Episode 224 – European Union and the Post Pandemic Economy with Dirk Ehnts

Macro N Cheese – Episode 224
European Union and the Post Pandemic Economy with Dirk Ehnts
May 13, 2023

[00:00:00] Dirk Ehnts [Intro/Music]: A lot of people from the middle class have mostly the house, and that’s almost all of their wealths. So increasing interest rates is a very regressive policy, and it gives money to those people of holding government bonds, which is definitely not the lower 90% of people.

Price stability and full employment together are possible. That’s what the past tells us. And the way we did it is we set up our institutions not in order to target deficit limits or debt limits or stuff like this. Instead, we used our monetary systems to help everybody to have a nice life.

[00:01:35] Geoff Ginter [Intro/Music]: Now, let’s see if we can avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.

[00:01:43] Steve Grumbine: All right. This is Steve Grumbine with Macro N Cheese, not Steve. I dropped the Steve Grumbine. What in the heck am I doing breaking out the old school surname. Anyway, I am with guest Dirk Ehnts and Dirk Ehnts is an economist from Berlin, Germany. He has published books and articles about MMT with a focus on Europe. He is organizing the third European MMT conference in Berlin on September 9th through the 10th, 2023,

and hosts a course on MMT and the Eurozone at the Mastrecht Summer School in early August. And with that, welcome to the show, sir. Thank you for joining me, Dirk.

[00:02:20] Dirk Ehnts: Yeah, thanks for having me.

[00:02:22] Grumbine: We’ve had you on not too terribly long ago, but things have changed and I want to set the stage so everybody understands where my questions are coming from. Previously,

MMTers, the Battle for Europe, Bill Mitchell, Warren Mosler, have spoken about how the European Union and in particular the Eurozone of the Euro adopting countries with the ECB, the European Central Bank, has been used as a neoliberal construct that was going to create austerity and put certain states in massive debt and imposed some harsh restrictions on them because of deficit limits.

But those things have since lifted and from our last talk, we know that the pandemic was a core part to lifting that at least temporarily, and it seems like it worked out quite well. Now here we are in a geopolitical war as well as the Ukraine-Russia conflict, which has created new facets to consider, things to look at with a more focused lens.

And I wanted to have Dirk describe the changes to the Eurozone and the Euro adopting countries and the rules around it, but also the impacts that this proxy war the US is waging through Ukraine and Russia and China on Europe as a whole, because Europe depends very much on Asia and Russia for its fuel needs.

The United States, once again, being the big bully, has a special relationship with Europe. And I want to explore the impacts of that relationship both economically and real resource-wise. Dirk, I hope I didn’t totally butcher that.

[00:04:12] Ehnts: Yeah. Well, I think we should start with the pandemic and what changed in the Eurozone, because I think that’s where things happened that we are now on a different trajectory in the Eurozone compared to a couple of years ago. So austerity policies ruled until 2014 roughly, and then there were quietly abandoned.

So this led, for example, in 2019 to excessive deficits in 10 countries in the Eurozone. Excessive deficit means that the public deficit divided by GDP is more than 3%. It’s an arbitrary rule in the Eurozone that has been imposed on countries, and normally you would have to have lower government spending as a result of breaking your deficit limit.

But in 2019 just a year before the pandemic, out of these 10 countries that had “excessive deficits,” in the language of the European Commission, only one was punished, which was Romania. The other ones were basically let off the hook. So this means that the Eurozone rules are dysfunctional and the politicians and policy makers, they had understood already in 2019 that the rules didn’t work. So yes, we have this fiscal straight jacket, but it wasn’t used anymore, at least not to most of the bigger countries. Maybe some countries like Romania still were feeling the heat from those kind of rules, but that’s only the smaller countries.

So when the pandemic hit in 2020, it was clear that the resulting policy should include an increase in government spending. So if you need money to create more vaccines and to help companies to find vaccines, then you should spend more money. And two things happened. First, European Central Bank said, well, we’ll do a very large asset purchase program.

We call it the Pandemic Emergency Purchase Program, so-called PEPP. And that allowed them to buy up to 750 billion Euros worth of government bonds and other financial assets. This was later expanded in size, and it basically meant to the investors to say, look, when you buy government bonds from Greece in 2020, we will always be there and buy them from you for a good price so that you never have to be afraid that nobody wants to buy Greek government bonds.

So back in 2010, Greek public debt to GDP was roughly 130% and the Greek government ran out of money because it couldn’t sell any more bonds. Once the ECB didn’t want to buy them, private investors didn’t want to buy them, so the Greek government was not able to sell them, and that meant that they could not bring up their account at the Greek Central Bank.

And if that account does not go back to positive at the end of the day, then on the next day the Greek Central Bank, even though it can create euros, but it would not be allowed to create Euros on behalf of the government. So when the Greeks ran out of money in 2010, public debt was at 130%. Now, because of the lockdowns and the resulting loss of tax revenues in 2020, Greek public debt to GDP hit 210% and upwards of that.

So they were truly at Japanese levels. There was no problem though because the investors knew that if they would buy the government bonds from the Greek government now, so in 2020, they could always turn around and sell them to the ECB if somehow people decided that Greek government bonds are not a good idea, and that meant that the Greek government came through the crisis unharmed.

They could also increase their government spending. So government spending went up by about 10%, I would say a little bit more even than 10%. I just checked the numbers earlier today, because I’m doing another research job. So that meant that in Greece, the economy is doing well, yields were also held down so government bond prices did not collapse like in 2010. That was something which was new. So the ECB was now supportive. It’s not exactly new because since Mario Draghi, ECB president from a decade ago, roughly, he once said in 2012, I think it was, that he will save the euro, whatever it takes.

And that was meant to mean that the ECB will start to buy up those government bonds to ensure that those national governments in the Euro zone cannot run out of money, especially not in times of crisis. So that was one big change, and that’s something which I have argued for in my own books, published in German first in 2014.

So Jörg Bibow and I were the first ones to say that the ECB would have to act as a dealer of last result, more or less, and that’s what they did. So you can say in 2020 that the ECB had understood MMT, and they understood now that they have to be supportive. I think already that Draghi understood it, but probably Draghi also understood some MMT himself.

But anyway, that was the one dimension and the other dimension was that you would have to get rid of those deficit limits. So if tech revenues collapse, you will always have big deficits. So public deficit in Spain and Italy and other countries in the Eurozone, their top 10% easily in 2020. And there was a general escape clause in the Stability and Growth Pact.

It was inserted only in 2011 after the global financial crisis. So now they activated this general escape clause, and that meant that the deficit limits were off. And without the deficit limits, the national governments, they could turn to the central banks, which are all creators of currency, creators of Euros, and the central banks say well, as long as you can bring back your account to zero at the end of the day, by selling government bonds, we will always help you to spend.

And with the ECB backing up those government bonds, it was clear that the countries of the Eurozone, even though it was just for a time, but they had full control over their fiscal policy, so they could spend whatever they wanted to spend with the idea that resources are the limit and that inflation might result if you spend on stuff that is not available and you need to pay higher prices.

But yeah, monetary sovereignty was returned temporarily to those Eurozone national governments, and we speak about 2020 to 2023, so it was going on for four years, and the results were pretty good. We now have in the Eurozone the lowest unemployment rate that we ever had, which is still pretty high. I think it’s roughly 6%, six and a bit, but it used to be much more.

So unemployment rate also has fallen compared to 2019. And we didn’t have this big increase in unemployment like you saw in the United States in 2020 because we had a lot of national governments who said to the companies, if you shut down your company for a while, we pay the workers’ wages and we just jump in there fiscally and help you out to stabilize demand, which was a great idea.

So I think the economic reaction of the Eurozone to the pandemic was even better than the reaction of the US government. So that was really a change in paradigm, which was open to everybody. But of course it was clear that this was because of the pandemic, and now that the pandemic is over officially, now the real fight will start. Because it’s true that the European Union has a neoliberal core and it has many policy makers which are thinking in neoliberal terms.

I agree with that. I agree with Bill Mitchell, but I also agree with Heiner Flassbeck, a German economist. Where he said, well, yeah, of course the European Commission is neoliberal, but we could have the European Commission of the left. If the left parties rule in the big countries in the Eurozone, then of course it’s also possible to have a left commission.

But right now France is not left. It’s liberal conservative with Macron. And Italy has these strange neofascists, and Germany has a coalition of the left with the liberal party, so we don’t have this yet. But I would definitely think that if we would have a European Commission dominated by left wing parties, they would be able to change policies if they wanted to.

So it’s a political thing. It’s a bit like in the United States where the Biden administration is thinking about issuing the coin, minting the coin to get around the debt ceiling. A progressive can do that as president, and it’s the same here in Europe. Politicians can somehow get around some of those rules. So the future of Eurozone is relatively wide open, I would argue.

[00:12:46] Grumbine: So with that in mind, we live in a very interconnected world. And yes, we can cordon things off within our nation state or our zone, as it were in Europe, but US has its tentacles all around the world from having a huge military and also the significant influence of the IMF in developing nations. So the dollar is ubiquitously leveraged around the world in various ways.

The US has a huge market. And people do a lot of business with the US, but the US has taken an interest rate policy stance that continuously increases that rate. And I know that Warren Mosler has long advocated for ZIRP, or zero interest rate policy. But now we are advancing interest rate policy – not nearly at the levels, but similar in framework – to the seventies oil shocks when Volcker raised those rates.

What are the impacts the United States monetary policy has on the Eurozone in particular, those Euro adopting countries?

[00:13:56] Ehnts: Well, for us it’s the ECB which makes the calls when it comes to the interest rate. So we have a system where we still have national central banks, but they all have the same interest rates, and the interest rates are set by the ECB. So they have a committee there and they decide on those interest rates. And they decided almost a year ago by now, at some point, that they would have to also raise interest rates to follow the United States.

And I think that the logic behind this was roughly that if the ECB would raise interest rates, then the exchange rate of the Euro would improve. And that meant that everything that we would get from outside of the Eurozone would be cheaper also, including, of course, energy imports. That was the logic. So policy makers or the policy consultants here in Berlin at the German Institute for Economic Research, for example, that was what the argument was.

So they said, we have to raise interest rates because otherwise the dollar will always be more expensive, the Euro will always go down, and then we will import inflation. So the only way to stop importing inflation is to increase interest rates. And then the ECB started to increase interest rates. I think at the beginning, not much happened to the exchange rate, but at some point the exchange rate turned around and I think it was even below one to one from our perspective, from the European perspective.

So briefly, for a dollar you could get more than one euro. Now it’s turned around so that we, for one euro can get more than one US dollar, and I think that the timing was more or less coincidence. If you look at countries like Japan, I think even for Japan, the exchange rate turned around and Japan has left interest rates at zero, if I’m not mistaken, so I don’t think that interest rates are driving exchange rates. It would be way too easy as an explanation, a variable. I think if you could just hedge on currencies going up, if interest rates increase in that country, then you would see lots of people getting rich real quick and that knowledge would spread.

So I think that you cannot easily predict exchange rates by predicting interest rate movements, and that’s just too simple. But that was the logic that the ECB put forward and also the German policy makers put forward, and I didn’t buy into it. So the ECB could have left rates at zero, and they probably would’ve been better off if that would’ve happened. I know that Warren would argue that it’s inflationary if you put interest rates up, so why not? But we don’t want to have more inflation right now. We want to have less. So I agree with Warren that interest rates are part of fiscal spending. So it’s just giving money to people who have money like Warren always says.

But of course, we would also have to consider the real estate market, and I think real estate market loans in the Euro zone have gone down more or less to zero. It’s very close to zero. So construction has more or less stopped, but industry activity has still been growing strongly. So the net effect is that we have roughly zero growth in the European economy.

It’s still a little bit positive. But the increase in industrial activity, even though it’s not that much of an increase, but it’s enough to net out the decrease in the construction sector. But we need more flats and houses in the Eurozone, and it doesn’t help anybody to build less flats and houses right now, which is the result of the increase in interest rates.

[00:17:14] Grumbine: The idea of raising interest rates has been around for a long time as the institutionalized view of how to deal with inflation. But as Warren correctly has stated, the increase in interest rates has really provided an income channel to people that already have money, as you just stated. With that in mind, he also went so far as to say this is probably the most regressive way of keeping an economy afloat, but because of the increased interest payments, that is in fact keeping a lot of these economies out of recession, including the United States.

Talk to me about how that particular paradigm with that interest income channel is impacting the Eurozone.

[00:18:01] Ehnts: Well, I think that the main result is that we have an unemployment rate, which is probably double by now compared to the United States or other countries like Japan. So because we don’t spend enough money, we get lots of unemployment and we also get lots of inequality as well. And now that interest rates are moving up, that means that house prices already have come down.

So that hits the middle class because a lot of people from the middle class have mostly the house, and that’s almost all of their wealths. So increasing interest rates is a very regressive policy. And it gives money to those people of holding government bonds, which is definitely not the lower 90% of people.

[00:18:45] Grumbine: What is inequality like in Europe compared to the United States, though. We have a huge inequality in the United States, but what is it like in Europe?

[00:18:54] Ehnts: Okay. So we are still in this period where we have lots of institutions from the social democratic age, from the golden era of capitalism, if you wanna call it that, like the post-war era. Back in those days, everybody was preparing for the Cold War and because that war would have happened in Germany, mostly everybody cared about the German workers and their wellbeing.

And we had a lot of government policies instituted in the 50s, 60s, to make sure that we have wealth for everybody, which was actually the title of a book by Ludwig Erhard , the Finance Minister and Economy Minister in Germany, who was a conservative politician. But that means still that even today, inequality is probably at the maximum in Germany, historically speaking, but it’s not as visible as in the United States.

So our rich people, they mostly inherited money from the past, so from the other generation, but they keep a low profile. They have their own places, but they don’t brag about their money that much. Also, I think the middle class, at least in Germany, but also in France and Italy, they don’t have this problem like the US middle class where the nominal wages have basically been flat since the 1970s.

So at least in Germany, nominal wages, for example, in the 2010s have gone up by a couple of percent each year. So I would say that inequality is a problem here, but it’s easy to fail to notice that kind of problem because things are not as bad as in the United States.

[00:20:29] Grumbine: Fair enough. So one of the biggest things that has come about during this time from leaving the pandemic to present is the fuel crisis. The price of fuel shot up and OPEC has been playing games with production. Biden was unsuccessful in getting them to agree to produce more. In fact, they kind of came back and said, we’re gonna produce about a million barrels less.

How does that resource constraint impact Europe? I know that you got a lot of your fuel through the Nordstream, the former Nordstream pipelines that are no longer around. What has this done to energy pricing in the Eurozone and in Germany and the other nations that have depended upon Asian oil?

[00:21:19] Ehnts: Well, energy markets are global markets, so the price of energy in Germany is roughly the same as everywhere else. But of course a couple of months ago when there was only very little energy coming to Germany from Russia, the German government was struggling to replace the energy import from Russia with imports from other countries.

So they signed a lot of contract with companies from the US, for example, to buy liquified gas. And it was rumored that the price that they agreed upon was five times the price from 2019 from before the invasion of Russia and the Ukraine. So of course time will tell whether this is true or not, but if that is true, then of course a means also for the German industry that they will not be very competitive because energy costs normally are kind of important.

And of course, as such are reflected also in the price. And if energy prices go up in Germany and then Russia is selling gas more cheaply to China, to India, then of course if German companies are competing with Chinese companies when it comes to electric vehicles, then the Germans have a disadvantage.

But it’s very hard to talk now about the magnitudes of this problem. So does it really matter that much or is this just a smaller issue? And the change in the price is like 50 euros more for a German car, which probably consumers would not to complain about. So that’s very unclear. The future of the German industry is now very uncertain because of this. We have seen also that, of course, energy and also other materials,

they are traded by big multinational companies like Glencore, for example, and they always find ways to make sure that everything is sold. So if Russia is not selling gas anymore to Germany, they sell more gas to India, and then the Indians sell liquified gas to Germany. And then the quantities don’t change, but the prices change.

And then now India has turned into one of the biggest suppliers of energy in the global markets. Now they were building up in the last couple of years very quickly, and they have very large fuel tankers and so on. So yes, in terms of geopolitics, there has been a lot of changes. And what we before called the emerging economies, the BRICS, for example, they are much more powerful by now compared to before.

And I think the West has realized this is a new situation where countries like Russia, Iran, Saudi Arabia, and China, they’re currently joined forces and now they have united. Maybe by Trump’s policies. I can imagine that helped because they see the United States as politically irrational. For me personally, it started with George W.

Bush lying about the weapons of mass destruction in Iraq and then invading the country.

[00:24:05] Grumbine: Yes,

[00:24:05] Ehnts: That was fabricated, and I think that opened the box. Now Russia has moved against Ukraine. Maybe China will move against Taiwan. That’s a political thing, more than economics thing. But politics and economics has always to be seen together.

[00:24:22] Grumbine: Since the Donald Trump era, and you could really go back to George W. Bush’s fiasco with Iraq and Afghanistan. But you’ve seen a significant erosion in the gilded era of US dominance. And one of the most important things, I think, based on your bringing up BRICS, when the US cut Russia off the SWIFT system. I think a lot of countries saw that and said, these are the sacrosanct things.

Everybody depends on being able to transact and if you’re gonna take a unilateral approach to simply cutting us off from our own assets, we’re gonna find a different way of doing business. And so, There’s a lot of hyperbolic nonsense out there about the death of the dollar, but it has definitely taken a hit on the chin and with dollar hegemony in flux to some degree, at least in terms of the popular narratives out there.

It leaves open the possibility of other groups rising, and it’s frequently rumored that the Euro will be the next one in line. Does BRICS create a more multipolar world? I’m speaking generically based on these talking points that people throw out there, I wonder if maybe you could help us better understand the impacts of the dollar losing some of its reach, if that’s what’s even happening, versus the rise of BRICS and their ability to cordon off their payment system away from the US’ ability to clamp down on them.

[00:26:09] Ehnts: Yeah. Yeah. I think I would first point out that I agree with you that some of these arguments are not economic arguments that a lot of talk about geopolitics is just talk.

[00:26:20] Grumbine: Yep.

[00:26:20] Ehnts: And we just went one to one with the US dollar here in Europe. The last time the dollar was as strong was in 2001 or 2000 maybe. I think there was already an exchange rate between Euro and dollar before the Euro was introduced in 2002.

Maybe it was 2003 then. So I would not say that the dollar is somehow weak, but I would agree that it’s a strange idea that the US has been cutting off Russia from the payment system and expects that the other countries will not come up with an alternative. Talking about soft power running the world’s payment system, that’s soft power, and why would you not use it?

Why would you give it away for free? But that’s what the US administration has decided, that we’re just gonna cut you off. And that, of course, as you said, provides a lot of incentives for other countries to come up with alternatives. But the Euro is not gonna be an alternative to the dollar. Because we in Europe are not ready to become a net importing continent.

So you would have to run, uh, current account deficits for many decades. But that’s not how our politics works. So because we have this neoliberal European Union, it’s kind of enshrined that because of the public deficit limit, if you want to increase saving for the private sector — so if you want to increase net financial savings of households and businesses, and the fiscal deficit can only go up to 3%–

then the only way out is the external surplus. So the rules that we have in the Eurozone force countries to become net exporters, if they get there, then like in Germany, they can prosper. And if they don’t get there, like in Greece and Spain, they will have a bad time. But this kind of setup will not allow a lot of Euros to be accumulated in the rest of the world.

If you cannot accumulate the currency, then that currency of course cannot become the reserve currency because then if there would be an increase in the demand for that currency and it would be supplied very inelastically, then the exchange rate of euro will go up by quite a lot, and that’s not what you want as a reserve currency.

The reserve currency has to be roughly stable in terms of the exchange rate, and I don’t see a fixed exchange rate system built on the Euro, like the Bretton Woods system. Because the Eurozone and the European Union, they have no political, military or financial leverage over any other region of this planet.

Say maybe from some eastern European countries and maybe North African countries, but definitely not against the US or China or India. So I don’t think that this will happen.

[00:29:02] Intermission: You are listening to Macro N Cheese, a podcast brought to you by Real Progressives, a nonprofit organization dedicated to teaching the masses about MMT or Modern Monetary Theory. Please help our efforts and become a monthly donor at PayPal or Patreon. Like and follow our pages on Facebook and YouTube and follow us on Periscope, Twitter, Twitch, Rokfin, and Instagram.

[00:29:54] Grumbine: That’s really powerful because it really opens up a couple other questions. I appreciate you taking that road there, Dirk. As you hear a lot of people, and mind you, it is all over the place. It’s not just activists, it’s other media outlets talking about the rise of China, but China is still a net exporter and it’s got huge amounts of accounts that it has built up

around the world, and I know people talk about China dedollarizing or this concept of dedollarization and various people, even some MMTs have mentioned this. I am curious what your idea of China’s ability to fill that role is, or is that a bunch of hyperbole that they’re a hundred years away from being able to do something like that?

Or are we closer to China being able to take that role? Or is the US uniquely positioned, based on many, many years of military and through the IMF and through petroleum sales, et cetera. Has that made the US dollar so ubiquitous that to be able to un wedge it would be a century away?

[00:31:04] Ehnts: Let me start with my answer

[00:31:06] Grumbine: Yes.

[00:31:06] Ehnts: before I give you the logic. The answer is yes. So yes, all of this will take a lot of time. It will take many decades. So the last time the reserve currency changed was after the end of the Second World War when the US took over from United Kingdom. And there was also a process that took roughly, let’s say from 1910 maybe to 1950.

So it took 40 years to happen, and it’s not something which you’re trying to do. So it’s not like a government of a country is saying, let’s try to make our currencies the world’s reserve currency. It’s more a process that happens. It comes with economic and political power, also with military power. But let me explain a little bit of how I see that logic of having monetary sovereignty and these kind of things, and the higher also of currency.

So in 1980, let’s go back in time, somewhat, almost half a century ago, China had one of the weakest currencies on the whole planet. So China was the agricultural country that was the largest one on the planet in terms of population, but it was really, really poor. And China probably at that time, could not import anything and pay with renminbi.

Not probably even a bicycle from India. So understanding this means that monetary sovereignty is something which you have, but it stops at your national border. So you cannot import stuff from other countries, and that’s with MMT, but also in the older works of George Friedrich Knapp, the the guy who rode the state theory of money.

So your currency stops working at the border because you cannot impose tax liabilities on other countries citizens. So what you can do is you can tell those citizens, look, there’s certain stuff that you can buy with my currency, and if that’s useful for you, maybe then you will be willing to hold this kind of currency.

So if Saudi Arabia is selling oil against US dollars, that of course helps the exchange rate of the US dollar because lot of countries, among them China say, well, we are okay to park our export earnings in US dollars because we think that we can always get oil for those US dollars, which is important for us as a strategic asset.

So as MMT always stresses, money is there to have access to resources and not the other way around. And over the last couple of decades, China has turned into probably the biggest economy. It depends how you measure purchasing power. If you would use the official exchange rate, probably the US economy is still bigger, but if you use something which is more realistic, maybe the Chinese economy is already bigger than the US one, and now China is having the currency, which now.

There’s not more demand because you can buy solar modules from China with that currency and electric cars and a lot of other things that you can buy from them. But I think what the Chinese are really trying to do is they would like to be able to buy stuff from abroad paying with renminbi. That’s what you like to do, because then you don’t have to worry about having access to foreign money first before you spend something.

So that’s a big price If you want the exorbitant privilege. I think it was a French finance minister who invented that term, I think it was in the sixties. So the exorbitant privilege allows you to pay for imports in your own currency, and that’s where China wants to go because it would kind of stabilize trade.

And again, you would just be able to use your Renminbi and you wouldn’t have to worry about the exchange rates anymore. And that’s where they want to go. But US still has a lot of political power and they have also economic power. They have their military. So I think I would expect this process to take many decades to happen.

But of course, if some war would come up, let’s all hope that this will not happen, then of course these things could move much faster. And also because of climate change, things could move much faster. So we could go into some kind of fast forward mode because of climate change. I think China probably has some of the leading technologies that we would need, like solar modules and electric cars and so on.

So if demand for that goes up and demand for oil goes down, then of course people will need to adjust their portfolios because now they will need to buy more from China and less from dollarized countries and countries that are using the dollar as their currency. We’ll have to see.

[00:35:20] Grumbine: Frequently we get into MMT conversations with people, and when you start bringing up what is possible, people’s eyes glaze over because their imagination hasn’t caught up with the currency regime. Their ability to envision a better tomorrow is still stifled by neoliberal austerity thinking. Europe was able to start from a social perspective where social needs were a priority as opposed to the United States where it’s truly dog eat dog.

You are on your own. But with that in mind, MMT does something to people like myself. And it starts a bit of a fire inside. Once you realize you’ve been lied to for so long, and there is this potential for a world that is far better than the one that we’re in, and a world where people can be made whole.

We get the MMT framework out there. People start seeing the logic of it. Where are we at with people seeing the currency regime as a public monopoly for the good of the public in Europe? We can look at it on a broader scale, but in general, are you seeing any eyes opening to the potential? Was the pandemic an eye-opener for people that were non MMTers to see maybe there’s something here.

[00:36:45] Ehnts: Yeah, I would definitely think so. Especially in Germany last year. Last year there was the start of the war. So when Russia invaded Ukraine, then of course the German military said, we need more money and we need to make sure just in case this turns into a major conflict, we need to upgrade our weapon systems and so on.

And the politicians responded by creating, which we call in German, Sondervermögen, so it’s called a special asset. And they created a special asset, which is part of the amended German federal budget. And there was a hundred billion euros. So they just, by the vote in the German parliament, allocated a hundred billion euros to the German army.

And everybody was like, oh wow, we thought we would have the debt break and so on, but apparently it’s possible to just do it like this. And of course people were surprised and then they did it again because when energy prices were rising, the federal government said, let’s make sure that the consumers pay the old prices and we pay the difference between the old price and the new price.

And they said, let’s have another one of those special assets. Of course, you can call it special asset, or you call it public debt. I mean, it’s the same kind of thing, and they said it’s increased the German budget by 200 billion. So everybody was again amazed and the German budget, normally in peace time is probably around, I dunno what it is actually.

I mean, the federal budget, maybe 300 or 400 billion. You almost doubled it inside of one year. There was really something new for most people. And of course it showed also to journalists that if the politicians want to increase government spending, there’s nothing that they would have to wait for. They can just do it.

And that’s what MMT always said. Yes, there’s political rules. But you can get around those rules if you want to, if there’s a political will. But even inside Eurozone, we are still able inside Eurozone to increase government spending. Of course, if the Stability and Growth Pact comes back and the 3% deficit limits is re instituted next year it will happen.

Then of course the deficit might be too high. But if you spend now and then you increase economic activity and GDP, probably will carry over into even a public surplus next year because you create a boom in your economy. So I think that definitely the pandemic has helped to shift perceptions and to also make people realize that if the politicians want to create money, then it’s not about availability.

Now they’re trying to roll back. Now the German finance minister says, We have tax revenues and we cannot spend beyond that, which of course is ridiculous because even in Germany we had in the last couple of decades, lots of public deficits. So it’s surely possible to go beyond tax revenues, but this is about power.

So the finance minister tries to get his story printed in the press and we are going against it and saying, no, no, that’s not how it works. It’s a fight for ideas, and I’m kind of optimistic that we’ll win this one at some point, but it will take many years.

[00:39:47] Grumbine: My trajectory for all the changes I had hoped to see once the lights went on with MMT. Now mind you, I was very much a right wing guy. A lot of my thinking and built in restrictions came from a conservative ideology. I had to unlearn a lot of stuff and it took me a great deal of time to think through this, and that’s why I think MMT is called a lens is because

you’re using it to analyze the world around you. The idea that it was a public monopoly was a long time ago, but what the implications of that public monopoly were in terms of making life better and also not hating your neighbor for being a moocher, for getting a free ride, but really understanding that there is in fact public money and that public money is there to do the public good.

[00:40:40] Ehnts: Yeah.

[00:40:41] Grumbine: Do you see people taking on that understanding that the currency is a simple public monopoly and that we can do great things? Do you see the lights going on? Not just the possibilities of financial transactions, but what the world could be? Do you see a growing acceptance and do you see new worlds opening up to us?

[00:41:04] Ehnts: Yeah, I do. To give you one example, again, this is a German example. I don’t know about the policy debates in other countries, but we have here also Fridays For Future. And one of the brightest is Luisa Neubauer. And she got together with the head of the German government’s think tank, the German Institute for Economic Research, Marcel Fratzscher

and they said, well, let’s have Sondervermögen for fighting climate change. So we have this special asset that we are normally just using for the military. We’re also using to keep energy prices lower. Why not use this then to fight climate change? That’s a way to create money, right? So why don’t we use that?

So, of course, they’ve been taking over this kind of framing and other people have now argued in favor of this kind of Sondervermögen for education as well. So the political debate is shifting. I think that the person who said this about education was coming from the Social Democratic party, for example. Fridays For Future, it’s normally closer to the Green Party, but because both of these parties right now are in power, it’s within the government.

It must be a discussion already in the future how to react to those people who are saying, well, since we can create money from nothing, which is true, of course. Central Bank just types it into existence when the money is spent. Then well, we can do all kinds of things. So I’m planning to write an article later this year.

I will just address this question. So once we understand that we can create as much money as we want, so how can politicians make sure that this is not misused? How can they make sure that they get the results? How can they make sure that inflation does not move up exponentially? So the policymakers say they are looking for a manual right now, so if they do know that something’s wrong, if you want, and it confuses a lot of people.

So I’ve been talking at the Hayek Club. So Hayek is this neoliberal figure if you want. He was this economist back in the 20th century and there’s some people around who will still want to hold up his ideas and they asked me to present MMT and I said, look, we already did MMT. If you want. I know that we cannot apply it, but what we are talking about is that makes a lot of sense to see the economy through the MMT lens.

And when you have your own currency like the deutschemark in the 1950s, 60s, 70s, then you can build up a welfare state, which we did. And it was the Christian Democrats who did it mostly was of course being pushed by social Democrats and socialists and other left wing people, but it’s mostly the right wing people who build it up.

So they already did this. There was no debt break in the 1950s. We didn’t have fiscal framework in the 1960s. Instead we had full employment and price stability. So in 1968, 69, yes, we had these student revolutions. But full employment was defined in Germany back then as an unemployment rate of less than 0.8%, and at some point we had less than 100,000 unemployed people in the whole of Germany.

By now we have 80 million people, but probably it was 60 million back then. And prices were stable, so inflation rates were 2 or 3%. So price, stability and full employment together are possible. That’s what the past tells us. And the way we did it is we set up our institutions not in order to target deficit limits or debt limits or stuff like this.

Instead, we used our monetary systems to help everybody to have a nice life. And the way we did this is we said, look, there’s certain things that we need in life like food. We need a place to live. We need education. We need money when we are old, we need healthcare. Let’s make sure that the government provides all these things for us for free, and then the rest of the economy can be capitalist with the rest of your income.

You can buy whatever you want, it’s not so important that the capitalist part of the economy settle it, and of course, the capitalist part of the economy, can provide goods and services and sell them to the governments to help also improve the public good. So that’s the way to set up a system like this.

And I think that people kind of remember that we did not always live in this neoliberal world. And I think there is some kind of movement, especially for younger people, to look back into economic history, to examine history of economic thought. I think this is all going into the right kind of direction to move away from this neoliberal “there is no alternative” kind of talk.

[00:45:31] Grumbine: When we talk about taxes, frequently people say that MMT says to control inflation, they would just raise taxes. And I frequently see some pushback there that we’ve got a bunch of tools. It’s not one tool and it depends on where the inflation’s coming from and what the cause of it is. What we would do, people try to simplify it down to nothing, but it does bring up a good question.

What is the role of tax policy these days and what would good tax policy look like in general. Like a overall tax regime that would allow the maximum value of the economy to flourish.

[00:46:11] Ehnts: I think here in Europe, what we could do is we could reduce Value Added Taxes, for example, when it comes to food stuffs. So why should we tax people who are buying stuff that they really need to live? For example, in Germany, we still have a tax on coffee and I don’t know what kind of purpose that tax serves. I think that people probably do drink too much coffee sometimes, at least, but the tax will not stop them. So why not remove that tax? It would put prices down. If you put taxes down on foodstuffs generally, then it would lead to higher purchasing power, mostly for poor people. For the rich, because they don’t spend a lot of their income, it means it’s much more meaningful, but the poor would really benefit, and by the poor, I would say roughly half of the German population, the lower half.

And of course you could reverse all these policy reforms of the last 20, 30 years. Also, in Germany, we reduced tax rates on income for households, especially for the rich households because it was supposed to increase private investment. That never happened. We increased the value added tax in order to compensate for that.

So, that should be just reversed. It’s very easy to just reverse it, and then you get much better distribution of income. And of course you could also have an inheritance tax, which is more meaningful than what we have today. And you can tax also wealth. We don’t have a wealth tax currently. So I agree that if you want to tackle distribution, then you would have to use taxes much more than we used to do to do this. it’s much better framing also than the idea of this kind of Robin Hood tax. Take the money from the rich, give it to the poor. I think that’s what the rich are really railing against. If you just say, we need to put taxes down for the people with lower income so that they can spend more, and then we increase tax rates for the rest, just to make sure that distribution is improving.

I think that’s easier to sell politically than the Robin Hood scenario.

[00:48:09] Grumbine: One of the core components of the modern monetary theory framework is the job guarantee. As Warren would say, it’s his base case for analysis. But for the rest of us, we look at that as a public option for labor. Since the currency issuing government, putting a tax out there created the problem, it should also solve the problem by providing a way of getting to the currency to pay the tax.

How in this new world, as we move forward, can we protect labor from predatory capitalism through the use of an understanding of MMT? Is the job guarantee really the silver bullet in terms of providing some form of counterweight to the labor/capital equation, or are there other things that you can envision?

[00:49:01] Ehnts: Well, the job guarantee would be a start. It would act as a minimal wage, and it would mean that people are not forced to take these, well, David Graeber called them bullshit jobs, and these jobs which have low productivity and maybe are not really necessary. So that would probably help. But I think that there’s also the broader picture that you should talk about democracy at the workplace.

In Germany, we have a lot of laws that translate into workers at least having a lot of information, if not power. So workers are represented everywhere on the board and so on. That means that they know what the management of the firm is planning to do, and they can also think about what it means for them.

And when the firm is thinking about moving part of the production process to Eastern Europe, for example, then the workers can organize to stop this if they want to. So as an MMT group, we would have to connect with other economists who are doing more research about institutions and democracy and people who are doing labor economics, for example.

It’s a very good question how you can set up a system which works. In Germany, for example, the private sector is also a sector where the unions are part and parcel of everything that happens. So we have the system that firms and the unions normally are working together. And I remember that I think 20 years ago, Volkswagen, the German car maker, went to, I think it was Tennessee or some other state in the south of the United States, and Volkswagen was asking the unions

let’s have some kind of agreement so that we have a working relationship. And the politicians then told them, no, no, you don’t work with the unions. And Volkswagen said, okay. So they would have been willing and they were hoping to work with the unions. Also, Germany productivity is high because the workers identify with the companies and there’s peace on the shop floor, and that’s very important.

This kind of continuance and this idea of respect. The idea that the workers are also getting their fair share. So by now the German companies like the institutional setup of Germany. So yes, they do go to Eastern Europe if they think they can do some cost cutting, but they normally do it reluctantly.

They like these German system, and that’s the thing where you have to look at every single country because the Eurozone still have these national frameworks. So of course the labor laws are different in Germany compared to Italy, to France and so on. If the French workers go on strikes, they burn stuff.

It’s always amazing for us Germans to see it happening, but their productivity is even higher. So maybe German workers should burn stuff when they go on strike. So that increases productivity. No, I’m just joking. I never said that. So these things are complicated and that’s not one size fits all solutions.

So we have to find a way that workers come together with the employers and they agree on a new set of rules. That gives both sides what they want. And I think the companies, they want to have motivated workers. I recently met a manager who is running a consultancy firm, a small one. And he says that out of 10 workers who work in a workplace, normally nine are not motivated, and six of them normally hate their job.

That’s an average. So the companies, of course, they want workers who are happy. And who are willing to help also the company to innovate and to become more productive. I’m talking about those German manufacturing companies, these industrial companies mostly, of course. So in the US, it’s a bit different because US has lost a lot of manufacturing jobs. But I mean, Biden is already trying to bring them back and I think it’s probably more attractive also for workers in the global workplace to come to the US if the unions play a stronger role and if there’s more democracy.

But how you get there, well, you would have to study American institutions and then institutions of maybe Japan and Sweden and other countries and see what kind of laws and what kind of institutional arrangements might work in the United States that work elsewhere. But it’s really trial and error. I think that this has more or less cleared up the issue little bit, but it’s an extremely complex kind of thing.

I would argue.

[00:53:24] Grumbine: We really just don’t love workers in this country. We have an oligarchy and then we have everyone else, and people are really struggling. And so a little jealous looking around the world, watching organized labor, have a symbiotic relationship with their employer. People not have to wonder if they’re gonna get healthcare and how they’re gonna survive, but instead these things are baked into the fabric of society and

it’s encouraging to hear you say that minds are changing. It’s also terrifying to hear that Volkswagen tries to come and do the right thing and the US says, yeah, we don’t do good things here. So, no. That’s very disturbing. But in any event, I wanna thank you for joining me today. This is very informative.

Where can we find more of your work? You’ve got some new stuff coming up.

[00:54:14] Ehnts: First of all, thank you, Steve for inviting me. It was very nice to be led here by your questions through these kind of topics. Well, I have a homepage which is available also in English, so just Google my name and you’ll find it. And there’s probably an English or American flag. I would probably think that your listeners would like to click on the American flag, and then you find some literature that I published also in English.

If there’s a paper which you really need and you can’t find it and it’s not downloadable somewhere, there’s also a way to contact me right on my website, just drop me an emial, and I’ll try to send you a PDF.

[00:54:48] Grumbine: Fantastic. Thanks again. I hope you enjoyed this as much as I did. Please do check out Dirk Ehnts’ work. It’s quite extensive, and thank you all for joining us once again for another episode of Macro N Cheese. I’m Steve Grumbine, the host. My guest, Dirk Ehnts, and we are outta here.

[00:55:13] End Credits: Macro N Cheese is produced by Andy Kennedy. Descriptive Writing by Virginia Cotts and promotional artwork by Andy Kennedy. Macro N Cheese is publicly funded by our Real Progressives Patreon account. If you would like to donate Macro N Cheese, please visit patreon.com/realprogressives.