Time and Money

Thanks to the Financial Times of a couple of weeks ago, I have read an interesting paper on tax evasion in Greece. Interesting because it quantifies what everybody already knew: the Greek government is structurally incapable to collect taxes. The study estimates a lower bound of 28 billion euros of unreported income for Greece. As a consequence, the foregone government revenues amount to 31 percent of the deficit for 2009. We are talking about lower bounds here, so both figures could be substantially higher.

The excessive weight of the informal economy, and the inefficiency in tax collection had already been pointed out repeatedly, for example in the last OECD Economic Survey of Greece before the crisis hit (2009). A sentence of the accompanying Policy Brief best summarizes what we already knew before the crisis

Quantitative Easing and Lender of Last Resort: Lots of Confusion under the Sky

I have read an interesting article by Wolfgang Münchau, on the Financial Times.  To summarize, Münchau argues that because of politician’s complacency, there is a chance that the new OMTs program launched by the ECB will never be used, and hence prove ineffective in boosting the economy. He therefore argues that the ECB should have done like the Fed, and announce an unconditional bond purchase program (private and public alike).

The piece is interesting because Münchau is at the same time  right, and off the target. It is worth trying to clarify.

The Tree and the Forest

What to do of yesterday’s decision of the ECB? The tree looks very rather nice, the forest much less. First, a look at what Mario Draghi announced:

• “[…] the Governing Council today decided on the modalities for undertaking Outright Monetary Transactions (OMTs) in secondary markets for sovereign bonds in the euro area. […] We aim to preserve the singleness of our monetary policy and to ensure the proper transmission of our policy stance to the real economy throughout the area. OMTs will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro. […] we act strictly within our mandate to maintain price stability over the medium term.” The technical note accompanying the decision explicitly states what markets wanted to know: “No ex ante quantitative limits are set on the size of Outright Monetary Transactions” In other words, bond purchases will be unlimited.The technical note also specifies the conditionality, the fact that the purchases will be on short maturities, and that they will be fully sterilized.
• Let’s go back to Draghi: “we decided to keep the key ECB interest rates unchanged.  […] inflation rates are expected to remain above 2% throughout 2012, to fall below that level again in the course of next year and to remain in line with price stability over the policy-relevant horizon.“

To summarize, the ECB will try to bring down the spreads, acting within its mandate, because speculation is perturbing the transmission mechanism of monetary policy and threatening stability.  This can also help explain the decision to keep the rates unchanged: there is no point in using that lever, unless it is  sure it works.

Why is the tree rather good? And what makes the forest more worrisome? The tree first.