In Bini Smaghi’s letter as quoted on ZH, he writes “a monetary union is de facto a political union” (quoting someone else). I’m no prof.dr. - anything but academic - but to me it’s the reverse: first political union, then the rest. Judging from the state of integration - and I find blaming the Greek crisis on some moral deficiency of Greeks in general extremely telling - we’re as close to a full political union as we are to Starship Enterprise.

As for the mountain of debt, it’s obvious that it only exists in the present framework. Not quite rosecolored lenses, but you get the idea. Change said framework and the problem might not be so huge. One solution I’ve heard (from an Australian leftist) is for the ECB to buy the debt and hitting the delete key. I like it!

Ciaran O’Hagan’s point that even substantial QE may not cause inflation is sobering. Are we back to Krugman’s and Hendry’s previous views that the hole of debt and wealth destroyes is so big that it is hard to over-fill it to the point of inflation.

The concept of ring-fencing sovereigns is interesting. What mechanism might be used to this end? Anyone?

It is worth a substantial amount of economic pain to keep the EU together. The optimum medium term economic solution is not necessarily the optimum long term political solution.

On the National level:

Whereas one might have feared that announcing a resolution scheme could prompt a flight of capital, if capital flies in any event then surely one should have a resolution scheme ready. In fact, resolution for weaker banks and institutions may increase the credibility of the guarantee vis-a-vis other institutions.

Whether or not the EU keeps it together, and I think it will, there is going to be a huge amount of enforcement of debt. There is a huge drag where banks micro manage borrowers to the point of paralysis and/or borrowers are enslaved for the rest of their lives. Borrowers need to be cleaned out quickly and let start again. It is a matter of profound failure on the part of the the DoF and the DoJ that there is still no published bankruptcy reform.

Now that people are starting to accept that “NAMA for the People” is as unaffordable as its title is misleading, we need to implement reform of debt resolution. Borrowers must be allowed to force banks to face up to the situation and reach a speedy resolution which allows borrowers to start afresh in short order. This should be a cheap, straight forward, state-facilitiated process based on financial institutions investigations, obligations of disclosure and affidavits of means.

The borrower must have the right to choose rapid bankruptcy based on the disclosures made in the streamlined process as opposed to any scheme proposed by the banks.

Whilst this may reduce recovery rates for banks, it should benefit banks by lessening enforcement costs and re-invigorating the economy.

Those who should be rapidly developing these systems need escape their current paralysis in order to help the economy escape its paralysis.

We have less fiscal autonomy than an English Shire. But there is a lack of democratic accountability. Our govt has less influence in the Halls of Power than a medicre US senator.

How can you have fiscal union without political uniion. The obvious fiscal union we are familiar with has a democratically elected President, 435 Representatives and crucially 100 senators who go in to bat on behalf of their state and ensure a fairly decent split of the federal transfers. The European Union has no such democractic foundation.

The available evidence is that we have not fared well in monetary union, largely but not exclusively self inflicted. Who is to say a fiscal union where we had very little influence would serve us any better. Rather we would then be operating in an environment where we had 1% control over monetary, fiscal or exchange rate policy.

My answers would be 1) no 2) not sure…maybe 3) since 1=no, don’t care. In 5 years time it will be 100 years since the declaration of independence by Pearse. MAybe we should go again but make a better fist of it this time.

Sorry, coming back to this rather late. Thanks for the kind words. Yes, i fully accept that you must have one of the thickest skins around for all the (mostly!) unwarranted stick you take around here.

Clumsily as ever, I was trying to make a point. Not to solve all the world’s problems but more to appeal for solutions as well as identification of problems. All in an irish context of course. Many people are very good at one part of this task, but not both pieces. My reference to the outside world was an expression of concern that things are deteriorating at a rapid rate of knots, euro project wise.

Colours to the mast; i think the eurozone has 12-24 months to form an effective fiscal union or it breaks up. By ‘effective’ I mean the creation of a eurozone debt market that leaves markets as interested in ireland’s debt as they are in New Jersey’s.

If this fiscal union proves unachievable I think core europe (germany and the usual suspects) will leave the euro and reconstitute the DM, leaving the rest with the euro. Chaotic i know.

The strategic choices facing irieland are (1) do we want to be part of a fiscal union (2) do we want (if invited) to be part of a breakaway core (3) how do we get invited?

Lots of strategic thinking required. Not a strong national trait I fear.

actually, the BBVA story is being downplayed by a lot of analysts, they’ve actually more than filled the gap on their Euro CP program, and it seems to be more a pricing issue than anything (they’ve refused to widen their spreads to match other issuers widening theirs).

saw that earlier, but was waiting for today’s updated rate to comment! Actually back down from 0.48% yesterday to 0.39% today! Ha! Patience is indeed a virtue!

But yes, starting to see a few jitters in the CP markets, rmr going round this afternoon that Spanish megbank BBVA has been unable to roll about $1.0-1.5bn of its US CP since the start of this month (though they still have $9bn in outstanding US CP, most of which is still rolling easy enough, and god knows how many billions more in Euro funding).

I agree that some QE and inflation is an option (after all, that and stable growth eroded the huge debt mountain after WWII), but I don’t think there’s a single silver bullet. All available levers must be pulled and instruments deployed. And that may include some sovereign debt restructuring (aka haircuts for holders of the PIIGSs’ sovereign and bank bonds). Politically, the bailing out of bondholders by all citizens and residents in the PIIGS is probably unsustainable; and, economically, the debt service capacity of these countries is also probably unsustainable.

I know Mr. Bond..Eoin Bond will point out that these bondholders advanced funds in good faith and sought a minimal (10-15 bps) risk premium, but we have to recognise both the failures of democratic governance that caused this mess and the legitimate global strategic objective of Germany (shared to a great extent by the other core EU members, the Scandinavians and the smaller central and eastern EU members) to create an economic zone with strong monetary and fiscal discipline and with efficient production of high quality goods and services that can go toe-to-toe with the BRICs.

The initial failure of democratic governance lay in the exercise of executive dominance by President Mitterand and Chancellor Kohl. Without securing popular consent Kohl browbeat the Germans into relinquishing their beloved Deutschmark on the basis that the Euro would be governed by the same monetary and fiscal discipline. But the Euro’s monetary regime provoked irrational exuberance in the PIIGS and they exhibited a genetic disposition towards fiscal incontinence. This was the second failure of democratic governance in that the system exercised no restraint on governments that failed to recognise the requirement to employ strict fiscal discipline to lean against the significant monetary easing (both in terms of the cost and supply of funds) that Euro membership entailed.

Chancellor Merkel is no confronting the bitter legacy of Kohl’s steam-rolling and the total irresponsibility of successive governments in the PIIGS - and German popular opinion is in no mood to fund an easy resolution. As Colm McCarthy has pointed out previously, Greece has lost its fiscal sovereignty. Merkel is compelled to seek powers to strip the other PIIGS of their fiscal sovereignty - and in this she is confronting opposition from the Commission and other members. But German popular opinion presents her from doing anything else.

The choice is between forcing the PIGS out (Italy excepted) and creating a hard Eurozone or imposing the fiscal discipline to maintain the existing EZ, primarily as a political project. The EU elites will fight to preserve the latter, but Merkel must bring German voters along - and the price they will exact for their consent will be severe.

I expect some fudge witll be engineered that will preserve the EZ as a political project and will ensure the sullen and grudging consent of German voters, but, as usual, it will fail to address the underlying failures in democratic governance that caused the mess in the first place.

Another bit of rambling if I may. I was thinking about inflation/deflation and what Charlie Fell described as the dispersion of possible outcomes in his article, Gold will shine in the era of bailouts. Robert Shiller has an interesting Open Yale lecture about portfolio diversification, which I think ties in nicely with Charle Fell’s points made about gold. Namely, in times of deflation people tend to flee away from assets. So I guess the point that Charlie was making is, the composition of the portfolio altered to include things such as gold. Robert Shiller is a really big believer in the idea of portfolio diversification, as a means towards protection of livelihoods. Shiller is also a student of behavioural economics though, and one cannot understand Ireland’s patent lack of portfolio diversification during the bubble years, without trying to understand human psychology. BOH.

http://www.youtube.com/watch?v=efPKwxZuLKY

The second is that it is difficult to cut wages; inflation makes it possible to cut real wages while leaving nominal wages unaffected.

Some insertions if I may, for the sake of bringing up some issues. The other instrument for roundabout ways to impose real wage cuts, without the associated political maelstrom we have witnessed in Ireland, is currency devaluation. In the sense, that purchasing power for all goods imported from abroad goes down for the entire population. I read a comment recently about the 10% wage decrease imposed on the entire British population in recent times. The other thing that springs to mind in this context, is the subject of national debt - as it was considered in the olden days of closed, protected economies - compared to nowadays, when a lot of trading goes on between various nations. In the past, economists did not worry about national debt so much, because goods and services were traded between agents within the one sovereign location. Even Ireland as I understand it did aim for the small protected type of economy during the De Valera years. Now because economies tend to be more open, we have to worry about de-valuations more maybe. If my memory serves me correctly though, I believe that Joseph Stiglitz had a chapter on ‘protection’ for smaller young nations in one of his books. Arguing that maybe the policy imposed on developing economies to open their trade barriers wasn’t a good thing as native industries try to get bedded in. Stiglitz argued if my memory serves me correct, that younger economies aught to protect themselves for a period, before opening themselves for trading on a global scale. If one were to read a book such as Alan Greenspan’s The Age of Turbulence, you would hear the polar opposite side to the argument - where he argues that keeping economies closed for any reason, is a recipe for a disaster. Certainly, in the Irish context, a book such as Tom Garvin’s Judging Lemass, would provide some interesting insights. Peter Schiff has an expression he used in his book Crash 2.0, where he said the United States in the past used to export its inflation to the Asian countries. With the trade imbalance gone out of whack now between the US and Asian exporters, it seems that much of the ‘inflation’ in the US, will remain on home soil. What the policies in relation to inflation are set to be in the EU region, I’m not fully aware. BOH.

That’s a very interesting point and has all sorts of ramifications. The ratio of old/retired to younger/working is another interesting parameter to throw into that mix. If populations decline and people are retiring less well off than the previous generation, insufficient ‘workers’ and tax take to support the pensions and services for those in retirement, lower consumption, etc. etc. The decline of the Roman empire sets in.

How does inflation solve the problem? (not challenging, just wondering).

The solutions lie in political movements well beyond academia, so it is unfair to expect academics to provide them.

I don’t really see how you can “allow” inflation to pick up given the scale of debt and asset destructions that have taken place. The debt destruction has sort of been sterilised by states, once equity holders have lost out (both now and in the form of future profits), but the problem is that the equity holders (whether in shares or in bust property bubbles around the world) have lost real money/cash. States have taken on real debts too for these imaginary assets. All this is sucking money out of economies, both within states and across europe. The Germans I know feel poorer by the losses on their pension funds/savings, paper though they may have been. They are not in a mood to spend.

The Japanese have thrown money at their problems without success, indeed, their public debt might indicate failure, except that Japan had a lot of money it had to put somewhere. Perhaps pretend and extend is entirely the right solution? After all, europe is reaching, if not declining, then steady state population. The requirement for growth may not be present?

And on previous post, interesting to note that after the Lehman crisis, corporate issuance was suspended for about 6 weeks, and financials 4 months. What bets today’s suspensions will be resolved sooner?

I too am interested in tull’s question, so if you get a chance…

What do you think of the German intention to tighten fiscal policy in the near term. I understand the imperative in the preriphery, but in the core?

Also,, do you think the ECB should just cut to the chase and go for full blown QE without the attempts to sterilise?

The last financial deal in the eurozone was the 15 April – a guaranteed Irish Permanent. Rabo came on 14 April with a €2bn issue. The last corporate deals were 5 May from Casino and ADP. Two small covered bond offerings got out the door last week.

The rollover of Irish bank debt seemed to be going well enough - if at an ever higher contingent cost for the Irish taxpayer - until mid April.
Even if markets were to remain closed, there are ways of maintaining the weaker banks on life support for quite a while yet. Again, those means would involve an ever higher contingent cost for the Irish taxpayer. The decision will be political, and not easy to debate prior to taking it.
My preference goes towards ringfencing the sovereign and the taxpayer against the troubles that could lie ahead. Today’s difficulties in Europe shows that aid packages have to be credible and realistic, and need the support of business and the public. More importantly still, the governments need to have the means to achieve their ambitions. So the sovereign’s own finances need to be seen to heading in the right direction. Unfortunately that means in many instances accepting that our wealth and incomes have taken a serious and non recoverable hit.
Many of these pennies have yet to drop. Otherwise the agony will continue, and most likely intensify. Time can be bought to fend off each new crisis, but only at the cost of gambling for ever higher stakes.

No, no, Simpleton’s a great guy, he’s not asking me to lie — it appeared I just wasn’t focusing enough on the global problem de jour. Or Bono’s neck for that matter …

I read Austin Hughes articles from May 21st 2010 in Irish Times, Euro’s fall from grace provides valuable breathing space. It deals with the subject of de-leveraging of many economies across the world, in a quite broad sense. Also dealing with the broad issues, Charlie Fell’s piece about gold, Gold will shine in the era of bailouts, in the same paper on the same date, dealt with price stability. Charlie Fell noted now the dispersion of possible future outcomes, (inflation or deflation) has rarely in history been wider. I agree with that assertion, and Charlie makes the point that gold is a decent hedge against either outcome. I stepped out of a local store at the weekend (the cheapest in my area in Dublin) with a half full bag of grocceries and the price mark nearly hit €20.00. I honestly cannot see the depreciation in retail that everyone seems to talk about. And I tend to look more at what I’m buying today than what I used to. BOH.

http://www.irishtimes.com/newspaper/finance/2010/0521/1224270806297.html