The European Union’s proposed recovery fund to counter the pandemic’s economic fallout seems destined to leave the majority in every member state worse off. Finance will again be protected, if badly, while workers are left to foot the bill through new rounds of austerity.

The euro crisis that erupted a decade ago has long been portrayed as a clash between Europe’s frugal North and profligate South. In fact, at its heart was a fierce class war that left Europe, including its capitalists, much weakened relative to the United States and China. Worse still, the European Union’s response to the pandemic, including the EU recovery fund currently under deliberation, is bound to intensify this class war, and deal another blow to Europe’s socioeconomic model.

If we have learned anything in recent decades, it is the pointlessness of focusing on any country’s economy in isolation. Once upon a time, when money moved between countries mostly to finance trade, and most consumption spending benefited domestic producers, the strengths and weaknesses of a national economy could be separately assessed. Not anymore. Today, the weaknesses of, say, China and Germany are intertwined with those of countries like the US and Greece.

The unshackling of finance in the early 1980s, following the elimination of capital controls left over from the Bretton Woods system, enabled enormous trade imbalances to be funded by rivers of money created privately via financial engineering. As the US shifted from a trade surplus to a massive deficit, its hegemony grew. Its imports maintain global demand and are financed by the inflows of foreigners’ profits that pour into Wall Street.

This strange recycling process is managed by the world’s de facto central bank, the US Federal Reserve. And maintaining such an impressive creation – a permanently imbalanced global system – necessitates the constant intensification of class war in deficit and surplus countries alike.

Deficit countries are all alike in one important sense: whether powerful like the US, or weak like Greece, they are condemned to generate debt bubbles as their workers helplessly watch industrial areas morph into rustbelts. Once the bubbles burst, workers in the Midwest or the Peloponnese face debt bondage and plummeting living standards.

Although surplus countries, too, are characterized by class warfare against workers, they differ significantly from one another. Consider China and Germany. Both feature large trade surpluses with the US and the rest of Europe. Both repress their workers’ income and wealth. The main difference between them is that China maintains huge levels of investment through a domestic credit bubble, while Germany’s corporations invest much less and rely on credit bubbles in the rest of the eurozone.

The euro crisis was never a clash between the Germans and the Greeks (shorthand for the fabled North-South clash). Instead, it stemmed from an intensification of class war within Germany and within Greece at the hands of an oligarchy-without-frontiers living off financial flows.

For example, when the Greek state went bankrupt in 2010, the austerity imposed on most of the Greek population did wonders to restrict investment in Greece. But it did the same in Germany, indirectly repressing German wages at a time when the European Central Bank’s money-printing was sending share prices (and German directors’ bonuses) through the roof.

Class warfare is arguably more brutal in China and the US than it is in Europe. But Europe’s lack of a political union ensures that its class war verges on being pointless, even from the capitalists’ perspective.

Evidence that German capitalists squandered the wealth extracted from the EU’s working classes is not hard to find. The euro crisis caused a massive 7% devaluation of the surpluses that the German private sector had accumulated from 1999 onwards, because capital owners had no alternative but to lend these trillions to foreigners whose subsequent distress led to large losses.

This is not only a German problem. It is a condition afflicting the EU’s other surplus countries as well. The German newspaper Handelsblatt recently revealed a notable reversal. Whereas in 2007, EU corporations earned around €100 billion ($113 billion) more than their US counterparts, in 2019 the situation was inverted.

Moreover, this is an accelerating trend. In 2019, corporate earnings rose 50% faster in the US than in Europe. And US corporate earnings are expected to suffer less from the pandemic-induced recession, falling 20% in 2020, compared to 33% in Europe.

The gist of Europe’s conundrum is that, while it is a surplus economy, its fragmentation ensures that the income losses of German and Greek workers do not even become sustainable profits for Europe’s capitalists. In short, behind the narrative of northern frugality lurks the specter of wasted exploitation.

Reports that COVID-19 caused the EU to raise its game are grossly exaggerated. The quiet death of

European debt mutualization guarantees that the gigantic increase in national budget deficits will be followed by equally sizeable austerity in every country. In other words, the class war that has already eroded most people’s incomes will intensify. “But what about the proposed €750 billion recovery fund?” one might ask. “Is the agreement to issue common debt not a breakthrough?”

Yes and no. Common debt instruments are a necessary but insufficient condition for ameliorating the intensified class war. To play a progressive role, common debt must fund the weaker households and firms across the common economic area: in Germany as well as in Greece. And it must do so automatically, without reliance on the kindness of the local oligarchs. It must operate like an automated recycling mechanism that shifts surpluses to those in deficit within every town, region, and state. In the US, for example, food stamps and social security payments support the weak in California and in Missouri, while shifting net resources from California to Missouri – and all without any involvement by state governors or local bureaucrats.

By contrast, the EU recovery fund’s fixed allocation to member states will turn them against one another, as the fixed sum to be given to, say, Italy or Greece is portrayed as a tax on Germany’s working class. Moreover, the idea is to transfer the funds to national governments, effectively entrusting the local oligarchy with the task of distributing them.

Strengthening the solidarity of Europe’s oligarchs is not a good strategy for empowering Europe’s majority. Quite the contrary. Any “recovery” based on such a formula will short-change almost all Europeans and push the majority into deeper despair.

During the week I joined a fascinating webinar given by the brains and policy guru behind the European Central Bank, Philip Lane, its chief economist. He looks like a man with the job he always wanted and is comfortable with it.

The reason I used the term “brains” is very simple: Lane is now the intellectual driver of policy. As I listened to him, I heard a combination of Ben Bernanke’s deep appreciation of monetary history and Mario Draghi’s sharp understanding of the power of the central bank and the breathtaking array of tools at his disposal. Lane grasps what is at stake and is prepared to act comprehensively.

The implication for the profile, maturity and cost of debt in euro zone countries is enormous. The only risk is that governments do not fully comprehend the gravity of what the ECB is saying and the opportunity it affords.

It is an institution on the ascendancy that has just slapped down the German constitutional court, has the full backing of the German government, realises that it has to save the European economy and – in practice, if not in theory – is becoming more like the Federal Reserve by the day. In a comprehensive analysis of its role, Lane reiterated the message that the ECB will finance everything any government, or indeed corporate entity, wants to do in the fight against this Covid-19 “pandession”.

The implication is that all debts in Ireland could be restructured at much lower – almost zero – rates. This Irish State borrowed at 0.28 per cent a few weeks back. The only issue preventing Irish mortgages being repriced at these levels is the willingness (or claimed ability) of the banks to follow suit.

I specifically asked Prof Lane this question and he said the purpose of lower interest rates was to get them to work on the street via the banking system. Lower official rates need to be “passed on” for them to work. He implied there was little point otherwise. Let’s come back to this in a bit.

In a series of slides, Lane suggested that euro zone policy could be yet looser. He implied, even at these low rates, that there is more the ECB can do if needed, which is something this column has been highlighting for the past ten weeks.

There is simply no financial constraint on borrowing or refinancing right now. In fact, because inflation is well below the ECB’s target, the next move in short-term interest rates will in all likelihood be downwards again.

In addition, the pandession has led to levels of unemployment that are unprecedented, implying that the ECB will buy more government debt because falling tax revenue might trigger higher bond yields, which the ECB will not tolerate now.

‘Downward loop’

The theme of the talk was very much centred on the ECB stepping into an unprecedented situation and deploying all its tools to prevent what is termed the “downward loop” – when higher bond yields lead to less lending, leading to lower tax revenue and economic growth, leading to yet higher bond yields and the downward spiral takes hold.

The stakes are extremely high and, although not stated, the focus is on Italy and, to a lesser extent, Spain. The ECB will not give the markets any excuse to envelop the euro zone bond markets with “selling contagion”, the type of contagion that almost led to the euro unravelling in 2012-13 under the leadership of the hapless Jean-Claude Trichet.

If member states of the euro zone avail of the opportunities presented by the ECB, this will not happen. Italy provides “cover” for other euro zone countries, particularly smaller ones, to act assertively on the interest rate front.

In a general point, Lane suggested the euro zone economy won’t get back to 2019 levels until 2022 and, during this period of weakness, the ECB stands ready to do more. Therefore, these policies are likely to be with us for some time.

In one of his slides, Lane revealed that the ECB is currently buying just over 20 per cent of all new government bonds issued and that this figure will go higher if necessary. Such a commitment to buy means the market is reassured that anything it buys will be bought from it by the central bank. This provides endless liquidity and therefore profoundly reduces any risks in the euro zone bond market.

In plain English, this means the ECB has said to the governments, “Do whatever it takes to cushion the blow of Covid-19, we are behind you and we will buy whatever isn’t nailed down!”. The ECB has no intention of standing idly by.

This means that right now, because the ECB is behind us, if Ireland wanted to avail of these opportunities, the State could issue a “perpetual” bond to cover all investment spending, ranging from the New Green Deal or it could refinance the entire mortgage book of State-owned AIB, bringing the average mortgage rate in AIB down from around 4 per cent to 0.5 per cent. Where AIB goes the other banks will follow. If they don’t, they will shrink.

Interest rates

Imagine the relief of customers and the increase in take-home income if the same low rate of interest charged to the State were to be charged to the citizens? Given that the risk implicit in Irish government debt is only the aggregation of the Irish citizens’ ability to pay, there is no reason why the State and the citizen shouldn’t face the same rate of interest, particularly if those loans are collateralised by Irish property.

The ECB has said that everything is on the table. Today the average mortgage in Ireland pays 3.5 per cent interest and above. That is more than twice the 1.5-1.75 per cent rate that German and French mortgage holders pay in the same currency. Why?

Equally, the rate of interest faced by the State is almost zero; contrast that “free money” with the cost to the State in terms of lost taxes, unemployment and bankruptcies of letting the tourist/hospitality sectors go bust?

Prof Lane was clear this week. We are in extraordinary times, which demand extraordinary measures. We should not be hamstrung by rules that apply when things are normal because things are not normal. The chance of us getting back to normality will be determined by the courage and vision we show now.

In a crisis, we need new thinking. What was radical before the crisis becomes mainstream, and what was mainstream becomes redundant. When an institution such as the ECB, arguably the most conservative institution in Europe, is prepared to rip up its own rule book, you know the time has come to act differently.

High inequality undermines social cohesion, erodes public trust, and deepens political polarization, all of which negatively affect governments’ ability and readiness to respond to crises. This explains why the United States, Brazil, and Mexico account for nearly half of the world’s reported deaths since the start of the pandemic.

Three countries – the United States, Brazil, and Mexico – account for nearly half (46%) of the world’s reported COVID-19 deaths, yet they contain only 8.6% of the world’s population. Some 60% of Europe’s deaths are concentrated in just three countries – Italy, Spain, and the United Kingdom – which account for 38% of Europe’s population. There were many fewer deaths and lower death rates in most of Northern and Central Europe.

Several factors determine a country’s COVID-19 death rate: the quality of political leadership, the coherence of the government’s response, the availability of hospital beds, the extent of international travel, and the population’s age structure. Yet one deep structural characteristic seems to be shaping the role of these factors: countries’ income and wealth distribution.

The US, Brazil, and Mexico have very high income and wealth inequality. The World Bank reports the respective Gini coefficients for recent years (2016-18) at 41.4 in the US, 53.5 in Brazil, and 45.9 in Mexico. (On a 100-point scale, a value of 100 signifies absolute inequality, with one person controlling all income or wealth, and zero means a completely equal distribution per person or household).

The US has the highest Gini coefficient among the advanced economies, while Brazil and Mexico are among the world’s most unequal countries. In Europe, Italy, Spain, and the UK – with Gini scores of 35.6, 35.3, and 34.8, respectively – are more unequal than their northern and eastern counterparts, such as Finland (27.3), Norway (28.5), Denmark (28.5), Austria (30.3), Poland (30.5), and Hungary (30.5).

The correlation of death rates per million and income inequality is far from perfect; other factors matter a lot. France’s inequality is on par with Germany’s, but its COVID-19 death rate is significantly higher. The death rate in relatively egalitarian Sweden is significantly higher than in its neighbors, because Sweden decided to keep its social distancing policies voluntary rather than mandatory. Relatively egalitarian Belgium was battered with very high reported death rates, owing partly to the authorities’ decision to report probable as well as confirmed COVID-19 deaths.

High income inequality is a social scourge in many ways. As Kate Pickett and Richard Wilkinson convincingly reported in two important books, The Spirit Level and The Inner Level, higher inequality leads to worse overall health conditions, which significantly increases vulnerability to COVID-19 deaths.

Moreover, higher inequality leads to lower social cohesion, less social trust, and more political polarization, all of which negatively affect governments’ ability and readiness to adopt strong control measures. Higher inequality means a larger proportion of low-income workers – from cleaners, cashiers, guards, and delivery persons to sanitation, construction, and factory workers – must continue their daily lives, even at the risk of infection. More inequality also means more people living in crowded living conditions and therefore unable to shelter safely.

Populist leaders exacerbate the enormous costs of inequality. US President Donald Trump, Brazilian President Jair Bolsonaro, and British Prime Minister Boris Johnson were elected by unequal and socially divided societies with the support of many disgruntled working-class voters (typically white, less-educated men who resent their declining social and economic status). But the politics of resentment is almost the opposite of the politics of epidemic control. The politics of resentment shuns experts, derides scientific evidence, and resents elites who work online telling workers who can’t to stay home.

The US is so unequal, politically divided, and badly governed under Trump that it has actually given up on any coherent national strategy to control the outbreak. All responsibilities have been shifted to state and local governments, which have been left to fend for themselves. Heavily armed right-wing protesters have, on occasion, mobbed state capitals to oppose restrictions on business activity and personal mobility. Even face masks have become politicized: Trump refuses to wear one, and he recently said that some people do so only to express their disapproval of him. The result is that his followers gleefully reject wearing them, and the virus, which started in the “blue” (Democratic) coastal states, is now hitting Trump’s base in “red” (Republican) states hard.

Brazil and Mexico are mimicking US politics. Bolsonaro and Mexico’s President Andrés Manuel López Obrador are quintessential populists in the Trump mold, mocking the virus, disdaining expert advice, making light of the risks, and flamboyantly rejecting personal protection. They are also guiding their countries into a Trumpian disaster.

With the exception of Canada and all too few other places, the countries of North and South America are being ravaged by the virus, because almost the entire Western hemisphere shares a legacy of mass inequality and pervasive racial discrimination. Even well-governed Chile fell prey to violence and instability last year, owing to high and chronic inequality. This year, Chile (along with Brazil, Ecuador, and Peru) has suffered one the world’s highest COVID-19 death rates.

Inequality is certainly not a death sentence. China is rather unequal (with a Gini score of 38.5), but its national and provincial governments adopted rigorous control measures after the initial Wuhan outbreak, essentially suppressing the virus. The recent outbreak in Beijing, after weeks of zero confirmed new cases, resulted in renewed lockdowns and massive testing.

In most other countries, however, we are witnessing once again the enormous costs of mass inequality: inept governance, social distrust, and a huge population of vulnerable people unable to protect themselves from encroaching harms. Alarmingly, the epidemic itself is widening inequalities even further.

The rich now work and thrive online (Amazon founder Jeff Bezos’s wealth has risen by $49 billion since the start of the year, thanks to the decisive shift to e-commerce), while the poor are losing their jobs and often their health and lives. And the costs of inequality are sure to rise further, as revenue-starved governments slash budgets and public services vital for the poor.

But a reckoning is coming. In the absence of coherent, capable, and trustworthy governments that can implement an equitable and sustainable pandemic response and strategy for economic recovery, the world will succumb to further waves of instability generated by a growing array of global crises.

The combined wealth of Facebook’s Mark Zuckerberg, Amazon’s Jeff Bezos, and Google’s Sergey Brin, and Larry Page is larger than the combined wealth of the bottom half of the American population.

They are the leaders of a second Gilded Age – ushered in by semiconductors, software and the internet – which has spawned a handful of hi-tech behemoths and crushed competition.

Facebook, Amazon, Google, Apple, and Microsoft now have the highest market values for all public corporations in America.

As of today, only three countries in the world have a GDP higher than these companies’ combined market value of approximately 4 trillion dollars.

America’s first Gilded Age began in the late nineteenth century with a raft of innovations – railroads, steel production, oil extraction – that culminated in mammoth trusts run by “robber barons” like J.P. Morgan, John D. Rockefeller, and William Vanderbilt.

The answer then was to break up the railroad, oil, and steel monopolies.

The answer today is the same: Break Up Big Tech.

First: They have a stranglehold on the economy.

Nearly 90 percent of all internet searches now go through Google. Facebook and Google together will account for nearly 60 percent of all digital ad spending in 2019 (where most ad money goes these days).

They’re also the first stops for many Americans seeking news (93 percent of Americans say they receive at least some news online). Amazon is now the first stop for almost half of all American consumers seeking to buy anything online.

With such size comes the power to stifle innovation.

Google uses its search engine to promote its own products and content over those of its competitors, like Yelp. Facebook’s purchases of WhatsApp and Instagram killed off two potential rivals. Apple stifles competition in its App Store.

Partly because of this economic concentration, the rate that new job-creating businesses have formed in the United States has almost halved since 2004, according to the Census Bureau.

Second: Such size also gives these giant corporations political power to get whatever they want, undermining our democracy.

In 2018, Google, Amazon, Facebook, Apple, and Microsoft spent 70.9 million dollars on lobbying and supporting candidates.

As a result, Amazon – the richest corporation in America– paid nothing in federal taxes last year. Meanwhile, it held a bidding war to extort billions from states and cities eager to have its second headquarters.

Not to mention, these companies have tremendous influence over how Americans receive information. And as we’ve seen, Facebook and Google have enabled the manipulation of our elections.

Third: Giant tech companies also hurt the environment. 

Many are failing to reduce greenhouse emissions, as they promised, and are unwilling to commit fully to renewable energy.

Finally: Their huge wealth isn’t being shared with most of their workers. 

Nine in 10 workers in Silicon Valley make less now than they did in 1997, adjusted for inflation. And many are part of the “working homeless.” That is, people who work full time and yet are still homeless.

The answer is to break them up. That way, information would be distributed through a large number of independent channels instead of a centralized platform. And more startups could flourish.

Even one of Facebook’s founders has called for the social media behemoth to be broken up.

Senator Elizabeth Warren has introduced a proposal to do just that. It would force tech giants to open up their platforms to more competition or break up into smaller companies.

Other countries are already taking on Big Tech. The European Union fined Google nearly $3 billion for antitrust violations in 2017.

Let’s be clear: Monopolies aren’t good for anyone except for the monopolists, especially when they can influence our elections and control how Americans receive information.

In this new Gilded Age, we need to respond to them as forcefully as we did to the monopolies of the first Gilded Age and break them up.

Kelton joins Slate Money’s Emily Peck, Felix Salmon, and Anna Szymanski for a long awaited episode on Modern Monetary Theory. She answers their many questions about MMT and discusses her book The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy.