What is a Surplus Recycling Mechanism? An idea going back to Bretton Woods

In yesterday’s post I claimed that Mrs Merkel is right on almost everything except that she seems unaware of the fact that her own wishes will only come true if our currency union is equipped with something that I called a Surplus Recycling Mechanism (SRM). What is an SRM? And why am I saying that it is sine qua non in a currency union?The answers lie in the debates that took place during the Bretton Woods conference. The very debates which led, eventually, to the establishment of what I refer to as the postwar Global Plan. In summary, from the late 1940s to 1971, the United States actively played the role of SRM, recycling wilfully its own surpluses to Europe and Japan. No market mechanism could do this. It was a mechanism that was run, administered and finetuned constantly by skilled officials. Of course, by the 1960s it run out of steam, as the USA turned into a deficit country. From that moment onwards the Global Plan‘s days were numbered. And when it crashed on 15th August 1971, the era of the Global Minotaur began, giving rise to another type of SRM. But more on this in future posts. Today I am posting here Chapter 3 of my forthcoming Global Minotaur, as a contribution to our discussion of what the SRM is and how it worked, at a global scale, from the late 1940s to 1971. In future posts I shall tell the rest of my story until we reach the point when the suggestion is fully spelled out  that Mrs Merkel would be right if only she understood that an SRM is necessary within the eurozone. For now, all comments are welcome. To download the chapter, click here : Chapter 3 – The Global Plan


  • I am following your writings with a lot of interest. I really appreciate the way you are doing political economy instead of economics in the sense of Samuelson and the like. Also, I find it great how wide is your perspective, looking on politics, domestic and international economics, culture, society, etc.

    I have some questions about the Surplus Recycling Mechanism which are unclear for me in your thinking and I did not find satisfying answers to them on your blog.

    1. A frequent argument is that in a fixed exchange rate system (or a monetary union), in case of differences in competitiveness between the countries, the solution is real devaluation, a decrease in wages. Seemingly, this is what Mrs. Merkel proposes with the competitiveness pact. What makes this impossible in your eyes that you propose instead a surplus recycling mechanism?

    2. When writing about Europe and the missing surplus recycling mechanism, you argue about current account deficits and surpluses which are created by differences in competitiveness (and the fixed exchange rate system). However, the European crisis today is not a crisis of current account deficits but of public deficits. I see a missing link in the causal chain here. How can you fill it in?

    If you have already written about this topics, you can just give me the links.

    Finally, let me draw your attention to a proposition of two Bundestag members which is very similar to yours: http://www.guengl.eu/upload//A%20European%20Clearing%20Union%20March%202011.pdf

    • You wrote, “The European crisis today is not a crisis of current account deficits but of public deficits”.

      True, but remember the source/creator of the current public deficits is when private financial institutions Ireland, Greece, Portugal, Spain and Italy borrowed heavily, lent imprudently and blew up asset bubbles using debt (with liquidity from banks in France and Germany) to sustain unsustainable current account deficits and “growth”. Then when the rubber band between lending and debt servicing “popped” the banks received “bail outs” (to repay banks in France and Germany) from their governments which now have unsustainable public deficits.

  • While reading an article in the newest Economist (http://www.economist.com/blogs/democracyinamerica/2011/07/euro-rescue), there is another question which came into my mind: How did the American government have the American electorate accept the massive investments in Europe and Japan? The obvious answer would be the cold war and its ideological mobilization. So the next question arises: what would take this role in your version of the European Marshall-plan?

    • Excellent question! The answer is: Logic. The difference between the original Marshall Plan and our proposal for an investment drive by the EIB is that in the matter case there is no need for give away funds (which was the essence of the Marshall Plan). What we are suggesting is that the EIB, further financed by the ECB issued Eurobonds, is allowed to utilise non European capital and to channel it into profitable investments within Europe.

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