The slow motion train crash of the Eurozone monetary alchemy

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Dusan Sidjanski Centre of Excellence in European Studies, Global Studies Institute, University of Geneva, Sciences II, 30 Quai Ernest-Ansermet, 1211 Geneva 4, Switzerland

The slow motion train crash of the Eurozone monetary alchemy

M.N. Jovanovic



Annotatіon

This article is about the potentially losing battle to save the Eurozone in the long term. The Eurozone, the greatest achievement of the European Union, is losing its glamor and is in danger of losing its appeal as the promise of perpetual prosperity for every participant faded away. The Eurozone architecture was created on the grounds that is almost designed to fail. Various policies such as quantitative easing did not help boost economic growth as the best remedy for economic troubles. Profound federalist-type reforms are necessary if the Eurozone is to have a longer-term future. Policymakers have at least two urgent tasks to save the Eurozone. The first is to relax budgetary rules and to change the mandate of the European Central Bank to add growth and employment to the low inflation policy objective. The second is to introduce belatedly federal instruments such as a common budget, automatic stabilizers (transfers), fiscal and banking unions, a system for orderly default, common bonds, and a disputesettlement mechanism. This is a tall order that faces strong political barriers. The dissolution of the Eurozone would not be the end of the world, and the European Union would return to where it was in 1992. Preparations for the post-Eurozone Europe are necessary.

Keywords: eurozone, monetary integration, optimum currency area, quantitative easing, Cantillon effect, Troika, gold, breakup.



Аннотация

Медленное крушение монетарной алхимии еврозоны

М. Н. Йованович

Центр передового Европейского опыта Душана Сиджана и школа Бизнеса Нови Сада,

Институт глобальных исследований, Университет Женевы,

Швейцария, 1211, Женева 4, наб. Эрнест-Ансерме, 30

Статья посвящена рассмотрению проблем, касающихся заведомо проигрышной войны за спасение еврозоны в долгосрочной перспективе. Еврозона, главное достижение Европейского союза, теряет свой лоск и рискует утратить привлекательность в силу того, что для каждого участника перестает быть гарантией вечного процветания. Архитектура еврозоны построена на фундаменте, который готов рухнуть.

Различные мероприятия, такие как количественное смягчение, не смогли ускорить экономический рост, что спасло бы от экономических проблем.

Для долгосрочного будущего еврозоны необходимы глубокие реформы федерального типа.

Перед политиками стоят как минимум две задачи по ее сохранению: во-первых, смягчить бюджетную политику и изменить мандат Европейского центрального банка, чтобы добиться экономического роста и повышения занятости и снизить инфляцию; во-вторых, ввести запоздалые федеральные инструменты, такие как автоматические стабилизаторы (трансферы), налоговые и банковские объединения, систему управления дефолтом, простые облигации и механизмы урегулирования споров. Это серьезная цель, достижению которой мешают политические барьеры. В случае распада еврозоны конец света не наступит -- Евросоюз вернется на этап развития 1992 г. Необходимо подготовить Европу к периоду постеврозоны.

Ключевые слова: еврозона, денежная интеграция, оптимальная валютная зона, количественное смягчение, эффект Кантильона, Тройка, золото, распад.



They are blind leaders of the blind. And if the blind leads the blind, both will fall into a ditch. (Matthew 15:14) eurozone budget economic default

Introduction

Monetary unions were often, but not always, created as a part of the process of political unification among countries. Economic reasons for monetary unions include enhanced monetary stability, improved spatial and industrial allocation of resources, boosted competition because of transparent prices, deepened integration, reduced transaction costs, access to wider markets, gains from economies of scale and from trade, as well as gains that come from harmonisation of policies. Non-economic reasons such as geographical proximity, common language, culture, history and religion sometimes contributed to monetary unification. The break-ups of monetary unions are often found in political factors. Once the political unity among the participating countries dissolves, it is most likely that the monetary union will vanish [Bordo, Jonung, 1999, pp. 24-25]. Hence, the political will and the firm promise and determination to respect fully a common currency system explains the rise and fall of monetary unions. Interestingly enough, the Irish 1979 break with sterling had no noted effect on trade between Britain and Ireland.

Monetary integration in the European Union (EU), the eurozone, has been expanding its membership which shows its attractiveness, even success. However, the credibility of the eurozone is based on a promise -- a credible fiat money promise for the time being -- to pay. But it is still an international promise which needs to be tested over time and, especially, during lean times and crises. History is full of such promises that were not honoured. There were 69 currency break ups during the 20th century. In Europe, for example, the Latin Monetary Union (1865-1927) included Belgium, France, Italy and Switzerland (Greece joined in 1868), while Denmark, Sweden and later Norway belonged to the Scandinavian Monetary Union (1873-1914). Apart from insufficient economic convergence among the economies of the involved countries, high and diverging rates of inflation, the domino effect in banking crises and a lack of political union that could enforce policies were always among the principal causes for their demise. The same holds for the Austro-Hungarian, Czechoslovakian, Soviet and Yugoslav economic unions towards the end of their existence [Jovanovic, 2015].

The real problem for governments is related to the issue of how to honour international promises and, at the same time, please domestic voters, if they matter. As long as governments are sovereign (no political union), the eurozone will have the potential to break up (the risk of a break-up is not zero). Monetary unions in Europe have a limited shelf life; break ups have always been a risky idea. In any case departure, from monetary unions has been common and a familiar eventuality in Europe over the past two centuries. There was always an initial “shock” for a country after departure, but ultimately the initially negative effects were usually rather temporary.

Various economic models (and tainted results), may provide politicians with various grounds for all kinds of manipulations. The British departure from the EU, the Brexit, is an obvious example. One needs to recall that “essentially, all models are wrong, but some are useful” [Box, Draper, 1987, p. 424]. In addition, empirical credibility of economics `is likely to be modest or even low' [Ioannidis, Doucouliagos, 2013, p. 997]. However, even though predictions are notoriously difficult in economics and linked with many unknowns and uncertainties, there are matters that the economists know, but to a more limited way than the textbooks might make one think. We know that the droughts (if there is no reliable and efficient irrigation) often lead to crop failures. This increases prices of crops and often to increases in the incomes of those who are lucky enough to have a crop to harvest (because the market demand is inelastic). We also know that major monetary expansions to cover government budget deficits lead to inflations and, if persisted in, to hyperinflations. We know that if an economy is depressed that austerity measures lead to more unemployment, even slower growth and more pain and suffering to the people.

This article is about the potentially losing battle to save the eurozone in the long term. Following this introduction, section 2 briefly reviews theory of monetary integration. Section 3 presents promises and deliveries regarding the eurozone. Section 4 explains how the eurozone troubles happened. Quantitative easing and the Cantillon effect are subjects of sections 5 and 6, respectively. The impact of the banking industry on the policymaking and the unelected institution such as the Troika are considered in sections 7 and 8, respectively. The Greek problem is found in section 9. Responsibilities for the situation and reforms including the eurozone breakup are elaborated in sections 10 and 11, respectively. A search for alternatives such as cryptocurrencies and gold are subject matters of sections 12 and 13, respectively. The article gloomy conclusion about the long-term future of the eurozone is in section 14.

Theory

The modern theory of monetary integration started with considerations of optimum currency areas [Jovanovic, 2015]. The first principal contributors were Mundell, McKinnon and Kenenen. They dealt with the one-criterion monetary integration models. [Mun- dell, 1961] proposed factor mobility as a criterion for monetary integration. For him, a region is the optimum currency area, as people and factors move easily within it. Factor mobility is the criterion that determines a region. Within the currency areas factors are mobile, while between them factors are immobile. Fluctuating rates of exchange are, according to Mundell, the adjustment mechanism between various currency areas, while factor mobility and flexible labour markets (i.e. quicker firing) are the equilibrating mechanism within them.

McKinnon focused attention on the degree of openness of a country [Mckinnon, 1963]. Goods in a country may be distributed between tradables and non-tradables. The ratio between those goods determines the degree of its openness to trade. Normally, the smaller the country, the greater its trade with other countries. A high degree of openness reflects this country's relative (high) specialisation and it may be taken as the criterion for the optimum currency area.

Kenen's contribution stated that countries whose production is diversified (criterion for an optimum currency area) do not have to change their terms of trade with foreign countries as often as the less-diversified countries [Kenen, 1969]. A reduction in foreign demand (an external shock) for a country's major export item may have a relatively smaller impact on the diversified country's employment than on a specialised country's economy and employment. Finally, links between home and foreign demand, as well as export and investment, are weaker in a diversified country than in a specialised one. Large and frequent exchange rate changes are not necessary for a diversified country because of the overlap in the reduction and increase in demand for various export goods. This overlap may keep the proceeds from exports at a relatively stable average level. Kenen suggested that fixed rates of exchange are suitable for diversified countries.

An extension of the three initial contributions to the theory of monetary integration came in the 1970s and beyond. Deepening of integration in the EU stimulated thinking about possible monetary integration. [Werner, 1970], for instance, argued in favour of the coordination of economic policies as a criterion for an economic and monetary union. Uncoordinated economic policies among countries may be a principal reason for the disturbance in the balance of payments. Coordination of economic, in particular monetary, policies from a supranational centre requires political will on the part of the participating countries because it goes to the heart of national sovereignty. A system of safeguards that includes assistance in the form of transfer of funds to countries that are in trouble is an essential feature for the survival of an efficient monetary union.

Another criterion for monetary integration deals with the rate of inflation. [Fleming, 1971] argued that a similar rate of inflation among the potential member countries provides grounds for monetary integration. Diverging ratios of employment to inflation among these countries will cause hardship and lead to disagreements about the necessary policy actions. Countries with a balance-of-payments surplus would be requested to accept a higher rate of inflation compared to the situation when they are free to choose this ratio. Conversely, countries with deficits may be asked to tolerate a higher rate of unemployment than they would be willing to accept if they were free to choose it on their own. Alternatively, the well-off countries would be asked to transfer funds to the ones that are in economic trouble.

Other definitions of an optimum currency area include the following. Machlup said that an optimum currency area was a region in which no part insists on creating money and having a monetary policy of its own [Machlup, 1979, p. 71]. A monetary union that imposes minimum costs on the participating countries may be called an optimum currency area [Robson, 1983, p. 143]. An optimum currency area may be alternatively defined as an area in which the net benefits of integration (e.g. increase in welfare in the form of greater stability in prices and smaller disturbances coming from abroad) outweigh the costs (restraint to individual uses of monetary and fiscal policies) [Grubel, 1984, p. 39]. That is, “the last recruit conferred more benefits than costs on existing members, but the next one will do the reverse” [Maloney, Macmillen, 1999, p. 572].

Monetary integration continued to be considered from the vantage points of costs and benefits [Jovanovic, 2015]. Costs of monetary integration for the participating countries include:

• loss of national sovereignty in the conduct of monetary policy: money supply, rate of interest and rate of exchange;

• loss in the choice between unemployment and inflation;

• capital would flow to the already prosperous countries or regions.

• loss of seigniorage;

• costs from switching to a new currency.

Potential benefits of monetary integration are numerous, but generally intuitive in their nature. They are barely quantifiable and non-economists have difficulty in comprehending their character and significance. The principal gains from monetary integration are the following:

• improvement in integration of markets for goods, services and factors;

• prices are transparent and directly comparable. This boosts competition and specialisation in tradable goods and services. Spatial and industrial location of resources is improved;

• with stable prices, interest and exchange rates, internal trade and investment flows are not volatile, as there is no exchange rate risk and uncertainty;

• hedging and transaction costs are significantly reduced;

• by unifying monetary and coordinating fiscal policies, the participating countries are led to fewer distortions while combating macroeconomic disequilibria. This introduces both a greater internal monetary stability and an increase in influence in international monetary affairs. This contributes to economic growth and dynamic gains;

• the pooling of national reserves of foreign currencies is also advantageous for the members of a monetary union. By internalising their “foreign” trade, these countries reduce their demand for foreign currency reserves. Such reserves may not be necessary for trade within the group, but they may still be needed for trade with third countries. Savings in funds can be invested in alternative and more productive uses.

The net effect of monetary integration may not be easily and directly quantified. The `new theory' of monetary integration suggests that there are somewhat fewer costs (loss of autonomy to handle domestic macroeconomic policies) and somewhat more benefits (gains in credibility in the fight against inflation) associated with monetary integration [Tavlas, 1993, p. 682]. Dissimilarities in economic structure increase the cost of participation in a monetary union for countries. Hence countries such as Britain (with a rather flexible labour market and domestic production of crude oil) may be advised to stay out of such an arrangement, while countries such as France and Germany may fare much better in it [Dellas, Tavlas, 2005].

To sum up, a monetary union introduces significant losses into the constitutional autonomy of participating states, but real autonomy to conduct independent monetary policy for a small open country in the situation of convertibility, synchronised economic cycles and openness for trade and capital flows will remain almost intact.

Eurozone: Promises and Deliveries

Monetary integration is the area where real and deep integration is tested. The eurozone, with the euro as the common currency, is the crown jewel in the European integration project. Even though the euro is the greatest of the EU's successes (together with EU enlargements), it also represents its weakest link which is instead of integrating eurozone countries creating not only economic divisions, but also political rifts.

Following the reunification of Germany in 1990, France wanted to lock the “robust” Germany into the European project for a long time to come. This was done through monetary integration. Starting in 1999, the process was technically based on a political compromise (Maastricht Treaty), rather than on initially sound economic basis. In essence, the arbitrarily set Maastricht criteria for the eurozone participation were for each country: annual deficit 3 % of the GDP and 60 % debt-to-GDP ratio.

The eurozone started out among 11 EU member states in 1999. The euro as the eurozone fiber-currency started circulation in 2002. It was the most ambitious project in Europe since the Bolshevik Revolution (1917). No currency has circulated in Europe so widely since the Roman Empire. The introduction of the euro in January 1999 was the biggest currency innovation since the introduction of the United States (US) dollar in 1792. In general, the conditions set for the eurozone in Maastricht were a political decision/ compromise with little regard for the suggestions/conditions that came from economic theory. Not only economic theory, but also rich experience suggests that for a successful and long-lasting monetary integration the group needs to have from the start at least:

• automatic stabilisers (including fiscal transfers);

• common federal-type budget;

• fiscal and banking unions (including deposit insurance);

• system for orderly default on public debt;

• dispute resolution mechanism, especially to manage insolvent countries, and

• a political union.

Unfortunately, politicians that created the eurozone defied those principles.

There were advance warnings being voiced about a possible train crash in the making well before the eurozone came into effect in 1999. As early as 1997 [JovanoviC, 1997,

p. 67-68] argued in favour of the postponement of the implementation of the eurozone as the conditions were not yet becoming for such a crucial integration step. At that time, the fiscal and banking union requisitioned for a single currency area were not in place. They still aren't. The same holds for automatic stabilisers. Harbouring doubts about the premature adoption of the euro, 155 university professors of economics from Germany signed a declaration in 1998 for an orderly postponement of the implementation of the eurozone. The reasons pertained to the unsuitable economic conditions in Europe. It is hard

for two economists to agree on anything; having a choir of 155 of them chanting with one voice is an extraordinary occurrence.

When the eurozone was created and the cherished German mark abandoned, the explicit and implicit promise made by the EU elite to the Germans and others in the eurozone was that the euro, a new uber-currency, would:

• be a “glorified version” of the German mark;

• bring perpetual growth and prosperity to everyone, hence solidarity among the participating countries would be enhanced;

• be stable;

• that financially thrifty countries would not have to bail out prodigal ones; and

• that German taxpayers would not foot the bill for all of the above.

Were those promises honoured and delivered? Apart from stability of the euro on the international money market, there was nothing else that all users of the euro in the eurozone enjoyed. Many would trade that stability for economic growth. What the people have seen and experienced in the eurozone are as follows:

• the banking fiasco (2008);

• the eurozone mess (2011);

• zero or anaemic real growth;

• austerity (as devaluation is not possible);

• debt;

• tensions within the EU;

• uncertainty;

• high unemployment (especially among the young);

• rising poverty;

• gap between rich and poor EU countries that remains large;

• disenfranchised citizens (democracy suffered);

• public protests;

• decline in public investments;

• weak banks (especially in the south);

• deterioration in public services;

• economic pain.

After the 20-years long operation of the euro, the eurozone achievements are more controversial than ever. This asks for serious analysis and investigations as a controversial study by [Gasparotti, Kullas, 2019, pp. 4-5] found out that:

“In 2017, out of the examined eurozone countries, only Germany and the Netherlands gained from the euro. In Germany, GDP went up by €280 billion and per-capita GDP by €3,390. Italy lost out most. Without the euro, Italian GDP would have been higher by €530 billion, which corresponds to €8,756 per capita. In France, too, the euro has led to significant losses of prosperity of €374 billion overall, which corresponds to €5,570 per capita. In Italy, therefore, the introduction of the euro led to a drop in prosperity of around €74,000 per capita or €4.3 trillion for the economy as a whole, over the period 1999 to 2017. For France, the loss amounts to almost €56,000 per capita or €3.6 trillion respectively. Germany achieved an increase in prosperity of €23,000 per capita and €1.9 trillion respectively”.

This is not the development that was promised by the EU elite to the population before the introduction of the euro. Therefore, the resentment by the population against the EU elite should not come as a surprise.

How did it Happen?

The great initial success of the eurozone during the years 2000-2007. Eurozone membership reduced risk related to government bonds between different countries, so there was almost no difference between the strong EU core and the comparatively weak EU periphery. They all converged to the low-risk German level. The peripheral countries had unprecedented access to cheap loans. They (and others) were exposed to the “perpetual cheap money illusion”. Debt-financed consumption had little in common with national economic fundamentals and growth. The assumption made by investors was that the Greek, Italian or other government bonds were almost perfect substitutes for the low-risk German ones. The crises revealed that this was not the case.

During the “happy hours” (2000-2007) the EU countries which had a history of monetary indiscipline (high inflation and high rates of interest) borrowed a lot at a (low) rate that was not warranted by their respective national economic fundamentals. Those governments, their private sectors and households borrowed cheaply and excessively. The inevitable happened: over-borrowing and excessive optimism about the eurozone (super optimistic promises about the eurozone were oversold) were not matched with the economic realities of repaying loans. Collected taxes and earned wages were insufficient to repay loans. Rates of interest accelerated to almost 30 % in Greece. That is the rate at which a country that does not control own low-inflation money cannot operate. Countries entered into deep recession without the possibility to exit for a decade, two or three or more. Commenting on the eurozone troubles, [Mody, 2018, p. 459] stated:

“The inevitable adversity that would test the eurozone came as the global financial crisis in 2007 and then continued as multiple rolling eurozone banking and sovereign debt crises through to 2013. During these years, the euro caused the most damage in the weakest eurozone countries, widening existing income disparities between member nations. Without their own currencies to devalue, the southern countries struggled to recover from the repeated economic shocks. The crises left even France hobbled with high debt and youth unemployment problems familiar to the southern group of countries. In contrast, the strongest survived the best. The German economy came out virtually unscathed”.

This created sharp tensions between the southern eurozone countries and Germany. Is debt good or bad? The reply to the question on whether it is smart to buy something now for which one does not have cash, depends on circumstances, i.e. for what purpose one uses debt. If one wants to get a better job, then debt for training or education may be smart. However, if in a similar situation one prefers to take a loan to pay for a travel to Monaco to see the Formula 1 race or to go on a cruise in the Caribbean, well such a choice may not probably be the best pick. The same logic applies to the governments, especially for the countries in a precarious situation. Debt for infrastructure development or education of the population that may contribute to economic growth in the future might be superior to the same investments in an amusement or a gambling facility or bailout of failed banks that have no recovery chances. Government debt to fight the existential threats such as the Nazis or similar menace may be justified. Still, to go into public debt to bribe the population or to buy social peace (increase private consumption) is rather problematic.

The economies of countries in the eurozone periphery were poorly prepared to cope with such a flood of cheap loans in the “foreign” currency that they do not control. Irresponsible borrowing had a full counterpart in reckless lending across Europe. After 2007 the financial market reacted to the alteration in the perception of the national risk (the origin of the crises was not a speculative attack on the euro). National bond yields were returning towards their historical averages. The Roman god Bacchus may as well join the Greek god Dionysus and close shop and turn out the lights for a while. The party's over.

Big players such as Germany and France have also often broken and ignored eurozone rules. France, for instance, has been breaking the eurozone deficit rules (maximum 3 % of the GDP) on yearly basis since 2008 without sanctions. The pressure for an increased public expenditure from to the gilets jaunes (yellow vests) protesters will have the same effect on the budgetary situation in the near future. This is how the eurozone rules are “applied” on big players. Another set of application of eurozone rules applies to other countries. For instance, in October 2018

“Italy's coalition government, comprising the far-right Lega and the populist Five Star Movement (MS5), presented a draft budget that included many of the parties' electoral pledges, such as a basic income for the unemployed and the shelving of a previous proposal to raise the retirement age. The budget would have increased Italy's deficit to 2.4 % of GDP, higher than that planned by the previous administration, but lower than the EU limit of 3 %. Nevertheless, in an unprecedented move, the European commission rejected the budget for breaking its fiscal rules. Rome's growth forecast, it insisted, is overoptimistic and the real deficit-to-GDP ratio would exceed 3 %. Italy was threatened with sanctions. Last week, the government in Rome caved in, drafting a new, more austere budget”.

The French President, Emmanuel Macron, an exponent of the financial industry, tried reforms and cut taxes that benefited corporations and the rich. To make up for the fall in public revenue, he increased taxes on fuel and tobacco. That was the last straw that initiated the yellow vest protest in France, first in the rural areas, then throughout the country in 2018 and beyond. The budget deficit would rise to over 3.2 % in 2019. This does not worry France as this country never paid real attention to this rule enshrined in the Stability and Growth Pact. This rule is for others in the eurozone, not for France.

The differential treatment of EU countries is evident. Hence, one should not be surprised that general public support for the EU is vividly abating. This is a fertile soil for extremists and anti-EU forces. For example,

“the EU is an irreformable instrument for impoverishing the continental periphery and the working people of each country to the benefit of a predatory class whose wealth increases with every one of capitalism's succeeding crises”.

Free markets in the EU exist only for the poor and weak. Big corporations (banks included) often privatised governments and socialised their own business failures. The big and rich are protected (socialism) and subsidised with enormous amounts of taxpayers' money. The Royal Bank of Scotland, for instance, got an injection of up to €111 bln of public money in 2009. These are pure Marxist principles, but in reverse.

The banks and banks-prone government “elite” share an array of goals, ideas and dreams. This is a politically toxic mixture found within the same group of people that favours big business to the detriment of democracy, taxpayers and consumers. Democracy means the rule of the people and their elected representatives, not rule by the bankers and other special interests. If something goes wrong in the economy, as happened during 2008 (and beyond), the elite does not pay the price, but rather the taxed general public, which loses jobs, salaries, careers, savings, pensions, student grants, health care benefits, homes and hope. The deep crisis was “engineered” by the bankers' financial alchemy. Still, the bankrupt bankers were able to extract subsidies (hundreds of billions of dollars and euros) and continued to distribute bonuses! The general interest of the society was overridden by specific and concentrated interests by the bankers. If one wants to have and keep a market economy (and capitalism), one must accept bankruptcies. Otherwise it would be like promoting Christianity without heaven and hell. If there are no bankruptcies, and if private risk and failures are socialised, you have state socialism -- socialism for the already rich while “free markets” are for the others (usually weak and poor).

The eurozone was the French idea. It was “imposed” on Germany after the German reunification. France also wanted to reduce the economic gap between the two countries. However, one of the most worrying matters for France (and the eurozone) is the ever widening gap in industrial production with Germany. This may be the background for other economic cracks between these two countries. Instead of narrowing as intended, the gap is accentuated. Even though Britain has been outside the eurozone, when compared its index of industrial production with Germany, it performed much better than was the case with France and Italy in the post-2008 crisis period. Staying outside the eurozone may assist better the industrial production than being a part of it.

So far the eurozone works well only for Germany and, perhaps for the Netherlands, hence it would be a difficult job to convince Germany to change something of crucial importance in the euro system. Therefore, Germany would fight tooth and nail to preserve it. To be tough on France as the German chancellor Angela Merkel was on Greece is a nonstarter. In the EU all countries are equal, but some are more equal than others. France cannot be treated as small countries such as Greece, Ireland, Austria or Hungary are. France needs Germany in the eurozone to keep it enshrined in the EU (not to do something on its own). However, Germany is changing. Economic might, problems with immigration of Muslims and the appearance of the Alternative for Germany on the political scene from thin air would modify the German perception of the EU, alliances and the euro.

Quantitative Easing or “Money for Nothing”

One response to the eurozone crises, introduced by the influential banking cast, was the application of `quantitative easing' (QE), i. e. purchase of predominantly government bonds by the European Central Bank (ECB). The intention was to flood the financial institutions with cheap capital in order to stimulate lending, increase liquidity and promote economic activity. The idea behind QE and extremely low interest rates was to “force” investors to invest in other more profitable ventures. It is suggested that the pumping of “free” money (“cash for trash”) into the economy would increase real estate prices and create the “wealth effect”. Those that had real estate, i.e. baby boomers (born between 1945 and 1965) experienced an enormous increase in the value of their property. There was also a cost, especially political. The millennials (born between 1981 and 1996) were priced out from property. The old (insiders) became subsidised and comfortable, while the young (outsiders) were “punished”. When real estate and other asset prices increase faster than wages, wage earners fall behind in wealth and social influence. The standard social contract that economic prosperity benefits everyone falls apart. Division in the society became stark both in Europe and in the US. This damaging QE side-effect contributed to popular protests and the rise of large-scale populism which was not countered effectively by the elite:

“Telling the people that they shall not be populist confirms the populist charge of arrogant elites disconnected from the anxieties and aspirations of Main Street” [Schmidt, 2019, p. 55].

Cantillon described the wealth effect as early as in 1755 (p. 39). Investors would feel richer because of the increased value of their real estate and invest more in the economy and, therefore, boost it. Experience has proven that this idea is nonsense. When safe investment assets have very low rates of interest, this gives a signal that there is no recovery on the horizon. Why, then, invest? The eurozone countries need to cure their chronic disease: weak spending and low consumption. The deflationary bias needs to be cured by flexible public spending rules (over an economic cycle). Private and public expenditure is necessary, but the eurozone rules prevent that (a cap on budget deficits). QE created price distortions. Fine art and real estate prices especially in top locations (London or Monaco) went through the roof.

Mario Draghi, the ECB President, said in 2012 that “policy makers will do whatever is needed to preserve the euro”. Translated into plain language, this means that this bank will, among other things, buy bonds of troubled (bankrupt) eurozone countries in unlimited quantities. Hence, this is equal to an endless printing of banknotes to finance governments.

The QE strategy (“money for nothing”) of the ECB was active in the period March 2015--December 2018 according to the following monthly schedule:

• €60 bln from March 2015 until March 2016;

• €80 bln from April 2016 until March 2017;

• €60 bln from April 2017 to December 2017;

• €30 bln from January 2018 to September 2018;

• €15 bln from October 2018 to December 2018.

During the 1371 days of the QE the ECB pumped in the eurozone economy €2.600 bln (€7,614 per eurozone person). This is on average €1.896.425.966 per day. The hope was to create extra demand, to accelerate inflation, reduce the value of the euro (to increase exports) and to boost business confidence and economic growth. What was the result of this policy?

The ECB, headed by Draghi (a former Goldman Sachs fellow), pumped in the eurozone's financial system up to €80 bln a month (the EU's annual budget is about €130 bln). When QE was introduced, the expectation was that it would last only two years. The intention was to give a boost to consumption which would revive anaemic economic activity. That revival did not happen. Why? The bankers and the wealthy used that money to buy US government bonds (higher rate of interest) and invested in real estate in tax havens such as Monaco where they do not pay taxes. Money did not go to debtors, but to creditors; money did not go to workers through wages or welfare, to the people that would spend that money, that would buy goods, services and pay bills which would revive the economy. Instead of creating inflation, QE created deflation. Money stayed with the wealthy, i.e. banks which mostly kept it within its circle.

There will be no improvement in the eurozone as long as QE or other forms of money creation are directed towards speculative activity. Money needs to be directed towards production. The post-Global Financial Crisis economy has temporarily been fixed, but the trust in the system has not been restored. Nonetheless, if the real growth does not return to the eurozone or if the situation in the economy worsens, there are hints from Draghi that QE would be restated. What does this mean? It means that the banks would be able to continue to get money for “free” and then “lend” it to the population via credit cards at predatory rates of interest. The QE Ponzi scheme will burst like all of them do.

The QE money remained in the banking industry which benefited most from the QE “honey spoon”. Rather than giving away trillions of euros to the banks (through QE) which do not invest further, a “helicopter drop” of money from the ECB to each citizen in the eurozone -- say €1000 or even five or ten times as much, in a few instalments -- may be a superior economic policy choice. Citizens would spend those funds and this would contribute to inflation, production, employment and growth. Alternatively, governments may take that “helicopter money” and increase public expenditure that would stimulate the expenditure in the private sector. QE was from bankers for the bankers (bailout), not for the people.

Greece was excluded from the ECB's QE because “Greek government bonds did not meet the quality criteria required by the ECB in the framework of its QE programme”. Greece `misbehaved' in the past, but the country was implementing draconian measures, hence this `punishment' by the ECB should have ceased, but it did not.

The Cantillon Effect and the “Honey Spoon”

Richard Cantillon (1680-1734) an Irish-French-Dutch-English economist and a banker was one of the early writers about economics and banking. In his 1755 Essai sur la Nature du Commerce en Gйnйral (Essay on the Nature of Trade in General) (written in about 1730) he left a powerful and lasting message:

“It is a common idea, received of all those who have written on trade, that the increased quantity of currency in a state brings down the price of interest there, because when money is plentiful it is more easy to find some to borrow. This idea is not always true or accurate (p. 50). Then the King augments anew the coinage, settles the new ecu or ounce of silver of the new issue at 5 livres, begins with this new coinage to pay the troops and the pensions. The old coinage is demonetised and received at the Mint at a lower nominal value. The King profits by the difference (p. 67). But all the sums of new coinage which come from the Mint do not restore the abundance of money in circulation. The amounts kept hoarded by individuals and those sent abroad greatly exceed the nominal increase on the coinage which comes from the Mint (p. 68)”.

This is to say that the first receiver of the new money profits most, i. e. more than the following ones. In the eurozone case, this is the banking industry which invests to an extent outside the eurozone and which often buys the US and other government bonds because of yields.

The Cantillon effect explains the uneven spread of the newly printed amount of money. The monetary expansion by a central bank does not spread evenly throughout an economy. The Austrian economist Friedrich August von Hayek compared this monetary expansion with a spoon of honey in a cup of tea. Honey sticks to the spoon well before it melts in hot water. The closer one is to the new money pumped into an economy, the higher the benefit.

One of the first lessons that students of economics learn during their 101 course is that artificially low prices of money stimulate bad investments, there is no interest-rate market filter that permits only potentially profitable investments. To addict the economy, especially banks, to a strong economic drug such as QE (financial crack cocaine) and then withdrawing it may create a serious problem.

The problem was not that there was a flow of capital towards the eurozone periphery. The problem was that it ended up in the property bubble (real-estate gamble) first, and then in the commodity price gamble. Who is to blame? The culprits are obvious: defective banks, the snowballing herd-like behaviour of investors, as well as imprudent governments. Not the euro. Countries such as the US, Britain, Iceland and other non-eurozone countries (Hungary) had property bubbles too. Being in the low-interest-rate eurozone only provided the possibility for the Irish and Spanish to get cheap loans to invigorate the property boom. Low-cost financing gave imprudent entrepreneurs the opportunity to undertake too many projects at the same time. Capital was misallocated and wasted in certain projects (too many houses and apartments remain empty and cheap). In the case of Spain, the migration of (affluent) foreigners such as retired into those cheap properties may be better than the emigration of Spaniards elsewhere.

The choice for the public authorities is the following. What is worse for the country: a failure of a big bank or a company or an economy with a burden of debt to help failed banks and companies (which prevents or slows down new and promising businesses)?

Regarding public assistance to bad and failed banks, Sir Walter Bagehot (1873, IV. 4) left economists and policy makers with an instructive advice. Its value is strong and lasting, but the contemporary policy makers ignored this important lesson, just as they did with Cantillons, to the detriment of taxpayers, gifted entrepreneurs and the promising future of the economy:

“If the banks are bad, they will certainly continue bad and will probably become worse if the Government sustains and encourages them. The cardinal maxim is, that any aid to a present bad Bank is the surest mode of preventing the establishment of a future good Bank”.

This means that evolutionary business selection (bankruptcies included) should take place in a market economy. During the Global Financial Crisis (2008) governments turned back at the market forces and the capitalist organisation of the society. They bailed out banks instead letting them go bust as free markets would demand. Capitalism is for private gains, but loses are socialised. This gave some support to Schumpeter's prediction that capitalism would be replaced by some sort of socialism.

How mighty big banks are and how they appropriate the legal and democratic process can be seen in the case of Eric Holder, the US Attorney General:

“When the Attorney General of the United States admits some banks are simply too big to prosecute, it might be time to admit we have a problem -- and that goes for both financial and justice systems...Some observers have defended the Justice Department, suggesting that prosecuting law-breaking banks would amount to a death penalty that upset the financial system and trigger recession -- although nobody really knows if it would do any such thing. But not prosecuting law-breaking banks, and confessing to its terror of prosecuting those banks, the Justice Department has waved a big checkered flag to the biggest banks to go ahead and break all of the laws they want”.

The social contract in a market economy is that if you take certain risk and invest, you harvest rewards, but you also have to accept failure if things go wrong. What happened to big banks was that they took risk, excessive risk, sometimes failed in their business and instead of throwing bad apples from the basket, such banks were bailed out by the government, i.e. taxpayers that were not asked anything about such important and expensive actions. Are we living in a post democratic or a post law society? Are the banks holy cows of the modern economy and politics? When faced with the Global Financial Crises (2008), unlike the US which bailed out banks and letting the offenders scot free, Iceland paid off consumers' loans, forgave homeowners' debt and put the offenders in prison. Iceland started from a clean sheet of paper and bounced back.

Continued and growing distrust by the population of the patrician elite that is indifferent to the troubles of the compatriots has mobilised the underclass and an ocean of losers. This is taking place not only within nations, but also between them. The elite sticks to its vanity project (the eurozone), now it becomes obvious, at all costs. The elite continues to live in a capsule and is incapable of understanding what the popular fuss is all about. This obstructs the positive reaction to the popular revolt and might lead to discords and conflicts. The social contract is on the verge of falling apart. Common vision of the future and an enemy (presumably foreign) was the tissue that connected various actors. Now, these have gone. Is the nemesis now the framework in which the EU is bound to live? Britain is leaving the EU, while Switzerland was under EU pressure and had own Brexit-style EU pressure for 30 years and survived outside the EU rather well.

Economic recovery rests on new investments in low-carbon energy, infrastructure, sensors, new and better skills of labour, not on continued austerity and propping up banks that make preposterous loans. As long as politicians go cap in hand to powerful vested interests that finance their election campaigns, a new and sound growth-friendly push in the economy will not be forthcoming. Backlash from the voters is unavoidable.

How to avoid the repeat of such a financial disaster (Global Financial Crisis)? Well, make the system smaller. However,

“in global finance today, the opposite is happening. The financial ski patrol of central bankers is shovelling more snow onto the mountain. The financial system is now larger and more concentrated than immediately prior to the beginning of the market collapse in 2007. ... the next collapse will not be stopped by governments, because it will be larger than governments. The five- meter seawall will face the ten-meter tsunami and the wall will fall” [Rickards, 2012, pp. 211-212].

In addition, public finances are and will remain fragile because of debt and feeble growth of the economy.

“Stuff happens”, but does not happen rarely. Hence, the bell curve distribution of events needs to be flattened in reality. “Black swans” may not be all that rare, for instance, in capital market and elsewhere. What matters is not necessarily the “black swan”, but rather the response to it. Rickards suggested:

“Societies that are not overtaxed or overburdened can respond vigorously to a crisis and rebuild after disaster, while those that are overtaxed and overburdened may simply give up. When the barbarians finally overran the Roman Empire, they did not encounter resistance from the farmers; instead they were met with open arms. The farmers had suffered for centuries from Roman policies of debased currency and heavy taxation with little in return, so to their minds the barbarians could not possibly be worse than Rome. In fact, because the barbarians were operating at a considerably less complex level than the Roman Empire, they were able to offer farmers basic protections at a very low cost” [Rickards, 2012, p. 222].

Current and future policymakers need to keep this experience in mind.

Revolving Door and Goldman Sachs

Mega investment banks such as Goldman Sachs have strong and spread global political power. Goldman Sachs dispatches its people to the top level of governments worldwide and offers them lucrative jobs once they leave their public posts (revolving-door turnover of politicians):

“This is The Goldman Sachs Project. Put simply, it is to hug governments close. Every business wants to advance its interests with the regulators that can stymie them and the politicians who can give them a tax break, but this is no mere lobbying effort. Goldman is there to provide advice for governments and to provide financing, to send its people into public service and to dangle lucrative jobs in front of people coming out of government. The Project is to create such a deep exchange of people and ideas and money that it is impossible to tell the difference between the public interest and the Goldman Sachs interest”.

Former Goldman Sachs bankers such as Mario Monti and Lucas Papademos were appointed (not elected) as prime ministers of Italy and Greece, respectively. Another former Goldman Sachs banker, Mario Draghi, was appointed chairman of the ECB. Interestingly, these appointments of Gloldman Sachs bankers (old boys' club) all took place in November 2011. Hence, instead of elected politicians, Goldman Sachs bankers were taking charge. Taxpayers and 99 % of the population should not expect good news for quite some time to come.

Article 245 of the Treaty on the Functioning of the European Union states that the members of the European Commission `shall give a solemn undertaking that, both during and after their term in office, they will respect the obligations arising therefrom and in particular their duty to behave with integrity and discretion as regards the acceptance, after they ceased to hold office, of certain appointments and benefits' Senior public officials have a responsibility not only to be followed by example, but also to set the highest standards of ethical behaviour. This is law and theory. Practice is different.

Eighteen months after his term as the President of the European Commission (twice five years), Jose Manuel Barroso was recruited by Goldman Sachs as an adviser on Brexit in July 2016. This is the investment bank that was deeply involved in the eurozone-related Greek financial alchemy and disaster. Even though Barroso did not break any law, Francois Hollande, the French President, said that Barroso's choice was “morally unacceptable”. Barroso could have chosen any bank, but not Goldman Sachs.