Absent from the discussion, Martin Hellwig says, writing in German paper Die Zeit, was any "criticism of the amount of credit that has been made available to banks", who also incidentally acquire national debt and use it as security. Instead there is more concern about the idea of virtuous Germany having to pay the bill of its profligate sister states, without understanding that it was not the profligacy of states that caused the mess.
Hellwig's point, and the point of many, is that the sovereign debt crisis should be seen as a symptom of an ill banking sector, which has still not been cured. The argument over the ECB's "Outright Monetary Transactions", which include buying state debt, is rather a red herring. This is because, as Mark Blyth, (Austerity: the History of a Dangerous Idea) puts it:
The ongoing Eurozone crisis really has little to do with the fiscal profligacy of the periphery sovereigns, only one of which [Greece], as noted, was meaningfully profligate. There is a crisis in European sovereign debt markets; of that there is no doubt. But treating it as a crisis brought about by debt-fueled consumption and profligate state spending is to confuse correlation (they happened at the same time) with causation (out-of-control spending caused the crisis).
Boom and Bust Credit CreationArguably, instead of "state profligacy", the number one systemic problem behind the financial crisis was the banks' creation and miss-allocation of credit. This problem remains and now banks are lending less, and people are paying off their debts, the money supply in the EU is decreasing and the European Central Bank is having to increase central bank reserve money to plug the gap. This can be seen in the graph below (ECB stats) and the sharp negative correlation between M1 and M3 in the percentage increase after 2007.
This negative correlation explains why the ECB's expansion of its money is not inflationary. As people pay off their credit and banks become reluctant to lend, money supply slows and money is destroyed.
Credit and MoneyHellwig likens a discussion of state finances, without the inclusion of how the money system operates, to be rather like a performance of Hamlet, without the Prince of Denmark. Without understanding the monetary system, it is not possible to see why the ECB needs to expand its money supply to help stop a depression similar to the 1930s. Hellwig writes that this lesson came from the Great Depression in the 1930s:
In their book on the monetary history of the the USA, the economists Friedman and Schwartz accuse the Federal Reserve Bank of letting the money supply between 1929 and 1933 shrink 33 percent, and that this shrinkage was a contributing factor to why the depression fell so heavily.Fortunately, the ECB has learnt this lesson, but unfortunately this is being undone by austerity, which is continuing its toll on Europe. The narrative is incorrectly focused on "virtuous" and "profligate" member states, rather than on the banking system.
Should banks have the power to create money in the first place?Considering the boom and bust nature of credit and money creation, there are movements such as Positive Money that question whether private banks should be able to have the power to create money as credit. In Germany, Positive Money's sister organisation is called Monetative, who are campaigning for roughly the same goals but in a European context. Hellwig doesn't go this far, but at least wants banks to be stable:
The real scandal doesn't lay in the politics of the ECB, but rather that until now, five years after the crisis, there has been no big tidy up of the finance sector. Incidentally, also in Germany.