leading to a shift away from risky assets all around the world, and the worldwide cost of such volatility is not small. Debt peonage looms for a range of countries that were recently thought immune to serious fiscal crisis, including the United States and UK.”

Johnson and Boone argue that the €750bn from the recent Greek rescue package ought to be used to fix the problem once and for all. They suggest the key ingredients for a solution include:

  • An orderly restructuring of the periphery countries' debt (Greece, Portugal, and probably Ireland). This should start with a standstill budget.
  • Regulatory forbearance explicitly provided to all European banks, with a backstop of ECB liquidity and a €500bn support programme to provide capital injections—as happened in the United States in 2008-09.
  • The nations not restructured need to be supported via ECB liquidity lines that guarantee the rollover of their government debt.
  • The G20 needs to provide support to prevent chaotic foreign exchange markets, but also accept a further devaluation of the euro. At some point, the G20 will need to intervene to support the euro via central banks.

Even though this comprehensive package of measures would be painful, Boone and Johnson say it is the only realistic solution to this chaos.

Further reading on the European Central Bank (ECB) and dealing with European debt

Tags: economic recovery , EU , European Monetary Union , financial crisis , Greece , sovereign debt
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