Is this the end of the world as we know it?

It's certainly the end of the eurozone as we know it.

If there was ever a time for apocalyptic titles, well, this is it. Politicians, journalists, market participants, commentators, academics and pretty much everybody under the sun have engaged in an unofficial competition for who is going to come up with the most depressing prediction of what the not-so-distant-future holds for the eurozone and Europe at large.

If these doomsday predictions are anything to go by, our world will come crashing before our eyes very soon. Maybe, but it is not all that bad. This is indeed the end of the eurozone as we know but I believe we should all feel fine.

What is about to end is the perverse system of guarding a monetary union with peer pressure alone. The Stability and Growth Pack was an inadequate tool for governance, based on intergovernmentalism. Supranational institutions like the European Commission and Eurostat were left powerless to enforce discipline (or even question Member States' statistics).

Proposals are already on the table to strengthen the governance of the eurozone and empower the Commission to scrutinise national budgets, warn about the build-up of imbalances and challenge Member States that break the rules. But more needs to be done; not least the creation of a European treasury with the appropriate authority, know-how and firepower to make fiscal and economic policy common for the eurozone as a whole.

The intergovernmental model of governance has taken focus away from the collective good of the Union and put the emphasis on EU Member States' competing national interests. What we need is independent and supranational institutions, taking decisions beyond narrow national interests, with the good of the EU as a whole in mind.

In a similar vein, the idea that monetary union can prosper without fiscal union has run its course.

The emergence of imbalances and the loss of competitiveness are features of all monetary unions, including the US or the UK. To reduce the chance that these imbalances occur, scrutiny of fiscal policies and national budgets must be accompanied by the integration of labour, social and tax policies in an effort to form not just common economic policies but also a truly common European economy.

But when imbalances do emerge a system of transfers must be put in place to afford the embattled part of the union time and space to implement the necessary policies that will allow it to regain competitiveness. Those transfers will be conditional to the applications of the appropriate policies and can only happen in the context of a comprehensive fiscal union, with the rights and responsibilities that implies.

Furthermore, the European Central Bank must be liberated from its purely price stability remit. A strong and stable eurozone requires an central bank that monitors the build-up of imbalances across the economy and the financial services sector and is able -- and willing -- to function as lender of last resort when solvent member states and financial institutions find themselves in liquidity problems due to a systemic shock in the markets.

The creation of a fiscal union and the strengthening of the central bank will allow for the issuance of common bonds without the risk of moral hazard. Member Sates won't need to rely purely on the discipline of markets when they have to abide to the discipline of eurozone institutions. At the same time, the eurozone will not run the risk of constantly falling pray to the un-picking of its weakest link by the markets.

Last, but certainly not least, this Huxleyian Brave New World should have at its core democratically legitimate and accountable institutions. If we are to move closer to fiscal and economic federalism, governed by the independent and supranational institutions mentioned above, EU citizens must be at the heart of the process. Those charged with making decision -- be it the President of the European Commission, the President of the European Council, a European Finance Minister or the Members of the European Parliament -- must be directly accountable to the people.

Direct election for the three former, and a more representative voting system for the latter, will ensure a direct link between the electorate and the elected, and legitimise the process of economic integration needed to safeguard the future of the eurozone. This is not pro-European fantasy: it is a necessary building block in the architecture of the new governance structure of the Eurozone. And for that we need a new, grand, pan-EU Social Contract between EU citizens and their elected representatives.

The sooner we start drafting that contract the quicker we will be able to take EU citizens on board the process of closer European integration, bidding farewell to the world as we know it while greeting a new, brave one.

Petros Fassoulas is the Chairman of the European Movement UK

Petros Fassoulas is the chairman of European Movement UK

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We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?