Jim wrote “Finally, back to the risk of a financing crisis, a risk which I think is a good deal smaller than much commentary on the subject suggests.” But he also wrote “sticking with an EU-approved programme offers the best prospect of securing EU assistance in sorting out our fiscal problem. As I argued last week, such assistance is likely to prove necessary.”
I’m a bit confused by these two statements and would be interested in hearing a bit more from Jim on these issues. I had been assuming that that an EU intervention would only take place if international bond markets were no longer willing to lend to us, i.e. there had been a financial crisis.
I suppose one could argue that once the EU is willing to intervene (and as usual in lender of last resort situations, there is a certain constructive ambiguity going around about whether this would happen or what form it would take) then a financing crisis has been averted — after all, in this scenario, somebody is still willing to lend to us.
However, if a co-ordinated EU program of lending to member states in difficulty is undertaken, I would have little doubt that it would enforce punitive conditions, perhaps not as strict as IMF programs and certainly not as strict as a “sudden stop” in which borrowing ceases altogether. But pretty serious still. Whether such an outcome is labelled a financing crisis or not, I think it would be pretty rough. We would be far better off to sort things out on our own.
Given this commentary by Jim and the related one by NESC the following by Jim is very pertinent.
“A ticklish question that arises from all of this is: what is to happen if, notwithstanding the measures announced on April 7th, a significant breach of the deficit target is threatened again a couple of months later? Should the Government enact yet another set of emergency measures or adjust the deficit target?
The question points up the desirability of setting realistic budgetary targets and adopting a strategy that is reasonably robust in the face of the unexpected. The design and implementation of fresh adjustment packages every month or two and the more or less permanent state of emergency that this generates are not conducive to good policy design. Moreover, this pattern arguably strengthens the perception of control loss by Government and accelerates the loss of confidence among the public.”
Alas, I have to suggest that the most probable outcome will be towards the minimalist end of the corrective spectrum; that this will prove unrealistic to the financial markets and politically unpopular at a magnitude to force clawbacks; and that we will not see any hints of joined up thinking.
See you all in July….
“Finally, back to the risk of a financing crisis, a risk which I think is a good deal smaller than much commentary on the subject suggests.”
This statement is sadly like the “soft landing” predictions most were making 12 months or so back. Perhaps many of the commentators here are not in business. I am and I am also involved in business consultancy. January and February has been dire for anyone I have talked to (anywhere from 10% to 50% down). No one is giving pay increases, most are working on smaller employee numbers. Many are hanging in there hoping for something to happen.
The government do not seem to understand the urgency of the situation and the need for serious corrective measures in the public finances. They won’t do what is needed in April but will probably try and hang in there until the usual end of year budget.
As the year goes on I predict we will see people predicting more and more the need for EU assistance. Maybe it will be for the best as they will force us to take our medicine quicker than we would do ourselves.
@ Karl,
The kind of ‘EU assistance’ I had in mind was of the more benign variety e.g. willingness to issue joint eurozone bonds or engage in straightforward fiscal transfers.
@ Karl and Stuart,
I accept that my statement about the risk of a financing crisis is a bit loose. In the final draft of the piece (and under pressure of time and space) it replaced a rather more elaborate and unwieldy statement about CDS spreads as an indicator of default risk.
@Jim
I think it is highly unlikely that the EU will offer us such an easy route out of this fiscal crisis.
If the EU gave fiscal transfers with no strings attached to a country so far in breach of the the stability pact limits then the pact is essentially worthless.
Countries that manage their finances would be asked again and again to bailout those that don’t. And that is a situation Germany or many other would not want to get into.
Aid will almost certainly be offered but we will have to reduce the deficit to below 3% within a maximum of 3-5 years to get it. That means we can expect equally tough budgets over the next few years.
The only real choice is whether we decide the best course of action ourselves or allow someone else to do it for us.
5 replies on “Designing the ‘Mini’ Budget”
Jim wrote “Finally, back to the risk of a financing crisis, a risk which I think is a good deal smaller than much commentary on the subject suggests.” But he also wrote “sticking with an EU-approved programme offers the best prospect of securing EU assistance in sorting out our fiscal problem. As I argued last week, such assistance is likely to prove necessary.”
I’m a bit confused by these two statements and would be interested in hearing a bit more from Jim on these issues. I had been assuming that that an EU intervention would only take place if international bond markets were no longer willing to lend to us, i.e. there had been a financial crisis.
I suppose one could argue that once the EU is willing to intervene (and as usual in lender of last resort situations, there is a certain constructive ambiguity going around about whether this would happen or what form it would take) then a financing crisis has been averted — after all, in this scenario, somebody is still willing to lend to us.
However, if a co-ordinated EU program of lending to member states in difficulty is undertaken, I would have little doubt that it would enforce punitive conditions, perhaps not as strict as IMF programs and certainly not as strict as a “sudden stop” in which borrowing ceases altogether. But pretty serious still. Whether such an outcome is labelled a financing crisis or not, I think it would be pretty rough. We would be far better off to sort things out on our own.
Given this commentary by Jim and the related one by NESC the following by Jim is very pertinent.
“A ticklish question that arises from all of this is: what is to happen if, notwithstanding the measures announced on April 7th, a significant breach of the deficit target is threatened again a couple of months later? Should the Government enact yet another set of emergency measures or adjust the deficit target?
The question points up the desirability of setting realistic budgetary targets and adopting a strategy that is reasonably robust in the face of the unexpected. The design and implementation of fresh adjustment packages every month or two and the more or less permanent state of emergency that this generates are not conducive to good policy design. Moreover, this pattern arguably strengthens the perception of control loss by Government and accelerates the loss of confidence among the public.”
Alas, I have to suggest that the most probable outcome will be towards the minimalist end of the corrective spectrum; that this will prove unrealistic to the financial markets and politically unpopular at a magnitude to force clawbacks; and that we will not see any hints of joined up thinking.
See you all in July….
“Finally, back to the risk of a financing crisis, a risk which I think is a good deal smaller than much commentary on the subject suggests.”
This statement is sadly like the “soft landing” predictions most were making 12 months or so back. Perhaps many of the commentators here are not in business. I am and I am also involved in business consultancy. January and February has been dire for anyone I have talked to (anywhere from 10% to 50% down). No one is giving pay increases, most are working on smaller employee numbers. Many are hanging in there hoping for something to happen.
The government do not seem to understand the urgency of the situation and the need for serious corrective measures in the public finances. They won’t do what is needed in April but will probably try and hang in there until the usual end of year budget.
As the year goes on I predict we will see people predicting more and more the need for EU assistance. Maybe it will be for the best as they will force us to take our medicine quicker than we would do ourselves.
@ Karl,
The kind of ‘EU assistance’ I had in mind was of the more benign variety e.g. willingness to issue joint eurozone bonds or engage in straightforward fiscal transfers.
@ Karl and Stuart,
I accept that my statement about the risk of a financing crisis is a bit loose. In the final draft of the piece (and under pressure of time and space) it replaced a rather more elaborate and unwieldy statement about CDS spreads as an indicator of default risk.
@Jim
I think it is highly unlikely that the EU will offer us such an easy route out of this fiscal crisis.
If the EU gave fiscal transfers with no strings attached to a country so far in breach of the the stability pact limits then the pact is essentially worthless.
Countries that manage their finances would be asked again and again to bailout those that don’t. And that is a situation Germany or many other would not want to get into.
Aid will almost certainly be offered but we will have to reduce the deficit to below 3% within a maximum of 3-5 years to get it. That means we can expect equally tough budgets over the next few years.
The only real choice is whether we decide the best course of action ourselves or allow someone else to do it for us.