Archive for the ‘EMU governance’ Category

Mr Weidmann and the Classics

October 1, 2013 1 comment

Bundesbank President Jens Weidmann strikes again. In a tribune on today’s Financial Times he argues that to break the sovereign-bank nexus, the only solution is to impose, through regulation, an extra burden on sovereign debt holdings (he is gracious enough to concede that a transition period could be accorded).
I find this fascinating. Germany is the country that most opposes a fully fledged banking Union, that to be effective would require common deposit insurance, a crisis resolution mechanism, and I would add, an enhanced role of the ECB as a lender of last resort.
This would break the vicious circle between sovereigns and the financial sector, without denying the special role of banks and credit in a modern economy; nor, also relevant in today’s situation, their capacity to finance governments. Weidmann stubbornly refuses to see any specificity to banks, and has nothing else to propose than imposing by regulation what de facto is a downgrading by default of sovereign debt.
Mr Weidmann is a talented economist. He should maybe go back to Bagehot’s Lombard Street

Cyprus. Been There, Seen That

March 19, 2013 2 comments

A small country is on the verge of bankruptcy. It is so small that the amount of money needed to save it (17bn euros) amounts to less than 0.12 per cent of the eurozone GDP (no typos here. It is around 30 euros per European citizen).
Been there, seen that. Just three years ago in another small country, Greece. At the time, procrastination, self interest, ineptitude, unpreparedness, made the small problem become huge. And we are all still paying the bill. The Greek crisis management was so successful that our leaders are happily embarking in the same dynamics: improvised, dangerous, half-baked solutions, supposedly designed to avoid free riding (the protestant syndrome, once again) and in fact destabilizing the whole system.

There is no need for me to repeat what has been understood everywhere except, as usual, in Berlin, Frankfurt and Brussels: the tax on deposits breaks an implicit pact between governments and depositors, and fragilizes the banking systems of the whole periphery of the eurozone. Read More

Of the EU Budget and Fiscal Rules

November 26, 2012 Leave a comment

Last Friday the negotiations on the 2014-2020 EU budget were put on hold because of  fundamental disagreements among Member States. Surprise, Surprise… I do not think it is a big deal anyway. There is not doubt that at the next meeting a last-minute- low-key compromise will materialize. A compromise that will most likely save the most controversial items of the EU budget, like agricultural policy, and  cut the very few investment programs that had made it into the budget in the past. But who cares, after all; our leaders will be able to show the usual self complacency, and the rest of us will be left with the all-too familiar sentiment of yet another missed opportunity.

Most commentators blamed David Cameron, but his position was not new, and hardly surprising. The UK has always tried to extract as much as it could from the European process, while giving as little as possible; others did it, are doing it, and will do it. But rarely with the consistency and the single-mindedness of the UK. This was true with EFTA in the 1960s, then again with the infamous UK rebate negotiated by Margaret Thatcher in 1984. If England never played for the common good in the past, how could we expect it to do so at a times of crisis?

No, the real surprise of the failed budget negotiation was not England, but Germany, and the coalition of the fiscal hawks. Read More

The Ancient Roots of EU Problems

November 2, 2012 3 comments

Il Sole 24 Ore just published an editorial I wrote with Jean-Luc Gaffard, on the structural problems facing the EU. Here is an English (slightly longer and different) version of the piece:

It is hard not to rejoice at the ECB announcement that it would buy, if necessary, an unlimited amount of government bonds. The Outright Monetary Transactions (OMT) program is meant to protect from speculation countries that would otherwise have no choice but to abandon the euro zone, causing the implosion of the single currency. As had to be expected, the mere announcement that the ECB was willing to act (at least partially) as a lender of last resort calmed speculation and spreads came down to more reasonable levels.

Read More

Of Useless Summits (and Related Posts)

July 13, 2012 Leave a comment

So, we had another crucial summit, on June 28-29, followed by another also crucial Eurogroup, on July 9. Like all the ones that preceded, and the ones that will follow, they were trumpeted as the final solution to eurozone woes. And as usual, these “final solutions” lasted days, if not hours.

I was tempted to comment immediately after, but I wanted to see the dust settle for once, so as to have more perspective. Did not work that way, though, as news kept piling up. But let’s look at what was agreed.
Read More

A Banking Union without a Fiscal Union?

June 22, 2012 1 comment

I really enjoyed this piece by Perry Mehrling on the lethal embrace between sovereign debt and banks, and on how to dissolve it.  Alex Barker and George Parker on the Financial Times seem to think that the only way to have a banking union is to have a fiscal union (which makes the proposal impossible to implement). Mehrling disagrees, and explains how this could be done.

I am no expert in finance, but he seems rather convincing. And for once, here is a proposal that does not call for a grand solution (unfortunately, very unlikely), but for a step-by-step process.

Also, i really enjoy reading what happens at INET (yes, this is called advertising).

Markets and Debt Monetization

June 14, 2012 3 comments

Countries like the United States, Japan or the United Kingdom can finance their debt at zero or negative real interest rates. This in spite of  debt levels higher than those of the euro area, and growth forecasts that are not necessarily better.  Meanwhile, the eurozone peripheral countries have to deal on a daily basis with the mood of markets, and to pay interests on debt at the limit of sustainability.

The reasons for this state of affairs are clear, and have been repeatedly mentioned.  Eurozone countries are forced to borrow in a currency that they do not issue: the euro is in effect a foreign currency. To quote Paul de Grauwe,

In a nutshell the difference in the nature of sovereign debt between members and non-members of a monetary union boils down to the following. Members of a monetary union issue debt in a currency over which they have no control. It follows that financial markets acquire the power to force default on these countries. This is not the case in countries that are no part of a monetary union, and have kept control over the currency in which they issue debt. These countries cannot easily be forced into default by financial markets.

In other words, peripheral eurozone countries are  in the same situation of Latin America in the eighties: they are  forced to pay high risk premia to markets fearing the risk of default, induced by the vicious circle austerity-recession-debt burden.
Read more…