Episode 146 – MMT Europe with Dirk Ehnts

So in the US, whatever happens in your state … you always have government spending coming from the federal level. So that’s going to pay for the military installation, that’s going to pay for the pensions. It’s going to pay for some of the public federal infrastructure. And that means that whatever happens in your state, the federal government is always there. And you also have these institutional mechanisms to ensure that states which do not have a lot of employment can somehow make bargains in the political process and basically trade votes for jobs. And that’s the main difference.

We have this problem, that there’s going to be a lack of government spending when it really matters. And there’s no institution to address this kind of shortcoming. So the Euro was always incomplete, and it was kind of the idea that once it is in place, it can be completed by having a Euro Treasury. But we’ve been in this kind of mess now since the global financial crisis, and it’s not clear where we are going.

Macro N Cheese – Episode 146
MMT Europe with Dirk Ehnts
November 13, 2021

[00:00:04.370] – Dirk Ehnts [intro/music]

The Eurozone is a strange animal because it has a central bank, but it doesn’t have a treasury. So historically, we always have had a treasury and a central bank, and they were both part of the same state. So normally it’s a nation state and it has its own currency. And the central bank is traded by politics. So the government is always more powerful than the central bank.

[00:00:27.570] – Dirk Ehnts [intro/music]

It’s very puzzling for many economists that if you look at Eurozone now, the Greeks did not run out of money this time. Okay, so how is it possible that in 2021, the Greek government is having a good time and they spend whatever they want to spend? But in 2010 and following years, they ran out of money?

[00:01:42.060] – 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.

[00:01:43.230] – Steve Grumbine

All right, folks, this is Steve with Macro N Cheese. I have Dirk Ehnts joining me all the way from Germany. And Dirk is an adjunct lecturer at Magdeburg-Stendal. He’s a speaker of the board of the Pufendorf Society and organizer of the second European MMT conference. And he’s also written this book that I have in front of me called Modern Monetary Theory and European Macroeconomics. Pretty good stuff. Welcome to the show. Dirk, how are you today?

[00:02:18.330] – Ehnts

Hi, Steve. Thanks for having me. I’m fine. Being very welcome to this show.

[00:02:24.330] – Grumbine

It’s been a long time coming. I’ve wanted to have you on since we first met in the very first MMT conference. I met you again in New York City, outside of the New School. During that and everywhere there is MMT, there is Dirk Ehnts, and I’m really glad to have you on here. Very much so.

And just to set the stage for everyone, I got Dirk’s book online and I said, I’d love to talk to you about this because we’ve had a bunch of folks come on to talk about Brexit, we’ve had individuals talking about fiscal money, we’ve had other folks talking about the neoliberalism of the European Union and how the rules and such have really impacted their ability to function.

We see a lot of the similarities between the global north and the global south, except in this case, it would be European North and European South. And so I figured what better person to bring on than Dirk Ehnts to really break this down for us? So, Dirk, take us to the premise of this book that you wrote.

[00:03:28.230] – Ehnts

Yes, Steve, thanks very much for your kind works. I was always interested in money, and when I was a student, I couldn’t figure out how it worked. And then I did a PhD in economic geography. So I was doing some kind of neoclassical model where you have trade in a region, so there’s no exchange rate.

Everybody is using the same currency, and then the trade account is balanced, and I still didn’t get money. So when I finished my PhD, that was in 2008, just when the global financial crisis began, I said to myself, Look, I have to understand how money works. So I went searching on the Internet, and I found Axel Leijonhufvud, Swedish guy at UCLA who wrote about money and networks.

And then Richard Koo, who wrote about Japan and surpluses and deficits. And then I found MMT. And I thought to myself, so that stuff is brilliant. And I just wanted to write a book myself to explain how money works. So how was money created in the Eurozone, how is it destroyed? And then I met Randy [Wray] and he had a book out, the MMT Primer.

And I approached him and said, look, maybe we can do a German version and explain how money works in Germany, but the publisher wouldn’t have it. So I said, okay, I will continue with my own project. And that book, then, is the outcome of this kind of project.

I try to explain in normal words, how money is created and how money is destroyed in the Eurozone by commercial banks, how money is created at the central bank and how the government spends and how the central bank is actually doing monetary policy in terms of balance sheets. And that’s what the book is about.

[00:05:04.530] – Grumbine

It’s very good. I’ve just recently got it. So I have not had time to dig into at the level that I would like to dig in, start with an understanding of what the Eurozone is and what makes the Euro functionally different than the US dollar in this case.

[00:05:24.210] – Ehnts

Yeah, that’s a very good question to begin with. So the Eurozone is a strange animal because it has a central bank, but it doesn’t have a treasury. So historically, we always have had a treasury and a central bank, and they were both part of the same state. So normally it’s a nation state, and it has its own currency. And the central bank is created by politics.

So the government is always more powerful than the central bank. So the central bank always makes sure that the government can spend, because that’s what the political power says. So even though we are talking about politically independent central banks, they all spend the money that the government wants them to spend.

So in the US, whatever happens in your state, for example, you always have government spending coming from the federal level. So that’s going to pay for the military installation, that’s going to pay for the pensions. It’s going to pay for some of the public federal infrastructure. And that means that whatever happens in your state, the federal government is always there.

And you also have these institutional mechanisms to ensure that States which do not have a lot of employment, they can somehow make bargains in the political process and basically trade votes for jobs. And that’s the main difference. So in the Eurozone, we have the European Central Bank, and we have the national central banks.

So the equivalent to the Federal Reserve Bank would be then the ECB plus the national central banks. So the ECB is actually not doing much policy wise. So the national banks, for example, have their accounts with the national central bank. So German banks have accounts with the Bundesbank, the German central bank. Spanish banks have accounts with Banco De España with the Spanish central bank. It’s probably like in the US where you have regional Federal Reserve banks, and then the banks probably have accounts there.

But the problem is then there’s a political hole where we need to have some kind of political institution that is responsible for full employment. Okay. So if you have high rates of unemployment in the US, you can ask Washington to fix it. And everybody knows that unless the debt ceiling comes into the picture that the government can just increase spending. Right?

So you can have fiscal policy that addresses this kind of problem. And we don’t have that in Europe. So if you go ask your national government and say, “Well, we would like to have more government spending,” they probably will say, “Well, we can ramp it up a little bit, but maybe then deficits will be too high because we have these deficit limits, which are enshrined in the Maastricht treaty.”

So the stability and gross excess of the public deficit cannot be more than 3% of GDP, or else you will get punished. So there’s a political vacuum because the European Union, we don’t even have a government, it’s a Commission. And the Commission means that it’s not Democratic to the bone. So as an American, you understand that if it’s not one man one vote, then it’s not Democratic.

And that’s not the case. So we have a lot of problems also, with what we call a Democratic deficit of the European Union, for example, we cannot have a vote of no confidence in the European Parliament to get rid of the government to get rid of the Commission. We don’t have these Democratic elements. So if you ask the European Commission to increase government spending in order to address the unemployment problem in the Eurozone.

And we have had above 7% of an unemployment rate since 2002. So from the very start, we had mass unemployment. Their budget is just too tiny. The budget is roughly 1% of Eurozone GDP. So even if you increase that by 10%, it means that you have done a budget which is roughly 1.1% of Eurozone GDP. It won’t help. So that’s the main problem of the Eurozone. And we always knew that you can read academic discussions in the 1990s.

You can read stuff by Wynne Godley where he talks about it, that we have this problem, that there’s going to be a lack of government spending when it really matters. And there’s no institution to address this kind of shortcoming. So the Euro was always incomplete, and it was kind of the idea that once it is in place and it can be completed by having a Euro Treasury. But we’ve been in this kind of mess now since the global financial crisis, and it’s not clear where we are going.

[00:09:44.310] – Grumbine

How does a country within the European Union make fiscal policy without having that kind of control? How do their programs get funded? In the US it’s pretty straightforward, but it seems a little bit muddled when I try to put the pieces together.

[00:10:05.130] – Ehnts

Now it’s actually very much like in the US. So you have Congress, and if you get your budget approved, then the money will be spent. And it’s the same, for example, in Germany. And it’s even easier in Germany. So the German federal government has an account with the German Bundes Bank, our central bank here, and it starts at zero in the morning, and the central banks can make payments on behalf of the government of the treasury, and there’s no limit.

So they just have to make sure that by the end of the day they go back to zero. So if the government would be a household, it would have an overdraft at the central bank. But of course, it’s not a household. But the situation works like this. So the German government first spends and then tax revenues and bond revenues are collected and they’re moved to that account and they bring it back to zero.

So in the US, it’s a bit more complicated. So in the US, you first have to sell government bonds in order to prefinance your government spending so that the Treasury’s general account, as a fact, is positive before you spend. So in a way, Germany and the federal government of Germany, they are more MMT-like than the US government. If by “MMT-like” I mean that it’s obvious that first your government spend into the economy and then only later you sell bonds and you have people paying taxes.

[00:11:24.810] – Grumbine

Interesting. So what is the primary driver of the disparity between the Northern European States and the Southern European States? It seems like the north is the net exporters of the bunch, and the south is the net importers. Looking at Greece and others, can you help me understand the disparity between the divide there?

[00:11:48.990] – Ehnts

Yes. If you are in a monetary union with a couple of sovereign states, you have to talk about inflation and price levels. Okay. So what you should talk about is how wages will develop, how unit labor costs will develop. So if you have an inflation target of let’s say 2% close to 2%, but below 2%, as that was the old inflation target, we just updated that to 2%. But anyway, so if your inflation target is roughly 2%.

Then, of course, it makes sense to have wages increasing by 2% plus the increase in productivity. And then maybe plus a little bit more just to make sure that you get where you want to go. You have some nations who are having wage growth, which is below that. So, for example, Germany, in the 2000s, you had wage growth, which was one point something percent. Okay.

So it’s not possible to have inflation rates of 2% if wages go up by 1% and a bit. And then you have also technological growth, which means you have higher productivity and you can produce more using the same amount of people. So that doesn’t work. And so that was in the center, so for Germany it was a deliberate strategy to let wages grow more slowly in order to gain competitiveness, which kind of makes sense in a fixed exchange rate system.

It’s clearly a beggar-thy-neighbor policy, no doubt about that. So you gain jobs and you gain income. And of course, the other countries lose, they lose jobs, they lose income. Well, and what happened in the periphery? So what happened in Spain and what happened maybe also in Ireland and Greece? Well, these countries, they looked at the Eurozone and thought, Well, look, our interest rates have fallen.

So normally, we had higher interest rates than the German government’s interest rate or the German central bank’s interest rate. And that meant we had to pay more money in terms of interest rate payments on our public debt. And apparently many of those countries decided that now that they would have to pay less interest to bondholders because interest rates have fallen and the new bonds issued now they carried low interest rates.

They thought that they can maybe then increase also government spending on wages of public employees. So in Spain, you have wage growth, which was very high. So it was roughly 3 or 4% each year. So starting from roughly 2002 going forward. And that, of course, meant that the Spanish price level was rising faster than the German price level.

But Spain also had a real estate boom going on, just like Ireland. And that meant that looking at these kind of countries, from the neoliberal perspective, they all seem to work very well. So they had low public deficits. And the Spanish and the Irish governments, they even had surpluses in 2004 to 2007, roughly. Public debt was very low. So I think it was 20 something for Ireland and 30 something for Spain in 2007, just before the crisis.

So for those countries, politically, it worked. The Euro worked. But of course, it only worked because the demand drain that came from Germany was offset by an increase in private debt and private investment, mostly in the real estate sector. And that’s where the divergences are coming from. So first it looked like the Euro would lead to convergence, and that would be catching up.

I think in 2007, the unemployment rate of Spain fell under the unemployment rate of Germany for the first time in probably decades. But after that, of course, it’s a completely different story with the austerity policy and all of that.

[00:15:14.790] – Grumbine

When I look at the United States- and that is typically where my primary focus ends up being- one of the big things that Wynne Godley and Stephanie Kelton and Scott Fullwiler put out there is the mirror effect of the sectoral balances that tip everyone off to the global financial crisis that occurred back in 2008, 2009. And in the United States, we could see clearly that the mirrors were penny to penny.

Spending at the federal level and the demand leakages from savings and trade and then also the position of private debt. That three sector model. I’m curious how that translates to the European Union, because the countries in the European Union are, in fact, currency issuers, they just have fiscal rules that prevent them from going beyond that 3% without steep penalties.

So help me understand the difference between sector balances as it pertains to the United States. And how would you do the same modeling in Europe?

[00:16:29.250] – Ehnts

Well, of course, you can just draw the sector balances for the Eurozone as a whole. So that’s not a problem at all. I have it here somewhere, so I can maybe put it on Twitter or somewhere. So yeah, it’s the same, especially during the global financial crisis when the economies of Greece and Italy and Spain and Portugal and also Ireland when they collapsed, of course imports fell.

So in 2008, 2009, most of these economies reached a position where the current account was more or less balanced because there was a big financial crisis going on and real estate collapsed. And that meant that people consume less. And that meant also then that they consume less imports. So even if you look at single Eurozone nations, you could see that in 2008, 2009, public deficits and private surpluses are a fit.

And it’s easy to see what’s going on there, that there’s some kind of deleveraging process that has been started. And then, of course, the Eurozone as a whole goes into surplus after 2010 roughly. But it’s not sustainable because the Euro has a flexible exchange rate. So Europe or the Eurozone became a little bit of a beggar-thy-neighbor in the world economy.

I think the surplus was roughly 3% of GDP. Let’s say, in 2013 to 15, and afterwards it fell to roughly 1%. So the Eurozone was a drag in the world economy and especially, of course, Germany, with the export surplus being roughly 8% of GDP. And of course, as Warren always points out, exports are costs and imports are a gain.

So for most of the German workers, this kind of export, that gross model is not an improvement. Okay, so of course, this kind of model creates more industrial jobs than you would have had otherwise. So those who now have industrial jobs in Germany, and they had none before.

Those are definitely winners, and of course, those who own the companies. But the German workers in the industrial sector, they’re mostly losers. They could have gained more money if the export led growth model would have been abandoned.

[00:18:36.150] – Grumbine

When I look at the United States as my model to compare against, we have certain states that are definitely stronger financially. They have way more rainy day funds. They have the ability to absorb a lot of shocks to the economy that most of the states do not have. And there’s no revenue sharing amongst states here.

So you can see what we call the race to the bottom, where states like Texas will lure businesses down to Texas by offering to cut the bottom out of the tax rate to eliminate certain penalties that the business would experience. And so they bring them down there leaving behind a huge vacuum where people no longer have jobs.

The revenue for the schools has dried up, and this has fueled a lot of the negative outcomes of neoliberalism in the United States, as you see, even places like Kansas, where UMKC is. Their governor, Sam Brownback, slashed the tax rates to the point where the schools were barely able to open. What is it like in Europe? In that same vein, given the nature of the way the money is issued into the economy?

[00:19:53.430] – Ehnts

Well, as I said, it’s a problem on the national level, but also on the state level. So just like in the US, if you look at Spanish states, for example, they also have these problems that they have to have a balanced budget. So the Covid-19 pandemic hits them hard, for example, in the Eurozone. So the tax revenues have been decreasing and they are in the red and they have to make cuts.

And they do cut the same here in Germany, where in Saxony, for example, they have a stupid debt break in their Constitution. They’re all stupid, but this one is the most stupidest. [laughter] So, it says that you have to repay the extra debt inside of eight years, which is really not a lot of time. So, they spend more money during the crisis.

So last year and this year, but from next year onwards, they have to have significant cuts in government spending. And of course, in Italy, they cut government spending as a result of the austerity policies, especially in the healthcare sector, which also means that they lost probably hundreds of lives that they should not have lost when the pandemic hit.

But the austerity is forced upon the nation state from the outside, at least in the US States. You could argue that it’s somehow an outcome, which is the result of economic processes. But it’s not imposed from Washington, for example, but austerity is imposed from Brussels. So when Italy or Spain, for example, had public sector deficits of more than 3%, and I think they were up to ten or more percent in 2008, 2009.

Then, of course, Brussels sent in the austerity crew and said, look, you have to cut. And that was, of course, very nasty from the politics because the Eurozone is clearly driven by the German government, because being a net exporter, there was no doubt about the solvency of the German federal government, and the German government pulled all the strings in Brussels.

And it was clear that it was the German government doing the austerity policies and at the same time not imposing austerity on its own population. So in Germany, we didn’t have any austerity since 2010, government spending has increased every year by roughly 3 to 4%, and social spending goes from record to record.

Okay, so we didn’t have a single year in 2010’s, which was not a record in the sense of spending in the social system. The welfare system measured in Euros but also adjusted for inflation. So that’s where the political problems are coming from. It’s perceived that the rules are unfair. And then, of course, that Germany is basically trying to push other countries into some kind of submissive status. And that, of course, politically did not play out very well.

[00:22:41.250] – Grumbine

We have massive austerity in the United States, and it’s always painted by the false belief that we can’t afford it. It’s never really focused on the resource availability, but always focused instead on a lack of money. In terms of the austerity in Europe, is the reason for this concept of too much money creates inflation, or is this a matter of they don’t want anybody being able to print their way to prosperity, so to speak, what is the point of austerity in Europe?

[00:23:16.470] – Ehnts

Yeah, that’s a very good question. I think when they created the Eurozone in the 1990s, which was a very neoliberal time, there was a lot of talk about moral hazard. Nobody really knows what it is. It’s clear, moral hazard just means that when you spend other people’s money, then you’re going to misspend the money somehow and you will waste a lot of that.

So everybody thought in the 1990’s that when you have different countries and they share a common currency, then you should stop those countries from spending too much money because otherwise they will just spend whatever they want to. And if you have a lack of resources, for example, you can just import it. Okay.

So if you don’t have workers, but you need them to deliver some kind of public service, you can just hire people from other Eurozone countries. So that apparently was the rationality behind the Eurozone idea of having these deficit limits. So the idea was to stop governments from overspending. That’s what people were afraid of. Of course, looking back, it was all wrong. But that’s what happened.

So they put down these deficit limits and said, look, you cannot have a public deficit, which is higher than 3%. And if you do, we will force you to cut your government spending. You have to draft the plan and explain to us how you will come back to 3% and less. So that’s the background there. So the European treaties are full of this idea of public debt, and they talk about sustainability of public debt, but it’s never defined, actually what that is. Okay.

So you have the big advantage in the asset. Even Alan Greenspan said some years back that the US government cannot run out of money, that they can always spend money. The problem is the availability of resources. That’s very nice to have. But we are kind of stuck with this idea that there is something which is like sustainability of public debt, and nobody knows really what that is. So how much public debt is too much?

Nobody knows about it, but it’s there. It’s in the legal text, it’s in the framework and it’s in the stability and growth path. And we didn’t figure out that in times of crisis, the European Central Bank would have to back up all these national governments. Okay. So in 2010, I remember that the government bond prices of Greek government bonds collapsed. What the ECB should have done is they should have said, Well, we’ll back the Greek government.

We act as a dealer of last resort. So we buy government bonds from Greece in a way that fixes their price roughly. So you intervene in the market, and you clearly say that it’s not negotiable. So we will not allow the Greek government to default. So the ECB under Trichet who was the ECB President. It just backed off and said, well, it’s not our responsibility to ensure solvency of the Greek government and liquidity.

And that, of course, was a very big mistake. And the Eurozone has learned from that. So it’s very puzzling for many economists that if you look at the Eurozone now, the Greeks did not run out of money this time. Okay. So how is it possible that in 2021, the Greek government is having a good time and they spend whatever they want to spend.

But in 2010 and following years, they ran out of money. And the biggest difference is that the ECB now has guaranteed the liquidity and solvency of all those national governments. We have this pandemic emergency purchase program, in short, PEP, and that is large enough to make sure that all the investors are happy with all those national government bonds, because they can always turn around and sell their bonds to the ECB.

If they think that there’s some kind of problem and the ECB is happily buying them at the market price, and that’s all it took. And then, of course, the stability and growth pact has been changed. So now there’s an escape clause. It was introduced, I think, in 2011 or 13, and the escape clause was activated last year in March. So that means the deficit limits are off.

So whatever kind of public deficit results in 2020 and 2021, there will be no punishment. So the Eurozone has changed its governance structure, and I think it’s much better now. So we have no austerity this time, not even today. There’s no talk about austerity this time. So again, we have it on the state level.

So inside of Spain, inside of Germany, there are some States who are forced into austerity by the national debt breaks and by the debt breaks of the States. But it’s not something which has been caused by a troika or by Brussels. They’re more like a victim to the pandemic than anything else.

[00:27:55.890] – Grumbine

So in the United States, we sell bonds largely to defend a positive inter-bank interest rate. And I would presume that you sell gilts or whatever other debt instruments in all the different countries, I suppose. Randy Wray is on record saying that in a modern money economy, there isn’t a need to sell bonds anymore. Maybe you could explain to us what is the point of the bonds that are sold in Europe as opposed to treasury bonds in the United States?

[00:28:32.970] – Ehnts

I would say that it’s more or less the same as in the US. So why does it treasury sell bonds? It’s because the political rules force them to. Okay, so they cannot spend without having to sell bonds before they spend. So that’s the pre-financing situation. So of course, the state is always spending first. So if you first sell bonds, the question is, where do the reserves come from? Okay.

So first the central bank then has to make sure that there’s enough reserves. And as Warren always says, lending is basically spending with the intention of getting the money back. So it’s the same here. I can only talk about the German situation because there’s no descriptions of how the fiscal process actually works in countries like Spain or France, which is a shame.

I have to admit that. But my own knowledge skills are not enough to understand that in other countries. I tried Austria, but it’s very secretive. So, well, no language problem, but it’s difficult. So the German government is selling bonds and to bring their account at the central bank back to zero after they’ve spent. So, for example, if the German government inside a day spends roughly a billion euros, that should be more or less the average.

Then of course, they will have tax revenues coming back, but they will not be enough because we now have deficits also in Germany. So they need to issue some bonds and move these revenues also into this kind of account that they have at the central bank, so that it’s at zero. Think of this as a traffic light. Okay.

So if the account of the federal government at the central bank is zero in the morning, then this gives you a green light for the whole day. Okay. And then when you have spent at the end of the day, the traffic light goes to red because you are negative territories, you have a negative balance. And if you would carry that over to the next day, the central bank would say, Well, we still can create money.

Okay, but we cannot create it for you because we can only do that if we get a green traffic light, which means that your balance has to be at least zero. And then, of course, the German federal government would say, Well, how do I get to zero if tax revenues are not enough? And then, yeah, it’s clear bond issuance. Okay. So they are selling bonds in order to comply with this kind of political rule that you have to go back to zero.

Why? Because Eurozone rules say that the central banks and the ECB are not allowed to finance government spending. So it’s okay Intraday. So, yes, the German central bank is making all these payments inside one day. But you have to make sure that by the end of the day, your balance goes back to zero. So that’s why we are selling bonds.

And, of course, the ECB and the national central banks who are doing this for the ECB. They also bought a lot of bonds. I just mentioned this Pandemic emergency purchase program, and I think the ECB by now holds more than 20% of the outstanding treasury bonds from the national governments. So of course, if this would continue, let’s hope that it does not.

But maybe at one point they would hold 100% of the outstanding government bonds. And then there would not be any government bonds anymore on the free markets. Okay. That would be a possible outcome. So of course, then you can just get rid of them anyway. So you just say, if the ECB is buying up all of these government bonds anyway, why issue them in the first place?

So it’s the same as in the US. We could easily get rid of government bonds and just say, well, government spends by having the central bank. So the German central bank, for example, marking up the account of some German Bank, which then marks up the account of me. If I receive money from the federal government of Germany and to stabilize the interest rate, the ECB has the deposit rate, they have a marginal lending rate, and then they have a main refinancing operations rate, so they can steer interest rates with these tools.

They don’t need government bonds anymore. And just like in the US, we have excess reserves. So the central bank flooded the banking system with reserves, and the interbank market is basically dead. All the banks have lots of reserves, and they don’t know what to do with them. So this is where we are. So it would be very easy now to say, look, let’s get rid of these government bonds because it’s just complicating the whole picture. So just like in the US, it would also be a possibility here.

[00:33:13.970] – Intermission

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[00:33:40.190] – Grumbine

The role of reserves and understanding banking and money creation is so fundamental to everything that we’re doing because it explains so much about the quote, unquote interest rates and how money comes to be and how banks clear payments, especially banks that are working internationally, where you’re clearing payments in US dollars on one side and euros on the other, balance of payments between the two countries.

Very interesting facts. One of the things that jumps out at me, though, is in the United States, we have this debt ceiling. We know it’s a fiscal rule. We know that it’s something that could easily be changed and ended if they wanted to.

Question I have when you think about minting a coin, which is one of the MMT accounting tricks we’re trying to use here in the United States, being able to have a trillion dollar coin deposited at the Fed to cover those reserves and eliminate this conversation about the debt ceiling altogether. Does such a situation exist in Europe where a minting of the coin might help with reserves? Is that an option for the European side of the world, or is that purely a US centric gimmick?

[00:35:02.990] – Ehnts

Yeah. Well, I’ve been following the work of Rohan Gray and also Nathan Tankus talking about the platinum coin that needs to be minted, maybe two of them. But it’s a very American phenomenon. So we have this public deficit limit in the Eurozone, and the member States agree that they will be okay with that.

So we have this political problem in a way that all these countries agreed to the fiscal rules that we have. But now that the fiscal rules are not workable, so we cannot return to the 3% public deficit limit. Okay. So because this pandemic isn’t over yet and the economic recovery isn’t over yet, we also want to build back better, just like the US. But that means we cannot reinstate those deficit rules.

So we have a political debate about those deficit limits already. So Warren pointed that out a couple of days ago, the second European MMT conference saying that, look, we already live in a kind of new normal, and the political fight in the Eurozone will be about the deficit limits. Okay. So some countries, like those Northern countries, they want 3%, countries in the south, which are harder hit by the pandemic, want 10%, or maybe even more.

People like me want them abolished because I think that we need to shift the macroeconomic mindset altogether, so I would replace them with full employment targets, to be honest. But the debate that we are having here is that we have agreed on these rules, and now we want to change them. But it’s not likein the US.  In the US, it’s Republicans versus Democrats. But it’s a different kind of political issue here because, as I said, the nation States all agree that the rules cannot be brought back.

And for the US, yeah, you can mint a coin, but you can also maybe mint a coin denominated in Euros and then sell it to the ECB for dollars in return. There’s more options that you have. And yes, I think the coin is a good idea. But the ECB would probably also be lending to the US Treasury if push comes to shove. So you have some friends here in Europe. You always should know that.

[00:37:04.670] – Grumbine

Yes, indeed. Let me take you down another path with Europe being still separate countries, but sharing a similar economic structure. European Nations have fought each other. How does the funding mechanisms within this structure impact any potential for conflict between the States? I’m just curious how that plays out in Europe now.

[00:37:33.710] – Ehnts

Well, I would say that the whole European project, at least officially, was the project to bring peace to Europe and sustain it, and the Americans kind of forced us into it. And then the French were going along with it because they thought it can be useful for them to keep their colonies more or less.

And the West Germans did it because they had no choice, and they wanted to be back as a member of respected nations. So I don’t know whether this kind of Eurozone set up… The idea was with the Euro, there should be more peace… But of course, it set up some kind of political conflict between nations. So it was Germans against Greeks, Irish people against German people, the way that the German tabloids framed it, it was like the Southerners would waste our money.

They would just print money in Greece and then buy BMWs with that. So I think that the way that the Eurozone crisis was mishandled created a lot of political conflict, and it opened the door to some kind of nationalist story about how other countries would take advantage of Germany or how other countries would take advantage of Greece, for example.

But these were more true. So to some extent, the rise of right wing populism that we have seen in the last couple of years in most of the European countries of the Eurozone probably has been caused by the mishandling of the Eurozone crisis. What they should have done is they should have just used the ECB as the fiscal backstop if you want, as a dealer of last resort for those government bonds of the Eurozone, they would not have to choose austerity policy then, and we could have recovered just like the US did under Obama.

So that was a political mistake. And I think it’s much worse now than in 2010. So the political situation in the Eurozone is bad, I would say, and I don’t think that we’ll have a war, but I think it’s probably more a problem of countries politics for example, in Poland and Hungary, we have populist governments, and whenever they need a scapegoat, they use Brussels. Okay. So that seems to be a very popular strategy.

And it’s to some extent true that Brussels and the European Union Eurozone, they did some really bad things. They took some bad decisions, and that has created some kind of division. And this kind of European spirit that we used to have that, of course, was also toned down by the way that especially the German dominated European Commission treated all these smaller countries. That was clearly from my point of view, a political mistake.

[00:40:12.530] – Grumbine

Covid exposed that money is probably the least important thing in many ways here in the United States, because out of nowhere, they raised the military budget billions upon billions of dollars without even so much as a negotiation. Has that recollection happen in Europe as well? Have people begun to realize the true nature of money, or at least an MMT perspective of money? Has that become more accepted, or is it still in the shadows?

[00:40:47.450] – Ehnts

No, I think that you are correct. So yes, MMT is now much more visible as a theory. And it explains what is a puzzle to most mainstream economists like, how is it possible that in the global financial crisis we had austerity and we had the private sector and [inaudible 00:41:05], which means that the Greek government debt was cut into half and half of it was written off.

And now there’s not even a hiccup. And the Greeks are part of the European scene again. So it’s kind of clear to people now that there is a problem with this kind of story of taxpayers money, which all goes down to Reagan/Thatcher economics. So many people have a better understanding now of what questions are important to answer.

And even the German finance Minister, I think last year he said that he would use a bazooka, he called it, so that the German companies would have enough money. The financial bazooka. And he said that it was unlimited. So I think he literally said that… Unlimited amounts of money. So the German development bank KFW, they lend billions of euros to companies who were struggling because they lost revenues.

And it was very open for everybody to see that if there’s a political will, then the money is forthcoming. And that, of course, means that this kind of “pay for” game that normally we are playing that whenever the Progressives want something, then they need to explain how they pay for it. Well, it happened again now that if there’s political agreement on all sides and the Conservatives are in, then there’s no question of how we are going to pay for it.

The money is just there. And it was the same with the banks when the banks were bailed out in 2008, 2009. There was no question, like, how are we going to pay for the bailout of the banks? So there was nobody saying “so we need some kind of bailout tax to impose on people and businesses to make sure that we can pay for those bailouts”.

And that, of course, has happened here that people have come to realize that, yes, there is some kind of problem here with the mainstream narrative. So it seems like we don’t actually pay for things. So we just have to talk about how money is created. And I think Christine Lagarde, the ECB President, in November 2020 she said that the ECB can create money unlimited amounts of money.

She said that the ECB cannot run out of money and it cannot go broke. So it was very visible. So everybody who’s interested in money and fiscal issues, everybody knows now and now it’s starting to dawn on people that we are living in a new world where MMT is describing what’s going on and especially those who are in favor of socioecological transformation.

Those people understand that with fiscal rules, that’s not going to happen. Okay. So if you want a green new deal, you need MMT to explain why an increase in government spending is not causing, I don’t know, inflation or the destruction of the exchange rate or loss of competitiveness or hyperinflation. So I think it’s now clear to policy makers across the whole spectrum that MMT is necessary for the next couple of decades.

[00:43:53.090] – Grumbine

So you had mentioned about Ronald Reagan really fueling the taxpayer narrative. And I would say he and Maggie Thatcher were instrumental in that whole neoliberal approach. They worked hand in hand with each other. And it brings me to the thought that in the United States, Warren Mosler would say that the US dollar is nothing more than a tax credit and that taxes are required for the government to provision itself. In Europe is the Euro nothing more than a tax credit as well? Is it the same thinking?

[00:44:28.370] – Ehnts

Yeah. Same thinking. We had our own currencies until we had the Euro. And, of course, our own currencies were there to make sure that the government can provision itself. So people were taxed and they were forced into unemployment, basically. And then they were willing to look for paid work. And then that meant that they would accept those currencies, those national currencies.

So it’s the same here. And when we switched from Deutschmark to Euro, for example, they switched from collecting taxes in deutschmark to collecting taxes in Euro right away. So it was very obvious also, with hindsight, at least it is obvious now that the tax story is very powerful. So once you have to pay your taxes in Euro, there’s really no reason to hold Deutschmark anymore. You can still have them.

So there’s a couple of billion Deutschemark still circulating, and you can go to the German central bank, and they will exchange it into euros, but not back. Yeah, we’re not forced to abandon Deutschmarks, but what happened is roughly that the German States said, look, we will buy your Deutschmarks and we will pay you with euros. And then you can use those euros to buy stuff.

But you can also use them to pay your taxes. And because of the businesses have to pay lots of taxes. VAT, for example, on a monthly basis. They are interested in having smooth business operations. And it would be stupid to have Deutschemarks and then having to pay taxes in euros. It would create trouble in the accounting, but also practical trouble.

So that’s what happened. So when we switched from Deutschmark to Euro, the only thing that happened is that the Stability and Growth Pact became more of a problem. I would say it was not enforced in the 2000s. So when the German government ran deficits that were above 3%, they got blue letters from Brussels. And then the Ministry of Finance basically said, yeah, okay, we know we won’t do it again.

So the French and the Germans, they were outside of the stability and growth pact deficit limits basically every single year. And then in 2006, I think it was there was a reform because the Southern countries said, look, you’re breaking the rules all of the time. Can you please change the rules so that you can be forced to reduce your government spending?

So it is really ironic, in hindsight, that it was mostly the Mediterranean countries that forced Germany and France to accept the reform of the Stability and Growth Pact so that the deficit rules became much tighter and it gave more power to the European Commission to force countries to cut government spending. If we wouldn’t have done that in the Eurozone in 2006, all of that austerity policy would not have happened, I guess. It’s really a shame.

[00:47:07.250] – Grumbine

Yeah, it seems crazy. Do we have any people in the troika or the ECB that understand MMT? Have we made any inroads?

[00:47:19.070] – Ehnts

Oh, yes, we did. For example, there is Ulrich Bindseil, he used to be the managing director for general market operations. So that’s the daily operations. And when I published the first edition of the German version of my MMT book, I asked him to endorse it and he said, “Well, I’ll give you two sentences for the back of your book,” and I think it says roughly for those who are reading about money, this book would be an excellent addition to any mainstream book.

So I think that’s very high praise for me. So he must have known it. And also Pavlina Tcherneva was at the ECB a couple of times. Mario Draghi, I think in 2019 said that MMT sounds like an interesting idea, and we should look into it. And Christine Lagarde later that year said that MMT is no panacea, but might be okay to fight deflation.

And we had deflation last year. So the very high ranking central bank officials of the ECB and also Bundesbank. Well, mostly ECB. They know about MMT. And from talking also to Bundesbank people, everybody who’s not politically appointed understands MMT and knows that it’s correct. It’s about nuances. But the German Bundesbank, they also published a paper in 2017 explaining that, for example, a loan given by a private bank to a household is something which is money creation.

So you create new deposits. And that was, of course, also the MMT perspective. So I had very good conversations over the years, also with Bundesbank people, especially the young ones. They are very open minded, but it’s the old ones that are the problem in a way that they still cling to these theories, and they don’t want to give up their paradigm.

[00:49:04.670] – Grumbine

It seems like at some point in time the empirical nature of MMT would become just so blindingly obvious that you couldn’t get away with denying it with a straight face. It seems like we’ve got a ways to go. But Stephanie’s book, The Deficit Myth, has been a huge help around the world in terms of getting regular people to understand this stuff here in the United States.

Just a couple of weeks back, we were able to interview Rep. John Yarmuth, who is the head of the Congressional Budget Committee, and his son was on as well, and they both attributed their growth to Stephanie’s book. I had talked to Randy Ray previously, so I know Randy had played a part in that and several others as well. But I’m curious, who do we have on the cusp over there? Who in Europe is starting to come around?

[00:49:57.170] – Ehnts

Well, I think that some of the political parties are coming around all over Europe, I would say so. I have also now established contacts with politicians and policy makers in Ireland, in Sweden and Norway, and also in Poland, where we had the MMT summer school. And already there’s lots of contacts in Italy and Spain. So I think, as I said, the Green New Deal stuff, that’s where MMT will be very important.

And I think the Green Party in Germany have realized that without MMT they won’t get anywhere. So everybody who’s serious about the socioecological transition has all the incentives in the world to embrace MMT. And to say, look, we have lots of deficits in our society, just as Stephanie always says, let’s forget about the fiscal deficits and use the money to solve our problems.

And I think that process has started. We are not there yet, but in Germany, we had the politician from the Party of the Left, Die Linke party, Fabio  De Masi, who was embracing MMT. He was arguing in favor of MMT on Twitter. We had invited him to the first MMT conference in Berlin, and he explained to us that he thinks that MMT is correct. So it has already started.

So the politicians know about MMT, but it’s a social kind of game. If you are the first one to come out openly, they will ask you questions. And Fabio was a smart guy, and he knew the answers. So he did it. But of course, most of the politicians have lots of different things to do, and you need time to understand MMT and to be able to answer questions.

John Yarmuth did it in a very nice way when he was interviewed on CSPAN. I think what you referred to also, that was brilliant. So I think the politicians will probably come around and try to find people who will teach them MMT and how to use it. For example, in Germany, there was also Robert Habek from the Green Party who was debating Friedrich Merz, who is a very neoliberal guy from the Christian Democrats and Habek was using some MMT frames, and Merz couldn’t go on the counterattack.

He was completely sidelined effectively in silence. So saying things like public debt is nothing but money that has been spent by the government and not collected yet in the form of tax payments. That’s very simple to understand. It’s also true, technically, and it takes away all this stuff about public debt being some kind of bad thing and being a negative thing.

So I think that in the Eurozone we will see some more movement. We just had German elections, and it’s not sure who will be in the next German federal government, but the opposition parties probably will be very interested in MMT both left and right.

[00:52:30.470] – Grumbine

It brings me to the final thing that I wanted to raise. And that is that you’ve mentioned the Green New Deal, and we’re way beyond the need for a Green New Deal. The world is not interested in all of our political stuff and fiscal rules. Physics doesn’t negotiate with anyone. One of the big things is the focus of immigration, because you have places throughout the United States and in Europe and around the world that will be directly impacted by changes in climate.

You’re going to see climate immigration happening all over the planet. And I’m just curious, in the United States, we have a lot of right wing reactionary folks that don’t want any immigration here. But we know that with a federal job guarantee, we can make society work for all and not be cruel to people that are coming as a result of cataclysmic climate change. What do you think is the feelings of Europe right now as it pertains to not only immigration but the potential for climate migrants?

[00:53:35.750] – Ehnts

Well, we just had some significant flooding in the west of Germany where more than 100 people were killed. So I think it has dawned on us that the climate change will effect us here in Germany, it will be a problem for all of us. So when I talk about the Green New Deal, I wouldn’t start with saying that hundreds of millions who live in far away countries will be affected and they might come to us, for example, those who are living on Pacific Islands, for example, I think that’s the wrong political approach.

I would start with saying, look, our economy is grounded in nature, and people are part of nature. You don’t stand outside nature. And if there won’t be enough food because of climate change, so it will be too dry or it will be too wet, then we have a big problem and you can clearly see you have seen the fires in the US, for example, flooding in Germany, flooding also in the UK.

I would always say, look, this is a global problem, but it’s also a local problem. And I would always start with the local dimension to it and say, look, this affects us locally and we need to fix it. And we need to make sure that we can stop climate change and not go to three or four degrees more. We should make sure that we can have maybe 1.5 degrees in 2100.

And of course, this migration stuff, if people are losing their homes and their jobs, yes, they will migrate somewhere. But I think this kind of narrative, it’s a right wing narrative, it’s scaring people. I would start with the local stuff and say, look, climate change is bad for all of us. And maybe we have thought that we would not be affected because that’s also at least to some extent, what the estimates say that North America and Europe will be the parts of the world which are least affected by climate change.

But I would always stress that even though they are the least affected, it’s still enough to start worrying about the effects that climate change will have on our societies. And then, of course, we can start helping other societies to adjust to the climate change that will happen and also to help them to make sure that there’s not going to be more climate change than absolutely necessary to make sure that they can also have a green economy.

So I would put it like this solidarity at home and then solidarity to other people abroad, those people who are losing their homes, they don’t want to go to Western Europe and they don’t want to go to the US. They would probably be happy to be somewhere closer to where they’re from. So in the European debate right now, this is not a big issue.

It’s pretty sad that the Mediterranean Sea has been more or less closed down to migrants, and it’s a dirty game that the European Union is playing there. But the debate has been also closed because of the federal elections. So they wanted to make sure that the German right wing extremists of Alternative for Germany, that they will not find their talking points in the press every single day. So it’s not a discussion right now, that’s all I can say.

[00:56:30.590] – Grumbine

Very good. I really appreciate it. Dirk, with that, let me just give you the last word and then close us out.

[00:56:39.110] – Ehnts

Well, okay. So looking at the future of the Eurozone, I would say that there’s going to be a lot of room for political debate and also for change. So I think right now we have a monetary system that is dysfunctional. I think that it’s very easy to see. So, again, the rate of unemployment has never fallen below 7%. I think the cause is lack of government spending, which is itself caused by the fiscal rules.

Well, Alternatively, you could say that people are saving too much – at least the rich people are – so a different kind of distribution of income also would help, of course, to create more employment, to create more aggregate demand. And we have now the big opportunity to change the rules of the Eurozone. The idea of the Eurozone was always just a crowning achievement.

And then we will have political union at some point. So if you have a European Treasury and the European Parliament is spending about 10% of European GDP, then of course, you need full democracy on the European level, and we don’t have it. And there’s this program, which is called Next Generation EU, which is a bit like a small fiscal capacity.

So even though we have this, it seems like politically we are moving towards some kind of Eurozone set up where the nation-states have more power again, where they can spend more money. It seems like there’s no political will to create the United States of Europe right now, especially given the austerity policies and what happened in the last ten years.

So it would be interesting to see what’s going to happen in the Eurozone because we cannot go back to the Stability and Growth Pact, but there is no political will to go back to national currencies either. So there will be a lot of muddling through. But I think for MMT, it’s a good moment because we can try to find solutions, try to make sure that people understand that when the ECB acts as a dealer of last resort, for example, for all those government bonds, it doesn’t cost us any single Euro.

It’s zero costs, and it completely kills this problem of national governments being illiquid or insolvent, which is great. But you need to understand MMT before you can offer this kind of solution and how to do the Green New Deal. That will also be a pressing issue looking forward. And the inflation rate is a little bit higher than usually just temporarily. But the problem of Europe might be also that we are very dependent on gas from Russia.

And apparently we have liberalized our gas markets so that it’s more spot prices and less long term prices. So that creates more volatility. It’s not impossible that we see higher inflation rates for a couple of months and even years if the Russians are using their power to hike up the gas price. So that’s my conclusion more or less. Thank you very much for giving me this opportunity. Thanks.

[00:59:22.970] – Grumbine

Dirk, thank you so much. It’s been a long time coming. I’m so glad we were able to make it happen. And with that I want to thank you all for listening. This is Steve Grumbine, Dirk Ehnts, Macro N Cheese. We’re out of here.

[00:59:58.470] – End Credits

Macro N Cheese is produced by Andy Kennedy, descriptive writing by Virginia Cotts, and promotional artwork by Mindy Donham. Macro N Cheese is publicly funded by our Real Progressives Patreon account. If you would like to donate to Macro N Cheese, please visit patreon.com/realprogressives.

Mentioned in the podcast:

Dirk Ehnts: Research assistant at the Chair of European Economics at the TU Chemnitz.

Website: Dr. Dirk Ehnts – personal homepage (dirk-ehnts.de)

Book: Modern Monetary Theory and European Macroeconomics – 1st Edition – Dir (routledge.com)

Axel Leijonhufvud: Swedish economist, currently professor emeritus at the University of California Los Angeles and professor at the University of Trento, Italy.

Richard Koo: Taiwanese-American economist living in Japan specializing in balance sheet recessions. He is Chief Economist at the Nomura Research Institute.

Books: The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession by Richard C. Koo | Goodreads

Balance Sheet Recession: Japan’s Struggle with Uncharted Economics and Its Global Implications by Richard C. Koo | Goodreads

Wynne Godley: An economist famous for his pessimism about the British economy and his criticism of the British government. In 2007, he and Marc Lavoie wrote a book about the “Stock-Flow Consistent” model, an analysis that predicted the global financial crisis of 2008.

Publications: Publications | Wynne Godley | Levy Economics Institute (levyinstitute.org)

Stephanie Kelton: Professor at Stony Brook University and a Senior Fellow at the Schwartz Center for Economic Policy Analysis at the New School for Social Research

Book: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy a book by Stephanie Kelton (bookshop.org)

Publications: Publications | Stephanie A. Kelton | Levy Economics Institute (levyinstitute.org)

Scott Fullwiler: Research Scholar at the Global Institute for Sustainable Prosperity and Associate Professor of economics at the University of Missouri – Kansas City.

Publications: https://wecanhavenicethings.com/primary-sources/scott-fullwiler/

Sam Brownback: American politician who served as a member of the U.S. House of Representatives (1995–96) and of the U.S. Senate (1996–2011) before becoming governor of Kansas (2011–18).

L. Randall Wray: Professor of Economics at Bard College and Senior Scholar at the Levy Economics Institute.

Publications: Publications | L. Randall Wray | Levy Economics Institute (levyinstitute.org)

Rohan Grey: A prominent voice in global financial news and focuses his research on the legal design and regulation of money and finance, as well as broader issues of law and political economy.

Publications: Rohan Grey | Semantic Scholar

Nathan Tankus: Visiting researcher at the Fields Institute and a research assistant at the University of Ottawa. He has also written for the Review of Keynesian Economics, Truthout and the financial blog Naked Capitalism.

Website: https://www.crisesnotes.com/about/

Christine Lagarde: French politician and lawyer who is the current President of the European Central Bank

Ronald Reagan: American politician who served as the 40th president of the United States from 1981 to 1989 and became a highly influential voice of modern conservatism.

Maggie Thatcher: Prime Minister of the United Kingdom from 1979 to 1990 and Leader of the Conservative Party from 1975 to 1990.

VAT: A value-added tax, known in some countries as a goods and services tax, is a type of tax that is assessed incrementally. It is levied on the price of a product or service at each stage of production, distribution, or sale to the end consumer.

Pavlina Tcherneva: An American economist, of Bulgarian descent, working as associate professor and director of the economics program at Bard College. She is also a research associate at the Levy Economics Institute and expert at the Institute for New Economic Thinking.

Website: Publications – Pavlina Tcherneva (pavlina-tcherneva.net)

Fabio de Masi: A German-Italian politician. He has been a member of the German Bundestag since 2017 and was a member of the European Parliament (MEP) from Germany from 1 July 2014 to 23 October 2017. He is a member of The Left Party, part of the European United Left–Nordic Green Left.

John Yarmuth: An American politician and former newspaper editor serving as the U.S. representative for Kentucky’s 3rd congressional district since 2007.

Bundesbank: The Bundesbank, or Deutsche Bundesbank, is the central bank of Germany and is the equivalent of the U.S. Federal Reserve. It is located in Frankfurt, Germany, and it has a group of nine regional offices throughout the country

Mario Draghi: an Italian economist, banker, academic, and civil servant who is the current Prime Minister of Italy since 13 February 2021.

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