Gary Littlejohn for the Saker Blog

It was very interesting to see Mr. Ramin Mazaheri’s reply on 30th April to my comments on his original article:

ZeroHedge, a response to Mr. Littlejohn & the future of dollar dominance

In addition, as a contribution on a related issue, namely German government bailouts of German corporations, there is now the article by the respected historian Eric Zuesse on 6 May:

German Government Bails Out Owners of German Corporations

Quite apart from the failure by the German government to take a shareholding stake in such companies, which Zuesse rightly criticises, a direct bailout by the German government undermines the intent of the new regulations by the EU Competition Commissioner that aimed to facilitate ECB bailouts in a way that did not favour the companies of any particular EU Member State. That is a clear example of the real political limits on the rhetoric of EU solidarity, a point that I intend to take up later in this piece.

Like Mr. Mazaheri, I do not share the main premises of those who edit the Zero Hedge website. Rather I look to Zero Hedge for up-to-date information, accepting that their motivation for any critical analysis is as Mr. Mazaheri states to protect their investments. A point that perhaps I should have made is that QE inflates all asset prices, including share prices, and so Trump is quite mistaken to treat a rising stock market as an indicator of US economic success. Like the UK economy and most of the EU, the US economy was at best flat-lining before the COVID-19 pandemic. More importantly, the use of QE to buy financial assets and then leverage them to create a pyramid of derivative assets is both a mechanism and a political cover for what must be one of the greatest transfers of wealth from the poor to rich in centuries. When combined with the transfer of jobs and entire industries out of what had been leading industrial economies, it goes a long way to explaining the stagnation or decline of real incomes in those economies.

Since one result of this is the relative predominance of service sectors in what had formerly been primarily industrial economies, this makes it all the harder for such economies to raise living standards because ultimately real income growth depends on productivity growth. While there may be room for future productivity growth in the service sectors through the use of artificial intelligence, most of the recent productivity gains in the service sectors have already been realised through the use of IT and the Internet, and those technologies are now mature. That almost certainly means that there is little future room for productivity growth with existing service sector technology. In turn, to me that implies that new industries need to be created if such economies are to have a realistic prospect of future growth after the pandemic. At the moment, it seems that China and Russia are moving more quickly in this respect than the Western economies, but while China’s innovations are reported in the Western media, there is a systematic Western failure to report on Russian innovations.

In his comments on my response to his original article, Mr. Mazaheri points to my remark that the new policy (whereby the Fed is buying corporate bonds) allows a possible new strategy of discrimination against foreign-owned companies:

“Indeed it does. But nations have a right to defend themselves (like with protectionism), after all; contrarily, national aggression (like with blockades) is the cardinal sin of international law. The new Fed-Treasury open alliance, with BlackRock as their bureaucratic arm, is a problem for the American citizen in that the priority is not the elevation of American corporations/individuals, but of Western/international high finance.”

I fully agree, and think that protection against such foreign attempts at what amounts to economic predation should be combined with increased cooperation among the countries that are not complicit in this policy. While financial sanctions can cause serious short-term set-backs (or long-term ones if the economy being targeted is already in a weak position) the use of the recently-created alternative international institutions such as the Eurasian Economic Union [EAEU] can be a major core of resistance to such aggressive financial policies.

Consequently I also agree with Mr. Mazaheri that the West will not by economic means alone be able to take over those countries that are clearly pursuing a genuinely independent path (and so I share his views on the danger of major wars, even at least one more World War). And I also agree with his ‘modification’ of Michael Every’s third alternative, which was:

“The WESTERN financial system fragments as the US asserts primacy over parts of it, leaving the rest to make their own arrangements.”

Mr. Mazaheri’s view is as follows:

Therefore what will happen is his third option, but accurately modified: The global Western financial system fragments, as the West asserts primacy over as many puppets/clients as possible, but the persistent economic success of the socialist-inspired camp attracts fresh allies.”

So that raises the issue of which countries are pursuing an independent path, which paradoxically does indeed imply a re-orientation towards a China-focussed set of arrangements. To me that focus includes the convergence of the Russian-inspired EAEU with the Chinese Belt and Road Initiative [BRI]. Implicitly that amounts to understanding that Russian military strength underpins the Eurasian economies even though China is rapidly building up its own military capabilities. It may be a cliché to repeat that trade wars often lead to real wars, but it is clear that the military threat from the West is real, even though its conventional forces are weakening – but current US military doctrine implies moving rapidly to the use of nuclear weapons. That is not to say that countries outside of Eurasia such as Cuba and Venezuela will lose their autonomy in a China-focussed orientation. Self-evidently they have long experience if withstanding Western pressure, and neither China nor Russia make ‘neoliberal conditionality’ a precondition of their international economic relations.

Some countries such as India have weakened their own independence by adopting policies that had been advocated behind the scenes by American financial institutions and ‘philanthropic’ bodies. For example, a few years ago the Indian government suddenly adopted a policy of moving towards a ‘cashless society’ in an economy where about 87 per cent of all transactions had been in cash in small rural markets.

Demonetisation has Left India’s Food Markets Frozen – and the Future Looks Tense

What Has Neoliberal Capitalism Ever Done for India? The Demonetization Heist

India’s Demonetization Triggers Extreme Poverty and Famine

This change had been lobbied for by some US banks at a time when the Minister of Finance, although an Indian citizen, had worked for one of the major international financial institutions and still kept his home in the USA. When the inevitable riots started over the sudden withdrawal of large-denomination bank notes, he resigned and returned to the USA. This sort of manoeuvre, apparently designed to increase the role of US banks in that country, is an indication that watchfulness is important in economic policy and that the recent US policy change giving more power to the Fed is by no means the only danger for non-Western economies. Protectionism has been condemned as short-sighted since the Great Depression of the 1930s but it is both legitimate and necessary in the face of these desperate attempts to prevent the decline of Western economic dominance.

Tax Havens and Money Laundering

Elsewhere in his commentary, Mr.Mazaheri rightly condemns the existence of tax havens. At the time of what is now called the Global Financial Crisis of 2008, there was a big campaign in the UK to reduce the number of tax havens and to increase their transparency and consistency of reporting if they could not be abolished. That campaign merely showed the resilience of such tax havens and their usefulness not just to the 1 per cent, but also to governments.

On resilience, it soon became clear that for example a promise to regulate, curtail and/or abolish British tax havens by the then UK Prime Minister ran into serious legal/constitutional problems. Many of these British tax havens are not part of the United Kingdom of Great Britain and Northern Ireland, usually called the UK. They are mostly dependencies of the Crown (the monarchy as a legal entity) and legally not part of the UK. Hence the UK government has no jurisdiction over them. Examples of such tax havens are the Isle of Man in the Irish Sea, and some of the Channel Islands. Other such tax havens include the Cayman Islands, which are a British Overseas Territory, and thus like other such Overseas Territories are linked to but not part of the UK.

To get an idea of how governments themselves find such tax havens useful, if only as a source of employment, the case of the Mossack Fonseca ‘reporting scoop’ of April 2016 is instructive. This event is also referred to as the Panama Papers incident because Panama is where the company providing the tax haven services was located. Here is an indication of the probable motives for the leak of this tax haven data, because the potential of this leak to further US interests was immediately understood:

In addition to the opportunity that this massive leak provided to pressure various targeted people, another probable motive was to scare potential clients to move to tax havens that would be far less likely to be investigated, namely some recently-created tax havens within the USA itself. For example, soon after the Panama Papers were published, Bloomberg reported that companies were moving from Panama to Delaware (footnote 10 in the link below, which lists the main US tax havens and the legislation that made this change possible):

So the main motive for this leak may have been the sudden rise of tax havens in some mid-Western US States such as South Dakota. That was certainly an outcome:

It was claimed that the SudDeutsche Zeitung (South German Times) had been founded in 1947 by the CIA and that it had an ongoing influence there. A separate source claimed that the Panama Papers leak was indeed a CIA operation:

US Government Partially Funded the Panama Papers’ Leak

The agenda was also claimed to be promotion of the cashless society:

The War on Savings: The Panama Papers, Bail-Ins, and the Push to Go Cashless

There is no reason why such a massive data leak could not have been used for multiple purposes, including smearing Putin as some websites claimed, but two aspects of this leak were certainly clear. It mobilised a group of journalists some of whom were thought to be willing outlets for intelligence services in a practice that with hindsight looks like a precursor to the UK Integrity Initiative for placing stories in the mainstream media. It also revealed the inter-relation between some uses of tax havens and money laundering, although money laundering can be done by a whole series of routes. One wonders why it was the US Senate, rather than the Justice Department, that pursued the 2012 HSBC money laundering scandal.

The scale of these scandals is enormous, and in fact they do not involve only money laundering and the use of tax havens:

Yet some kind of immunity seems to remain:

The above link includes a video that is 37 minutes long, by a US Professor of Economics and Law who used to be a US banking regulator. Despite these alarm bells being rung in December 2018 and November 2019, Deutsche Bank has been allowed to continue trading and ran a huge loss for the last three months of 2019, before the pandemic struck:

For this to be the case is a matter for serious concern, especially for the EU since Deutsche Bank is the largest bank in the EU, and is thus a major problem for EU financial regulators at a time when serious strains within the Eurozone have not been resolved.

The Eurozone

Mr. Mazaheri is well aware of some of the most serious structural problems of the Eurozone and there is little that I would disagree with in his critique of Varoufakis’ book about his experiences as Greek Finance Minister when trying to renegotiate Greek debt with the anti-democratic Eurogroup.

The hopelessly corrupt structure of the Eurozone & the Eurogroup

In October 2017 Mr. Mazaheri rightly predicted in the link above that there would be a continuation of QE in the Eurozone that had not been reformed in any effective way since the 2008 crisis. He also predicted that the ECB would try to ‘taper’ the QE (gradually reduce it) and that this would not work. That proved to be the case and the ECB even extended QE with a ‘zero interest rate policy’ (ZIRP) for a while before at one point actually going into a negative interest rate (whereby some banks had to pay the ECB to keep their money there). This proved unsustainable for some banks and led to a ‘two-tier’ policy where those large banks that could not pay the ECB interest returned to zero interest while others still had to pay. This surreal attempt to sustain QE in the Eurozone when the EU as a whole was stagnating or contracting (in different countries) has led to renewed political pressure to mutualise the debt (as mentioned in my earlier piece) in order to ease repayment pressure on those countries whose economies have been performing less well in the Eurozone.

So there clearly are difficulties in rolling over the debts in the Eurozone, and as Mr. Mazaheri pointed out in 2017 (near the very end of his article) there are important differences between QE as it has operated in the USA and in the Eurozone:

“Secondly, the risks in the national bond markets for Eurozone nations are not anywhere as secure in comparison with the United States. They weren’t as secure in 2012, and the Eurogroup’s policies have not corrected these differences in risk whatsoever in 2017. Nor has the Eurogroup strengthened the resilience of the “real economies” in their member nations – indeed, austerity policies and labor code rollbacks have worsened the real engine of the “real economy”: the People (everyday consumers, for our capitalist readers).”

In my view this is related to the fact that the Eurozone is not only run anti-democratically but that there is no unitary European state with a single fiscal policy to stabilise the Eurozone economy, and there has been and will be no debt mutualisation because various Member States will always resist it. I am not arguing in favour of debt mutualisation and a fiscal union, but instead saying that the way the Euro was designed as a currency was bound to lock in differential performance. There is no mechanism for funds to flow from prosperous countries within the Eurozone to the less prosperous countries, despite the existence of ‘regional funds’ and ‘social funds’ that are supposed to perform this function but have always been too small to have any real impact. The structural effect of integrating different Member States with differing levels of productivity per capita into a single currency is to lock in that differing level of performance with little chance of raising investment to equalise productivity because there is no national currency of their own for the Eurozone Member States to devalue.

That is why when Italy joined the Eurozone its productivity per capita was equal to that of Germany but in recent years it has been about 16 per cent lower. In the past Italy could respond to German improvements in productivity by devaluing to maintain export sales and using the ongoing income to invest in appropriate technology to catch up on Germany again. It has since lost that compensating mechanism that enabled it to compete on the world market, as have most other Eurozone economies, including France. This is why France has kept pressing for a relaxation of the fiscal rules (on public spending) because having the state provide the investment finance is almost the only other realistic (or at least reasonable) way of catching up in productivity and keeping the economy growing in a globally competitive environment. The only other way is for the Member State government to cut consumption (impose austerity, unreasonably) in the hope of using the funds saved to invest in future growth, However, that cannot really work if the economy is already in debt and there are limits on public spending. And that was the situation in which many economies, especially in southern Europe, soon found themselves in when they joined the Eurozone.

In contrast, Germany under Chancellor Schröder had undergone various quite painful economic reforms before entering the Eurozone, reforms which lost his party the next election but which placed Germany at a competitive advantage in the new currency zone that amounted to a cost-free devaluation, making its goods much more competitive on the world market. So Germany started in the Eurozone with a double advantage: the Schröder reforms followed by a de facto devaluation of the currency without the usual devaluation-induced inflationary impact on Germany’s cost of living.

As Varoufakis found to his cost when trying to renegotiate Greek debt with the Eurogroup, when devaluation is not possible and there is no debt write-down or other form of restructuring (which could in principle have been possible) then brutal austerity can be imposed as a conscious policy to ensure that the banks holding such debt do not bear the consequences of their own reckless lending. This is often described as an ‘internal devaluation’ but it is not the same thing at all as a real devaluation because demand is ruthlessly suppressed in the affected economy and there is no boost to exports to provide an increased source of national income. Hence there is no new source of investment funds available to boost growth. Any funds available as a result of national cuts in public expenditure go to servicing the debts. So as Mr. Mazaheri described in his 2017 article, the anti-democratic banker’s Eurogroup ensured the stability of German, French (and I would add Italian) banks. This led to a contraction of about 25 per cent in the Greek economy over time.

Should anyone imagine that such anti-democratic behaviour is atypical, it is worth recalling the removal of an Italian Prime Minister and the attempted removal of a newly-elected Portuguese government by a Portuguese President who publicly stated that he feared that this reforming government would be unacceptable to the European Commission, the ECB and the IMF (the Troika). So despite the rhetoric about the EU being a ‘rules-based order’ and ‘European solidarity’ the reality is very different.

Structural Economic Differentiation and Financial Flows in the Eurozone

The real impact of the Eurozone has not only been the imposition of austerity throughout most of the EU, but increasing differences in the performance of national economies within it. These impacted initially on the southern EU economies, but when eastern European economies joined the EU the small regional and structural funds tended to be diverted to them at the expense of existing members. Despite that new members did not grow quickly and the promised prosperity was limited. By the end of 2019 ongoing austerity was even adversely affecting Germany which was close to recession. That in turn implies that EU banks now face real problems in staying profitable, and so Deutsche Bank’s recent huge losses are no surprise.

The financial impact of the Eurozone included the development of a central system of international bank payments within the Eurozone using a Standard Shared Platform [SSP] provided by the central banks of the three largest Eurozone economies: France, Germany and Italy. These payments developed over time into what are known as TARGET 2 flows:

“The objectives of TARGET2 are to:

 support the implementation of the Eurosystem’s monetary policy and the functioning of the euro money market

 minimise systemic risk in the payments market

 increase the efficiency of cross-border payments in euro, and

 maintain the integration and stability of the Eurozone money market.”

Yet what are presented as technical flows between banks facilitated by central banks do not tend to cancel each other out over time as payments are made, as would be expected if Eurozone economies were converging to equal levels of activity. Indeed far from minimising systemic risk in the payments market and maintaining the integration and stability of the Eurozone money market, the figures show an increasing divergence in flows, strongly suggesting an inherent instability in the Eurozone. (The most recent figures suggest a small moderation of this divergent pattern, as some economies reduce their negative position within the TARGET2 balances, but the general trend remains: see below.)

Given that TARGET2 is one of the largest payments systems in the world by value, and operates according to the better-known SWIFT standards of international payments, it is astonishing that so little attention is paid to it. As indicated in the Wikipedia link above, independent analysis in 2011 by Hans-Werner Sinn of the Institute for Economic Research showed that these payments operations meant that countries with positive balances had corresponding liabilities, which created a risk for remaining countries should any member country leave the system. Moreover, such growing imbalances had implications for individual countries’ current account deficits (on their de facto balance of payments within the Eurozone), for international private capital movements and for an international shifting of the refinancing credit that national central banks grant to commercial banks.

While Sinn later accepted that such outward flows from some Eurozone countries did not correlate with balance of payments deficits, it nevertheless stands to reason that such flows must include a substantial (varying) amount that consists of de facto current account deficits. In addition, there is no real doubt that one large (varying) component of such outflows towards northern economies in the Eurozone are indeed international private capital movements. In other words, this second component amounts de facto to capital flight, as Sinn has argued from 2011. Indeed at one point even the Bank of International Settlements [BIS] described such flows as a ‘slow bank run’ (implicitly from the southern Eurozone economies to the northern ones) before trying to walk back from that position, doubtless realising that it could cause a financial scare. As can be seen from the above Wikipedia link, Sinn and Wollmershaeuser argued that the Eurozone crisis was a balance of payments crisis, and that TARGET credit financed current account deficits or capital flight in Greece, Ireland, Portugal, Spain and Italy.

On the shifting of refinancing credit granted to commercial banks by national central banks [NCBs], it must be remembered that the countries with the positive TARGET2 balances are the ones with the legal liabilities.

“Hence, a country’s TARGET liabilities also indicate the extent to which its central bank has replaced the capital markets to finance its current account deficit, as well as any possible capital flight, by creating new central bank money through corresponding refinancing credit. Sinn illustrated that from an economic perspective, TARGET credit and formal rescue facilities serve the same purpose and involve similar liability risks.”

To put this another way, a country with a positive inflow of such funds, recorded as an increase in its TARGET2 liabilities, has reduced its dependence on borrowing from international capital markets and increased the amount of money that its NCB can lend to its own commercial banks. (Later Sinn & Wollmershaeuser argued that this increased liquidity grew to the point where commercial banks were less dependent on the NCBs and could even land money to them.) But this will not show up as part of the QE by the ECB, and if it can be done for commercial banks, it will now also presumably make it easier, for example, for the German government to bail out German companies, as discussed above by Eric Zuesse. Countries not holding such large positive TARGET2 balances will it find harder to engage in such activities: a clear competitive advantage for northern Eurozone countries.

T he growing TARGET2 imbalances were subject to further comment in May 2017 in a report by ABN Ambro Bank:

Eurozone Watch – Target2 balances a ticking time bomb?

This shows how TARGET2 balances were limited in size before the 2008 crisis and grew rapidly afterwards, especially among what are here called the periphery countries (Greece, Portugal, Spain and Italy plus Ireland). The interest that these countries paid on their government bonds also increased in comparison to those of other Eurozone countries (or in other words, the bond yield spreads in periphery countries rose over Germany as this report puts it). Most of this increase occurred after 2015 as an indirect result of the ECB’s QE. But it seems also to have been partly as consequence of the fragmentation of finances and increased risk perception within the Eurozone. Assuming that the ECB QE was the dominant factor in such TARGET2 flows, the outlook forecast by this ABN Ambro report in 2017 was for total TARGET2 balances to increase.

It can be seen from the latest evidence from the Euro Crisis Monitor at Osnabrück University that this increase has indeed taken place, with a small reversal in the curves of the most widely differing countries over the last two years:


To illustrate the most recent available figures (February 2020) underlying the above graph, Finland’s positive balance is 73.13B EUR, Germany’s positive balance is 804.00B EUR, Luxembourg’s positive balance is 207.96B EUR, whereas France’s negative balance is -17.95B EUR, Italy’s negative balance is -396.86B EUR, Portugal’s negative balance is -74.06B EUR, and Spain’s negative balance is -373.58B EUR. Ireland has turned to a positive balance with 42.82B EUR.

So two of the three largest Eurozone economies (France and Italy) have a negative balance. In my view, this reflects their failure to get the limits on public expenditure changed, which would have been one way to help kick-start their economies while still within the Eurozone straightjacket. On the other hand, the very small country Luxembourg has a huge positive balance, which suggests that it is a primary destination for capital flight from other countries. This fits with changes made when Jean-Claude Junker (later President of the European Commission) was Prime Minister. Some have described Luxembourg as a tax haven.

These growing TARGET2 imbalances stand in contrast to the situation in the USA where the Fed (which is actually comprised of District offices in various parts of the USA) has a system for equalising such imbalances by redistributing/reallocating them periodically among those Districts. As outlined in the Wikipedia link above, Sinn & Wollmershaeuser:

“compare the TARGET balances of the Eurosystem with the corresponding balances in the US settlement system (Interdistrict Settlement Account) and point out that US balances relative to US GDP have decreased thanks to a regularly performed settlement procedure in which ownership shares in a common Fed clearing portfolio are reallocated among the various district Feds comprising the US Federal Reserve System. They advocate the establishment of a similar system in Europe to end the ECB’s role as a provider of international public credit that undercuts private market conditions.”

However, having such a common settlement procedure in the Eurozone runs into precisely the issue that distinguishes it from the USA, namely that while it may have a common currency it is not a unified state with a common fiscal policy and common debts which can impose that settlement on its constituent members. Such a solution which is effectively a precondition for debt mutualisation has been (in my view rightly) resisted as creating a European superstate. The Eurozone crisis has not stampeded countries into accepting this change which has long been a semi-clandestine part of the political agenda for some parts of the European elite. It is for this reason – the lack of an overarching superstate that forms a single political entity – that I do not accept that the Euro can be treated as a sovereign currency like the US dollar, as Mazaheri seems to argue in his response to my comments.

In that case, I remain of the view that the Eurozone financial system remains fragile and inherently unstable. The institutional problems that have slowed the ECB’s response to financial crises also mean that it cannot guarantee to be able to roll over the debts. So far, it has managed to do so with great difficulty but at the cost of rising financial tensions among the constituent states, and what does indeed amount to a slow bank run or capital flight from the countries that remain trapped in the Eurozone by the TARGET2 system. It should be remembered that this payments system is a legal requirement for Eurozone members, and for new countries joining the EU, whether they are about to join the Eurozone immediately or not.

The political resistance to debt mutualisation and a fiscal union that comes from many electorates in the EU is complemented by the tacit agreement of the governments of those countries benefitting from the liquidity provided by the TARGET2 system. They know precisely how much they would lose by replacing it, or could lose if even one Eurozone country abandons the Euro. Some economists have argued that the Euro countries with large positive holdings of TARGET2 balances could repudiate those legal liabilities if any member country left the Eurozone, because the Euro is a fiat currency. But these days one can ask what currency in a developed country is not a fiat currency supporting a fractional commercial banking system, with in many cases an elaborate pyramid of complex derivatives dependent on that financial infrastructure? To repudiate a Eurozone debt on those grounds could lead to potentially massive institutional collapse.

In addition to such institutional factors, the financial difficulties of major banks such as those that have been involved in the banking scandals cited above mean that there would be a serious credit crunch in individual countries if any of these large banks failed. In fact Deutsche Bank is considered in some quarters to be a global systemic risk.


My view that the Eurozone cannot absolutely guarantee to continue to roll over debts is not based on some conception of a ‘final crisis’ of capitalism. It is an argument that there are inbuilt institutional weaknesses in the Euro currency system that were in fact known before it was inaugurated. Politicians had been advised beforehand that the regional fund and the social fund were far too small to reduce existing inequalities between EU economies, but being aware that their own electorates would probably resist the tax increases required to spend more on ’European solidarity’ they chose to go ahead with the Euro in the hope that the probable resulting currency crisis would scare those electorates into accepting greater unification in the direction of a super-state.

On the contrary, the Euro crisis in a context of austerity simply promoted stronger nationalistic feelings in many member countries and was accompanied by an international blame game within the Eurozone. So for me, the Eurozone, which had until the pandemic been the largest consumer market in the world, is actually the weakest link in the industrialised part of the global economic system. If its institutions should founder, then the US Dollar will presumably be leveraged to increase US dominance within Europe in any attempt at recovery, perhaps using the rhetoric of the post-1945 Marshall Plan.

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