Thursday, 30 June 2011

The Birth of European Monetary Union - Tommaso Padoa-Schioppa and the Grand Strategy of Capital in the 1980s

ON PADOA-SCHIOPPA: Among economists, central bankers are those who are at the interface of economic theory and politics. It should not surprise, because they deal with money – and money is the pivotal “institution” where use value (let us call it loosely “social need”) and exchange value or capital (the “need” to ensure that only those use values that are “profitable” are pursued) – where these two opposing forces meet or collide. Money is the institution that, if well understood, will tell you unequivocally that “economics is a concentrate of politics”. Money is that “object” on which “the sovereign” is imprinted, even when it is commodity money such as gold. And central bankers “juggle” economic concepts in a curious manner: they are aware that the “concepts” they are using are not “eternal”: they are “transitory” and “specious” (a play on “species money”): - because politics is its real social substance. That substance is “value”, but I will not go into that now.

Among economists, Tommaso Padoa-Schioppa was a central banker, and of all central bankers he was one with an Italian ‘Renaissance’ education – with an insight into that period of “capitalist” history in which finance and money still ruled over industrial capital and in which the co-existence of a dozen “principalities” in Italy made money and finance very interesting indeed. So I could not help but be struck recently, upon re-reading one of his papers, by the following passage that, if you forgive the presumption, truly deserves to be quoted in full:

“Of the other factors I mentioned, I shall only recall the powerful role played by two ideas that became popular in the 1980s, one in the economic field and the other in the monetary field. In the economic field, it came to be held that public intervention in the economy should be reduced and more scope allowed to the play of market forces, which can be summed up in the expression 'minimum government'. In the monetary field, the paradigm gradually prevailed that monetary policy should be primarily concerned with price stability and central banks made independent. The two components of this paradigm are clearly related, since an independent central bank is much more acceptable if it is not entrusted with politically sensitive choices such as that between more employment and more price stability, which was how monetary policy was usually presented in the 1950s and 1960s. The two ideas of minimum government and an independent central bank oriented towards price stability were very important in facilitating the acceptance of monetary union since they tended to minimize the shift of sovereignty. If the central bank is not entrusted with politically sensitive decisions, it becomes a more technical institution, one that has to make sure a metre is always a metre long, neither more nor less, and the transfer of this function from the national to the European level is thus less politically charged; governments would be less inclined to feel that they were relinquishing something that was theirs by right. What is ironic is that a prominent opponent of EMU, Margaret Thatcher, and the monetary institution that has supposedly most to lose from monetary union, the Bundesbank, were in fact strong supporters of these two ideas, which ultimately helped to create a climate favourable to the entry of EMU into the Treaty.”

Now, I believe that these words should be etched in… gold (if you forgive the allusion to commodity-money par excellence). What Padoa-Schioppa is saying is that “two ideas” (ideas!) “became popular” (popular!) in the 1980s: and they both “can be summed up in the expression ‘minimum government’”. So somewhere, someone decided that “minimum government” was needed: - which meant that “public intervention in the economy should be reduced and more scope allowed to the play of market forces”. Please note this beautiful expression: - “the play of market forces”. And then Padoa-Schioppa continues by stating that the “other idea” in the “monetary field” was that of “technocratic” central banks “oriented toward price stability”.

To cut a long post short, I would invite participants to think long and hard about “the meaning” of these propositions. Because what we have had with the current crisis is precisely this: the total, irrevocable and ignominious collapse of the “idea” or capitalist “strategy” of “minimum government” and “the play of market forces”. Not only has “public intervention” been necessary – but the assumption of (Martin Wolf) “notionally private debt” by the State into “public debt” means that those “market forces” have failed in the most “catastrophic” or “systemically risky” manner!!

Think about it when you reflect on the “options” available to Bernanke and Trichet! Regards and good week-end!

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