One thought on “Managing the Eurozone’s Fragility”

  1. The problem with the analysis is that it is too simplistic in political terms and, insofar as I am capable of judging, also in economic terms. It sets up a series of three options, implying that there are no others. No sensible argument can be allowed to be limited in this fashion or used as the sole basis for a discussion.

    To take just a few points which I have made earlier when the De Grauwe paper was under discussion.

    The first is that the UK is a very bad point of comparison. The UK is, as is well known, almost two distinct economies, the City of London and the rest. Some economists, Buiter for example, have raised the possibility that the UK banking sector is, in fact, two big for its domestic economy and running the same risks as in Iceland and Ireland with the associated consequences for the sovereign. The experience with Northern Rock and Bradford & Bingley would suggest that there is some truth in this. In short, the lower UK borrowing costs may be less related to the UK’s capacity to issue debt in Sterling that might be imagined. It is, however, a comforting thought to think that this is the case and there will be no one in the UK establishment who will challenge it.

    Another point: “The second option would be to limit the eurozone to countries so similar to one another that large divergences are unlikely”. This assumes that countries cannot take action to protect themselves against “large divergences”. This is exactly what the Euro Plus Pact is supposed to do. There is considerable evidence that the fact that it has become so economically evident as to become a political sine qua non is already making it work insofar as the markets are concerned.

    With regard to the issuing of eurobonds, no less a personality than Jean-Claude Juncker, the chairman of the Eurogroup, has been advocating this for years but the answer from Berlin has been ‘nein’ and seems unlikely to change.

    But the choices for Germany are now stark. The real value of the De Grauwe paper is to make this so glaringly evident, particularly in relation to whether Berlin insists on the reversing of the decision by the ECB to embark on a bond buying programme in the secondary market or, instead, allows the ESM to take over this role (the benefits of such a step having been clearly enunciated in the paper by Winkler).

    P.S. I seem to recall that the UK had an involvement with the IMF in 1976.

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