Saturday, May 26, 2012

Warren Mosler and Andrea Terzi — The euro area is not running out of euros. Yet, it pretends it is.

Technically, any central bank can spend or lend any amount of its currency with any of its member banks by simply crediting their accounts. This is the basis and the source of any currency, which is nothing more than an account at the central bank—an ECB liability in the case of the euro area. 
This power of “issuing” currency is exercised by simply changing the numbers on the account balance of commercial banks as a result of a loan being extended or of a payment being made. The ECB does this routinely when it makes loans to banks and when it credits banks to settle government payments to the private sector. This power of crediting reserves is held by the Governing Council of the ECB (Article 12.1 of the ECB Statute).

The process can work inversely, of course: the central bank can debit reserves (i.e., “un-print” euros) when banks pay off their loans or when banks pay taxes for their own or their clients’ accounts. 
The political rules of the euro area, however, limit what the ECB can do. Governments are forced by those rules to get funding without ECB support. The ECB is prohibited from buying government bonds or distributing a balance of euros to each government (on a per capita basis) to prevent local states from running out of money. So, euro area governments can run out of money, although their common central bank clearly cannot! 
One would suspect that if the euro area were to undergo an emergency such as a major natural disaster or a war, European governments would request that the ECB put its absolute power at their disposal. Thus, one wonders why European politicians do not believe this is an emergency that justifies the exception.
Read it at MEPOC
The euro area is not running out of euros. Yet, it pretends it is.
by Warren Mosler and Andrea Terzi

Read this in conjunction with Steve Roth's post that I cited earlier today here.

7 comments:

paul said...

semi-related: (@Tom H.)

Economics is not math - the word is spreading about which trumps which.

http://ineteconomics.org/blog/inet/economics-not-math

A.K.A. Damo Mackerel said...

'One would suspect that if the euro area were to undergo an emergency such as a major natural disaster or a war, European governments would request that the ECB put its absolute power at their disposal. Thus, one wonders why European politicians do not believe this is an emergency that justifies the exception.'

Because certain countries in the EU have blatantly abused their membership of the eurozone and have squandered their financial reputations.

Would you give a junkie alochol as a subsititute for heroin?

Tom Hickey said...

Those who supplied the easy credit did not act imprudently? To get to a financial crisis of this proportion it takes two to tango.

Tom Hickey said...

@ paul. Promoted.

John Zelnicker said...

IIRC, Warren has said for a long time that the end game on Europe is that the ECB writes the check. I just hate the continuing human losses of all kinds while the Euro elite try not to give in. Talk about heartless psychopaths.

Tom Hickey said...

John, this is disaster capitalism at its finest or worst, depending on which side of the town in which you live. This is by design. It's an opportunity to discipline labor and maximize profit margin. When that has been done to satisfaction, then the recovery will begin, with capital secure that wage pressure will not emerge any time soon.

They are fully aware of what needs to be done and specifically prohibited the ECB from becoming a lender of last resort. Faced with an implosion of the EZ, they will just relax the rule, as they have several times already in creative ways. But always just enough to avoid disaster, while they tighten down the screws more.

John Zelnicker said...

Tom -- Agreed. In another comment I referred to the Euro elites as heartless psychopaths. Seems to fit.