Karl Whelan on the summit

This excellent post by Karl deserves a thread of its own.

83 replies on “Karl Whelan on the summit”

A very good article with some excellent points:

1. It does nothing to solve the current crisis. [A point the markets will soon make clear.]
2. A constitutional deficit limit will increase if not mandate the tendency of pro-cylical fiscal policies. The constitutional limit would make for very bad economics, just at the time good economic policies are needed.

3. The (seemingly unable and unwilling) ECB is only player in town that can make a difference in the short term.

I would question one point.
Can the ECB intervention to date be really described as massive?
Last week’s bond purchases of approx €22 bilion amount to approx one quarter of one per cent of EZ GDP. As a lay person I would consider that a small intervention?

I get the feeling these Goverments do not understand the fiscal debt concept – this is money already misspent , its merely a accounting entry now.
If we do not engage in fiscal debt expenditure which is merely money provision for private debt repayment at its most basic level all of the core banks credit investments will go up in smoke.
I would love to see a rational transport policey based around the template of the Edwardian railways as the fascist autobahn stratergy as been a clear write off because of the very limited internal wealth that can be generated in this country.
Imagine Irish road expenditure for Manchester’s population……. there would be flyovers on top of the Lake district !
We can save the remaining rational bits of our built infrastructure but without any money ALL of ours and the core banks “investments” go up in smoke.

Very good article.

From the Wall Street Journal

‘Sarkozy, Merkel Call For Penalizing Excessive Deficit Countries’

“PARIS (Dow Jones)–France and Germany Wednesday upped the pressure on their euro zone peers to improve fiscal discipline in the bloc, proposing that the region’s wayward spenders should be cut off from key European Union transfer funds.

“In a letter sent to European Council President Herman Van Rompuy, French President Nicolas Sarkozy and German Chancellor Angela Merkel recommended that payments from the EU aid fund’s to euro area members states with “excessive budget deficits” be suspended.

“They also said that money from EU structural and cohesion funds should not used by euro area countries receiving bailout money. Instead, that money should be pooled in a new fund to be managed by the European Commission in order to bolster growth and improve competitiveness in the euro zone.”

I don’t like that at all.


Thanks Karl.

A nice concise description of the options facing Europe. The third option (sovereign bond funding to infinity by the ECB) which is outside the legislative arena of either the EU or the national parliaments looks like the only runner for the present.

I am going on holiday to Italy in September. So, should I buy Swiss Francs or carry a few silver ounces with me just to be on the safe side?

Silver is heavy and only useful for local trade – its best you buy a few 1/10 ounce philharmonic gold coins…………………

“In a letter sent to European Council President Herman Van Rompuy, French President Nicolas Sarkozy and German Chancellor Angela Merkel recommended that payments from the EU aid fund’s to euro area members states with “excessive budget deficits” be suspended.”

Watch Greece.

Kevin I think this is a bad choice of article to post. Almost everybody agrees with it.

Does anybody know of an analysis that supports the current Franco-German line? You never know, we might all be missing something.

The results of the Merkel-Sarkozy summit are pretty insignificant ,they should have skipped that meeting rather than meeting to announce next to nothing .It was to be expected from two politicians whose constituencies do not agree on anything ,less than a year from the next elections.
Nevertheless I do not really understand what most of the contributors of this blog really hope.
• Do they want the Euro experience to end ,in which case they should discuss the many practical problems that this would cause (pretty apocalyptic problems ,in fact) ?
• Do they believe that the AAA countries should bail out the PIIGS ,no question asked ,with fiscal transfers or Eurobond emissions that would raise the interest rates of the AAA countries ,which would not keep their AAA rating very long).A tough sell to the Germans and the French?
• Or, do they accept the idea that such a transfer cannot proceed as long as a common economic governance is put in place .Do they agree that it was the absence of such a fiscal discipline which was the cause of the demise of Greece and Portugal and the dire problems of Spain and the absence of a common financial regulator that caused the disaster in Ireland and the near-disaster in Spain. In which case do they really believe that such a governance is compatible with corporate tax dumping and the national parliaments powers to tax and spend as they see fit?
Precisely, what do they want?

Its up to the ECB now to do the heavy lifting 2 trillion to 4 trillion to 6 trillion…………….. anyone anyone ?

– the fiscal authorties can cool things by raising taxes on EU imports…….and that means OIL

The dollar / oil century of 1913 to 2007 is so over – all preconceived notions of sustaining economic well being must be turned on its little pointy head.
Mindless resourse intensive economic growth – otherwise known as WASTE must stop dead in its tracks.

@Overseas commentator at 14:37

I think your questions are a little tendentious.

The question for the Eurozone CNBGs* really is “If Eurozone fiscal targets and monetary policy are set chiefly to benefit mitteleuropa, is it beneficial to countries with very different resources, scales and strengths to be involved?”

The answer seems to be an increasingly clear “No”, the bigger question is how do we roll back to a pre Eurozone, pre Lisbon, EU without destroying the whole structure.

Merkozy might yet destroy the EU while trying to save the Eurozone for Christian Democracy.

* Countries not bordering Germany

Yes, a very good article by Karl Whelan. But something keeps troubling me in all the analysis of this ongoing crisis: the assumption that the ‘markets’ are a rational agent. Anything I’ve ever read concerning their operation suggests the opposite; that the markets are guided by emotions of fear and panic and by herdlike behaviour as much as any other social system, further compounded by dysfunctional information systems. In which case, it really doesn’t matter what actions politicians propose to deal with the debt crisis if the dominant ‘mood’ in the markets is disposed towards rejection, does it?

The Euro Austrian intellectuals have a very serious lack of that vision thing.

A Dork might make a shit load of money whatever that is when goverments don’t spend , private debt contracts and all credit deposits flows into the one Griffen good that can’t be consumed but what good is that in a Mad Max world ?

Gold is not wealth – it is the best symbolic representation of wealth.
Austrians do not seem to comprehend the complexity of european wealth – much of that wealth was built by state run utilties that are now being sold off so that they can be broken up into smaller and smaller pieces so that we can have competition , competition for what ?
Where does the wealth go when a company becomes profitable – yes it is spent on consumption by capital holders much like in the days of a decent labour wage – the actors change but the dynamics of the tragedy remain.
But what % of GDP gets spent on sensible capital creation that factors in depletion in its economic accounting ?
If a country spent a large amount of fiscal debt on rebuilding railways it would be pilloried – however car expenditure does not show up for the most part on the fiscal side – its a product of private bank credit , the input costs of oil & other raw materials do not show up on the goverments books – but what if these raw materials were spent on real end use consumption rather then GDP enhancing ghost consumption. ?
Something is gravely wrong with the west and indeed our very concept of wealth in this sad old little continent.

Overseas Commentator:

You fail to comprehend the political consequences of the perception that the problem in Ireland had to do with banks, not fiscal deficits. Ireland would have passed the proposed new fiscal rules.

No other Eurozone member is being asked to bail out private (mainly foreign) creditors on the scale being demanded of Irish taxpayers and at the cost of possible sovereign default.

The distribution of the costs of rescuing the European banking system is perceived in Ireland as unfair. This is a political, not an economic or legal question. Do you think it is fair?

@ Grumpy

I have not seen on this blog any other contribution that has pulled together a series of disparate political and economic threads in the way that Karl Whelan has done. If there is an emerging consensus around it, all the better!

A debate anchored in the real world that sticks to the major issues – rather than constantly going off at a tangent about this or that esoteric academic point – is what is needed.

This blog serves a particularly useful purpose as, with a few – but growing in number – exceptions among reporters, and none at an editorial level, the Irish media coverage of European affairs is abysmal. (The fact that French coverage is even worse is little consolation).

@ Colm McCarthy

It could be argued that the unilateral 2 year Irish guarantee of bank debt (the only EZ country to issue one) had in effect made melding of bank and sovereign debt a fait accompli by the time the guarantee expired.

The ECB in the interval had evolved its position on protection of senior bondholders during that time because of the fallout from Lehman and its loans to Irish banks had grown.

@ All

There is no point in handwringing if there is no interest in considering the political challenges in not only Germany but a number of other countries.

How many of you would support eurobonds without a more credible governance framework, if you were a taxpayer and asked to pay a levy in one of these countries?

I guess not many.

Four years after the onset of the credit crunch, the only prospect of reform in Ireland is because of external pressure.

There is one very simple point that I am surprised that Mssrs Merkel and Sarkosy missed. Unemployment is 20% in Spain. Spain needs to run deficits for the next few years to get its people back working.
The German way of doing things doesn’t work for everyone, thats something the Germans are having trouble accepting.
I don’t really like to see France and Germany go off on these one-twos up the feild by themselves. I would prefer if they were at least flanked by Italy at these type of announcements.

We have travelled from a mad hatters world of all insane capital investments good & now all rational investment bad.
Its as if Europeans now consider all debt as bad when once all debt was good.
If I have a house in Youghal and get a lowly paid job in Cork or Midleton what do I do ?
I can’t afford a car and can’t afford to leave – I stay on the dole……
Not that it matters to me personally but when I don’t buy a car for commuting more of my transport expenditure stays in the country due to the higher labour needed to service the line and less fuel imports – this money can be spent on domestic consumption or saved in the post office / bank.
We are living in a different economic ecosystem now that the dollar / oil monetory system is dying but that does not mean you give up on all economic activity.
A leap of imagination is needed.

Would it help Ireland in future if the banks were in the main foreign owned ? I note that AIB has collapsed for the second time in 30 years.
Or would it help if they were run by Protestants? Or would it make no difference ?

@Colm McCarthy

“No other Eurozone member is being asked to bail out private (mainly foreign) creditors on the scale being demanded of Irish taxpayers and at the cost of possible sovereign default.”

Has anybody found evidence of this that can be presented to foreigners? We know that Irish officials detected winks and nods – but it is faintly ridiculous for Ireland to come up with nothing more than that and effectively ask to be let off obligations that the outside world understands to have been freely taken on – and with self-congratulation.


The problem is it might be useful to understand the thinking behind the proposals. OK, I understand that Germany is trying to avoid business as usual in the periphery but this time on the German taxpayer, but beyond that it is difficult to imagine their train of thought.

Maybe there isn’t one.

what did the ECB say when the the late Minister Lenihan proposed imposing losses on the unguaranteed seniors at the time of the bail out. I do not believe the answer was “Oui, bien sur”.


In relation to the un guaranteed bank bonds its terribly simple – don’t pay them.

The institutions to which they monies were lent are to all intents and purposes dead and there’s no legacy cash left.

Where exactly is the problem here – in relation to the unguaranteed bonds, the clue is on the bond label its ‘unguaranteed’ – move on.

Tull, I don’t know. Do you know?

Was there a side letter? Is no TD even curious?

If there was evidence the state was acting on instructions from the ECB I would expect there to be evidence. If they did act like that an obtained not one shred of evidence to cover themselves should the gamble not pay off then…….

Would you believe it if you were an average German swing voter – some blarney about winks and nods?


Exactly right – and why would you repay them without obtaining an order to do so? Would you?

I think there is a train of thought…they are simply not telling us. Side deals, nods, winks and a plan to weed out the zone. Watch Greece first. Spreads widening again while everything else is tightening. Greek two year 35% and 10 year 15.66% wit US q10 year now at 2.17%

Seamus Coffey has calculated that while the General Government Debt (GGD) will be €205 billion by 2015, just a quarter of the growth since the crisis will be due to the banks.

Although the total upfront cost of the banking bailout will be around €66 billion, the debt burden associated with it by 2015 will be at €33 billion up to that time.

Of course it’s of consequence but 7 to 8 years of deficits will be the biggest burden.


I deduce from the available evidence that the ECB was thrilled that two successive govts did not imposes losses on bond holders. As you state yourself in two successive posts.

“If there was evidence the state was acting on instructions from the ECB I would expect there to be evidence”


“and why would you repay them without obtaining an order to do so? Would you?”

I submit that there is the evidence.


Order or no order they are unguaranted bonds linked to dead institutions and the vault is empty. Piss off I think is the technical phrase. You pays your money you takes your chances. You win you win you lose you lose.

To answer the question absolutely not – not one word of these liabilities is mentioned in the Trioka agreement. Nods and winks me arse I wouldn’t go back to the local corner shop without a receipt if there was an issue. What’s the difference here?


Beggars can’t be chosers. In a crisis every little helps, as they say. Seamsus may indeed be correct but tell that to the parents of 57,000 leaving Cert students may of whom are about to be clobbered by ever increasing 3rd level fees.


Or would it help if they were run by Protestants?

Apparently that was the plan for Irish Life.

Would it help Ireland in future if the banks were in the main foreign owned?

In an environment of both cross-border banking competition and a de facto compulsion on governments to 100% guarantee all the senior debt issued by domestically-based banks, it seems pretty crazy for Ireland to have any domestically-based banks at all. (I say domestically-based rather than -owned, because simply having foreign shareholders won’t help you when senior bondholders have to be made whole.) But, again, try having a discussion with the cheerleaders for the Irish banks about this!

I note that AIB has collapsed for the second time in 30 years.

I’ve previously mentioned my working hypothesis about the Irish banking sector since ’58 or so. In a phrase, AIB and BoI were national champions.

@Shay Begorrah
I understand your point of view, you are asking for a friendly divorce .But I do not see how you can get one without defaulting .The “new punt” would fall like a stone and you debts in Euro will become even more unbearable .So is your position: first leave the Euro, then devalue ,finally default?

@ Colm McCarthy
Even if the rest of Europe agreed that Ireland treatment is unfair (which I do not think it does),what exactly do you think should be done then (by the rest of the EZ and by Ireland)?


My understanding of Colm’s position is that the state should seek to also separate ELG from gilts. Indeed this may be what is appropriate given the unguaranteeds left. How do you sell that?

The unguaranteeds are being repaid, er, possibly because the Irish have “calculated” it is a good idea for them. Thats what they say anyway.

If they were to say “we think it is bizarre and we are doing it under duress because A and B have threatened us with C and D”, then there would be an international discussion. While Ireland insists it is acting in its own national interest, how is the discussion supposed to start?

In the event of default ALL DEBTS would be redominated in Punts, otherwise there is little point – this may of course lead to war whether trade or something more in your face like.
But there comes a point…………………………..

The Charles de Gaulle off Rochestown point would be quite something – we would have to reinforce & rearm Fort Camden , Carlisle & Spike before we can make such a move.

2006 GGD = €44 billion

Borrowings to build up cash reserves 2008-2010: €12 billion
Borrowings to fund deficits 2007-2010: €52 billion
Borrowings for bank bailout 2009-2010: €40 billion

2010 GGD = €148 billion

Borrowings to fund deficits 2010-2014: €48 billion (forecast)
Borrowings for bank recapitalisation 2011: €9 billion (estimate)

2014 GGD = €205 billion (forecast)

Of this we brought about one-quarter with us into the crisis in 2006, one-quarter is due to direct contributions to the banks and one-half has been to finance the annual deficits over the 2007 to 2014 period.

@Michael Hennigan

I entirely agree that it would be a good thing for Ireland to have a better governance framework. But debt ceilings and balanced budget amendments are not a better governance framework. They are, in fact, worse than having no governance framework at all.

You could be accused of being autistic – the fiscal defecits are also a result of bad bank investments in the physical world.
For example much of the middle class live far from their place of work – they subsequently import oil and cars that would be best spent on domestic consumption such as going down to the friggin pub and employing a few extra barmen thus reducing unemployment.

Whatever poltically correct methophor people used to describe the Ireland of old – it was by far a more closed loop financial system.
Middle class families staying at home on a Saturday night with a few cans of Heineken is the end of Ireland as I knew it and the breakdown of communal Irish living.
We have become automans tied to our house & car.

@ grumpy

‘Has anybody found evidence of this that can be presented to foreigners?’

‘Was there a side letter? Is no TD even curious?’

If I remember John McHale right, he argued that it was perhaps best to keep quiet about this as it would put the ECB in a public position that it might be hard to step back from. But as we’re scraping out the rotted carcass of Anglo now, I don’t see there’s much point in being tactful now.

We know from various events and speeches that the ECB is quite prepared to make political interventions with the threat of withholding support if they are not met.

I don’t think we (ver public) do know what was said, but we know that some Irish people know – Patrick Honohan, Brian Cowen, Michael Noonan, plus preumably a number of civil servants and bank officials. So, yes, I do think it would be worth some enterprising journalist and/or TD seeing if they can get answers. Certainly Morgan Kelly’s Irish Times piece was full of info that must have come from an insider.

It is perhaps an irrelevance, but I think one of the biggest misses by the popular media (unless some one can point me to it), was the bit where the banks had become dependant on the ECB for liquidity support for over e140bn, and this was suddenly sprung on the Irish as a very good reason why the state should do what it was told. I simply don’t remember any, ‘banks become increasingly reliant on the ECB’ type articles until it was a massive figure – but I may have missed them.

@Overseas commentator

I understand your point of view, you are asking for a friendly divorce .But I do not see how you can get one without defaulting

Default is such a loaded word, do you not think?

If we find ourselves forced out of the Eurozone by policies blatantly tailored for the core I imagine that there would have to be burden sharing for the costs incurred.

Who knows what combination of form of involuntary restructuring, redenomination of debts and possibly debt for equity swaps in our pillar banks (a la Morgan Kelly) could be put together to share the pain in an equitable fashion.

This is slightly premature of course, there could be another external shock to the EU which will force a collective approach to our collective problems, or Merkozy’s malign reign might come to an end before Euro exit is necessary.

OK Gavin in my best politically correct language I would implore economists to engage with the economy in a HOLISTIC manner rather then banging on & on about fiscal defecits.
In particular the need to walk around this broken landscape and try to reconnect the bits of capital expenditure that can be saved from this giant legoland experiment.
We can learn much from Edwardian planning in this country – back then the landscape was not oil dependent but in large surplus.
The Hinterlands around our cities and towns are now the mere extensions of urban areas – indeed they are subtracting from our general wealth on a massive scale.
See the historic 25″ Map

HA – good one , but I am only into nationalising natural utilties – beside what most Gold bugs fail to realise is that all treasuries / CBs have both official gold reserves on their books and unofficial which is all known recorded private gold withen their juristiction.
They may be nice bankers & give me back its true cash price (capital gains tax ?) when it is revalued or they may not.
On a macro scale it would not matter a jot but would be perhaps unfair to fiat paddies and extremely fair to bankers – if I walked into the Irish CB after the revaluation / nationalisation and got its true new fiat price and lodged the new fiat in the post office what would it matter ?

Cheers Dork

And your point is well made. I did in fact look up your previous map overlays from OS.

I have to admit I did this because I have recently been to see Brian Friel’s ‘Translations’, which is set in 1830s Donegal at the time of the first Ordnance Survey of the country. I also had the pleasure of talking about it with the great man himself.

Friel gets at the fact that the coloniser does not see himself as a self-interested exploiter, but as a beneficial bringer of improvement. Who can argue with improvement? The disaster that follows is self-perceived as the best intentions gone wrong, rather than the inevitable consequences of conquest.

I think there’s something here to think about, as whilst the consequences of decisions made by the Irish Government, ECB, Markel and Sarkozy, etc may be pernicious, they won’t see it that way – they’ll see crucial decisions (to them) in a top-down, ‘they wouldn’t understand’ kind of way, where they are simply trying to do their best for the ignorant resistant masses, who, if only they could see the bigger picture, would understand that the best thing would be if,er, they could lose all their jobs – and their culture.

I appeal to paul quigley and Bordeau here to comment on whether the powerful ever actually see themselves as powerful.

I fear we are in the early 19th century phase of “improvement” after the act of union – maastricht 1992 / 1801 ? / 2011 / 1820 ? – what comes next ? , a continued overpopulation / deindustrialisation phase………………………. and then………………….
It was only after maybe 70 – 80 years of disaster that the congested districts board although corrupted to some extent made real improvements to the place – although by that stage it was arguably too late – the Catholic Church was embedded into the cultural sphere by that period creating a strange bitter hybrid nationalism.
Must the Titans create another famine before we get real improvements ?

I don’t think he is a 21rst century Charles de Gaulle – but maybe he really wants to send the Venezuelan navy into New York…………….

He will probably end up going on a retirement holiday to Sneem.
Me thinks Frau Merkel does not want to go there – she much prefers the South Tyrol.

In political terms Merkel/Sarkozy are acting as a tango dictatorship – tango dicatorships have no place in the post-national European constellation possibly/more probably taking shape.

@ Gavin

As I am sure you know, Kipling was a British administrator in India. The dilemma for the EC bureaucrats is an age old one. It is also ours.

‘If you can keep your head when all about you
Are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you,
But make allowance for their doubting too:

If you can wait and not be tired by waiting,
Or being lied about, don’t deal in lies,
Or being hated, don’t give way to hating,
And yet don’t look too good, nor talk too wise;
If you can dream—and not make dreams your master;
If you can think—and not make thoughts your aim,
If you can meet with Triumph and Disaster
And treat those two impostors just the same:

If you can bear to hear the truth you’ve spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to, broken,
And stoop and build ’em up with worn-out tools;
If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breathe a word about your loss:

If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: “Hold on!”
If you can talk with crowds and keep your virtue,
Or walk with Kings—nor lose the common touch,
If neither foes nor loving friends can hurt you,
If all men count with you, but none too much:

If you can fill the unforgiving minute
With sixty seconds’ worth of distance run,
Yours is the Earth and everything that’s in it,
And—which is more—you’ll be a Man, my son!

Events are happening as such a fast pace that Merkel/Sarkozy have ordered a time capsule filled with EU memorabilia be buried tomorrow to be opened in 2012.

It’s hard to argue with the consensus as it was during the boom.

The debt brake and the like are window dressings which give people the opportunity to vent anger at the mad men or women in Europe.

Eurobonds for example will not be issued absent agreement on robust governance structures.

On Tuesday in Helsinki, Finland announced that Greece would lodge cash with the Finnish state as collateral for participation in the latest bailout.

The ‘democratic deficits’ have given way to public opinion.

Eurobonds could cost Germany up to €47bn per year in additional interest


@Michael Hennigan

My point is simply that debt brakes are misguided. They’re bad for us, but they’re also bad for our creditors. They make default more likely, and will lead to higher interest rates. Public opinion in the core may be in favour of them, but all that says is that political leaders in the core countries are either suffering from a lack of knowledge or a lack of courage.

@Micheal Hennigan – the estimates by the IFO institute appear to be based on a weighted average of current (very recent) bond spreads. This is simplistic as the spreads would be considerably smaller if the default probability was (close to) zero as would be the case with a Eurobond. In other words the rate on Eurobonds would be lower than the current weighted average and thus the cost to Germany would also be considerably smaller.

The big issue with Eurobonds is moral hazard i.e. no incentive for countries to behave well as the bond markets can’t get at them and a consequent increase in the rates on Eurobonds. Of course this issue is particularly important if a big country were to misbehave as that would increase the total Eurozone debt burden quicker than if a small country misbehaved. Paul de Grauwe in an interesting articles in the latest CES-IFO Forum deals with this (page 40 onwards):

It looks like the Greek deal could be in trouble…
Austria opposes Finland’s deal with Greece on collateral for loans and will demand collateral as well if eurozone countries approve Finland’s deal, a spokesman from Austrian finance ministry was quoted in a newspaper report as saying.

“The collateral model has to be open to all the euro zone countries. We will figure out if that’s the case,» Harald Waiglein from the finance ministry told Finland’s biggest newspaper Helsingin Sanomat in a phone interview.


spot on. The more the Core resists E-bonds the wider the spread over bunds goes. The wider the spread goes the greater the increaes in the cost of bail out/default. Along with that, as contagion spreads, more and more countries get dragged under, starting with Belgium (no govt), France (its banking sector), The Eastern Reich etc. Soon there is only one country left holding the bag.

The figure when this article was written wasn’t €140bn, but it was pretty clear even two years ago that withdrawal of ECB support would be a disaster.

In this respect, the Irish Death Notices advertisement on the page banner takes on ominously portentive.


The 47bn figure is from the IFO institute is it not? Is the good Prof Sinn not the president of that organisation?

@Tull/ MH

Germany GGD was approx €2080 Billion (83%of GDP) at the end of 2010 with a Government deficit of 3.3%.
If German debt cost increased by 2.5% as a result of Eurobonds that equates to €52 billion.

There is however another way of looking at this. The current crisis which has seen German bunds being used as a safe haven have reduced funding by the same 2.5% vis a vis other countries, thereby saving Germany annual interest bill of approx 2% of government deficit.

So far, at least until the stock market falls, the Euro crisis, has been very good for Germany.



Touche!- kind of.

OK. But since 2009, the fixed coupon has been lower by X% because German bunds were / are seen as a safe haven.

Dar liomsa, the conclusion therefore stands?

So far, at least until the stock market falls, the Euro crisis, has been very good for Germany.

@ Joseph
The current 10 yr Bund was sold at 3.25% and the previous at 2.5%. the fact that they have appreciated massively does not reduce their funding cost.

My point is that without the flight to the ‘safety’ of German bunds, the current 10 year bund, given the present crisis, would not be 3.25% and would likely be up to 5%. The same holds true for other Euro safe havens.
In some ways the existence of any spread is a negation of the whole idea of a common currency. Or at least a common currency where default is prohibited.
Only if default is allowed then there is reason for a spead.
Indeed as the ECB has dictated that there cannot be a default it should have no problem buying bonds of any EZ member. In fact it should just be a ‘nice little earner’ for the ECB at the expense of those idiot bondholders and other assorted persons not possessing the even temperment of Northern Europeans.

@Joseph Ryan

In some ways the existence of any spread is a negation of the whole idea of a common currency. Or at least a common currency where default is prohibited.

I’m sure you know this, but it’s worth repeating. The Euro is not a common currency where default is prohibited. The Euro is a currency where the EFSF and EFSM are prohibited.

@Joseph Ryan
Many contributors to this blog advocate a sovereign default .That alone justifies the spread.
Others explain the real-estate bubble to the interest rates forced on Ireland by the ECB,in other word the absence of spread.

Looks like the Greek deal is in trouble….
“The eurozone assistance package for Greece agreed last month is in danger of being undermined after four more countries suggested on Thursday they want Athens to provide collateral, as it did in a separate agreement with Finland, for it to receive their share of the 109-billion-euro bailout.

The requests from Austria, the Netherlands, Slovakia and Slovenia led to Finance Minister Evangelos Venizelos coming under attack from New Democracy, which claimed he had “opened Pandora’s box” by coming to an arrangement with Finland.”

They have to pay out 2b today and 8 b on Monday and apparently are raiding the local banks for it.

@ Edgar/Tull/Joseph/Hoggie

the IFO figures on the “cost” to Germany from enacting a Eurobond are simplistic and use faulty maths. As noted above, an increase in funding costs now does not affect those bonds already issued. With a stock of debt of €2.1trn, a funding requirement this year of €180bn, and a likely reducing funding requirement in coming years as they reduce their own deficit, it would probably take 15yrs+ years to issue a ‘fresh’ 2.1trn in debt and ‘bear’ the cost put forth by the IFO. Also, they don’t just issue 10yr Bunds, they issue a lot of shorter dated instruments which definitely wouldn’t be subject to a 230bps increased ‘cost’. Quite simply, the IFO figures are nuts, but that shouldn’t be a surprise given the previous rantings of Prof Sinn.


thanks for that. Is it possible that E-bonds could actulally result in lower yields as a common bond market would be deeper and more liquid and thus more attractive for SWF and foreign CBs etc.

Another issue that has been puzzling me is the German objection defence of the current status quo on the basis that there shold be a credit spread to reflect risk in the periphery. However, since the periphery has given a sovereign undertaking not to default, how can such a spread be justified.

Could we accuse the Germans of hyping up the crisis to establish themselves as the “risk free” sovereign in the neighbourhood? This lowers their funding costs and improves their budgetary at the expense of their neighbours.

@ Tull
What’s a sovereign undertaking worth? We now have the situation that four sovereign countries don’t trust the Greek sovereign undertakings and want their proposed loan contributions to be collateralized by hard cash.

It is getting interesting with the Austrians reported on the Guardian live blog saying…
“If everyone demands collateral then [the rescue package] cannot be financed. That is why I proposed… that we combine the private sector involvement – the protection of the private sector – with the protection via collateral.

I hope that other countries accept this Austrian proposal.

We [Austria] have a low shore of private sector [involvement], which means we would get collateral under this model.

@ All

Copy of my post on other (superseded!) thread.

@ All

Quentin Peel has a very good piece, including a link to the Merkel-Sarkozy grand plan in their letter to the chosen one, Van Rompuy, in today’s FT.


Sarkozy, unfortunately, is no De Gaulle and Merkel is but a sad shadow of German leaders since the war (Schroeder excluded). According to German press reports, she chose an election meeting in deepest former East Germany to re-state her veto of E-bonds.

Derek Scally’s piece in the today’s IT is also excellent but it fails, fatally, to draw the distinction between budgetary equalisation between laender in Germany and the several and joint guarantees – which I believe is the technical term – of E-bonds, which is quite a different matter.

As Donal O’Brolchain points out, he that pays the piper calls the tune. But the payer in this instance are the countries borrowing repeat borrowing from the creditors countries who, it must be assumed, are lending not out of the goodness of their hearts but because it is in their own interest to do so. Fairness does not figure among the elements involved in inter-state relations.

@ Edgar Morgenroth

On the pending judgement by the German constitutional court, you may find this link of interest. It suggests that the judgment likely in September may not be as earth-shaking as some fear. The legal expert consulted evidently anticipates a retreat on the pattern of other more recent judgements from the more bizarre elements in the court’s judgement on the Libson Treaty, notably the argument that the European Parliament lacked democratic legitimacy because elections to it did not take place on the basis of one man one vote. This view conveniently ignores the fact that the present system of elections to the European Parliament mimics that of elections to the Bundesrat, whose representation is not directly linked to the population of the laender.


Cet Par,

You and I may debate or doubt what a Sovereign Undertaking is worth but how can we be expected to have any faith in it, if the power that be don’t seem to have any faith.

The Chinese reputedly asked Rehn was the ECB buying Sovereign debt in June and July and when informeed in the negative, asked why they were expected to buy it.

Clearly Germany is pushing for a tough love union of fiscally conservative countries . Hard wiring fiscal rules into national laws and codes is the only way any rational german politician or taxpayer should agree to a common eurobond. U can say debt brakes etc run the risk of reinforcing pro cyclical policies but there are worse ways of running an economy. How many elements of irish fiscal policy pursued over the last 10 years would contributors to this blog agree with?

I thought the free money scheme of transferring fiscal money directly into credit deposits to further justify increased credit supply real in your face like.
I don’t think anything so transparently corrupt has occurred between the treasuary of a country and the banks in the history of financial buggery.

Why did they not give a decent interest rate on post office bonds back then ? – it might have prevented at least some of the over lending.

Pure corruption from top to bottom me thinks.
The Banks are the State & the State is the Bank and now the State is in some State.
And don’t think Germany is somehow a wallflower – the Bundesbank owns Germany , Berlin has very little real executive power.
Fiscal conservatism means you give most of the credit to private bank lending – creating bubbles – Germany can pretend to exist in a pure state merely by remaining a virgin mercantilist.

@ All

As Cantillon points out in today’s IT, the subject of E-bonds simply will not go away cf. links below.

The developing situation is of interest from a number of different viewpoints. The first is that there is an element of the “Empire striking back”, that is to say the institutions of the EU are finally reacting against the rampant inter-governmentalist approach of Merkel and Sarkozy. If the Commissioner responsible is mentioning to the European Parliament the possibility of legislative proposals, it must mean that there is an adequate legal base – in the view of the Commission at least – in the existing treaties.

The second is that the issue is one for consideration by the all the member states of the EU – initially at least – in the context of economic and monetary union, in which they all, despite popular belief, participate, including the UK and Denmark who alone have formal derogations to allow them to opt out of adopting the single currency.

The third is the fact that the Chancellor of the Exchequer is on record in favour of the introduction of E-bonds, a position no doubt not unrelated to the fact that the City of London would, in all probability, snaffle the lion’s share of the trade in them. Whether the UK would participate or not is another matter.

The fourth is that all that is required for the adoption of an initial proposal by the Commission is a simple majority of its members.

The fifth is a question; what will be the impact of the decision of the German constitutional court in respect of the cases currently in front of it?

Jacques Delors has, not unsurprisingly, come out in favour of the introduction of E-bonds, stating that the the euro was on the edge of the precipice. Giscard d’Estaing, interestingly, while dismissing their immediate introduction, states that preparatory work should beging and this was “what he had advised the President to do support”.

Interesting times!




Unfortunately, e-bonds on their own will not be enough. They may make current debt loads sustainable by putting a ceiling on interest rates (and so limiting variability and allowing banks to swap tat for bling), but they will not enable already indebted economies to repay their debt loads.

Only growth will enable that and growth is a difficult prospect with both the US and the eurozone heading for recession (never mind the global economy). Growth through exports, while desirable, is unlikely. While the sum of trade is greater than its parts, the individual components cannot all be in surplus.

Where then is growth to come from? The traditional source for under-achieving EU economies has been structural funding from the EU. As Michael Hennigan has demonstrated, the funding that Ireland received was in excess of the interest it paid on its national debt in the 1980s. This is something that will have to return. While in the past the emphasis was on roads and rail, in some countries this is ‘done’. What frontiers remain? Water, power and telecoms cross-border – greater integration of physical infrastructure with funding resulting in at least part ownership and ‘rent’ payments.

@ hoganmayhew

Not so! Ireland made good use of structural funds but they were not the explanation for the economic boom. If they were, the Mezzogiorno would already be in clover. The Irish boom was attributable to sound policies, increases in productivity and export increases before Bertie Aherne got his hands on the tillar and blew the whole thing out of the water by not alone allowing but actively promoting a sterile building boom with the inevitable subsequent housing bust.

Ambros Evans-Pritchard puts it well:

“The problem is deep and structural. These countries were thrown together into monetary union by high-handed politicians before there was any meaningful convergence of productivity, growth patterns, wage bargaining, inflation proclivities, legal systems, or sensitivity to interest rates. The Maastricht rules targeted one variable (debt) but missed all the others”.

The changes required are not confined to the peripheral countries. Those at the centre, and notably Germany, also need to reform. For example, the limitations on the retail trade (opening hours etc.) in Germany are totally at odds with those in surrounding countries. Many anomalies also exist with regard to wage bargaining and, of course, and most importantly, a genuine internal market such as exists in the United States, is still far from being achieved in the EU.


As to why Ireland’s use of structural funds was so successful, the explanation is fairly simple. The funds were spent on independent and reasonably well-chosen objectives without pandering to pressures for vanity projects more related to the export industries of the donor countries than the needs of the recipients.

“Ireland made good use of structural funds but they were not the explanation for the economic boom.”
I didn’t say they were the explanation for the economic boom. I said that they were the reason the country didn’t go bust in the 1980s and that they were essential for growth at that time. I did say the 1980s, not the 1990s…

“For example, the limitations on the retail trade (opening hours etc.) in Germany are totally at odds with those in surrounding countries. ”
This is just neo-con rubbish. If people in Germany want to shop 24 hours a day, they can vote in bought politicians that will permit it at the expense of wage rates and working conditions. Or, they might prefer that you can’t shop all day.

“As to why Ireland’s use of structural funds was so successful, the explanation is fairly simple. The funds were spent on independent and reasonably well-chosen objectives without pandering to pressures for vanity projects more related to the export industries of the donor countries than the needs of the recipients.”
Er, yeah. All those roads to run German and French cars on have been a real boon. Nothing to do with the 12.5% tax rate then? Or the IDA/Enterprise Ireland? As I say, though, structural funds are not about success, they are about preventing failure.

One of the reasons for structural funding and in particular funding that targets donor states is to integrate a genuine internal market. The main reason, though, is to stave off a depression and a collapse in not just the euro, but the EU itself.

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