Two New EU Pillars, Where One Old International One Will Do Better

The Eurocrats are anxious not to waste the current debt crisis. In today’s Financial Times, Manfred Schepers of the European Bank for Reconstruction and Development proposes not one, but two new EU institutions, to be staffed by transfers from the senior civil services of member states, and promotions within the Brussels/Frankfurt bureaucracies. There will be a new European Monetary Fund, taking on the roles of the International Monetary Fund managing troubled sovereigns, but working on a permanent rather than temporary basis within the Eurozone. Then there will be a new European Debt Agency, managing debt issuance and deficit control for all member states. At a minimum, Schepers’ proposal will aid the Brussels and/or Frankfurt commercial real estate markets, since these bodies will need a lot of office space.
Schepers is keen to retain the ECB’s restricted mandate as a central bank without the ability to engage in quantitative easing, restricting its work to commercial bank liquidity provision and inflation control. He holds this view despite the growing evidence that this central bank design does not work, and the alternative, more flexible mandate of e.g., the Bank of England and US Federal Reserve, does work.
Much more sensible are the views (via a skype video) of Jeff Sachs suggesting that the IMF, together with a reformed ECB acting as a lender of last resort, be brought in to restore stability and confidence to the Eurozone, in the interests both of Europe and the world economy. We also get a glimpse of Professor Sachs’ chi-chi Manhattan kitchen in the background of the video.

15 replies on “Two New EU Pillars, Where One Old International One Will Do Better”

“Then there will be a new European Debt Agency, managing debt issuance and deficit control for all member states”

What about a European bank hospital and debt addiction centre? The banks are at the heart of this mess.

@Gregory Connor

Sachs must be one of most sensible policy proposers – yet most ignored in terms of implementation – that I have ever come across. He would make a great one term senator or congressman …. and foxnewz would simply love to hate him …

As to Schepers’ Pillars – we could save him the bother and send him both of ours – but holding onto that fine building on Dame Street for the sake of, if not prosperity, at least posterity. The thought of a European Debt Agency packed with X-men from the MatrixsQuid to further the interests of the Global Financial System to the detriment of European citizen_serfs fills me with horror …

How’s that cds tutorial coming on?


IMHO this conjures up an image of “generals” moving virtual divisions and armies around a board in a “command centre”. which is losing control of a chaotic situation .

Lots of communiques and grand plans but is anyone listening? 🙂

@Gregory Connor

The FT article is behind a paywall so I have not read it but based on your post.

It all a matter of trust at this stage. Who trusts any European institution? Who trusts Merkozy?

A European Monetary Fund.
We are very familiar with two heads of this newly proposed monster, those two being the ECB and the EU. The philosophy was clear from the beginning. It was all the debtor country’s fault. Moral Hazard was to be so high on the agenda that penal interest rates were essential. Any cash left in the tin was be used first. No running away was to be left on the table.
Regular lectures from Bini-Smaghi or Stark or Trichet were obligatory elements of this gestating three headed monster.
Our yields would come down. European growth would help Ireland and we would get regular rosettes just like a prize bullock at the Tullamore show.
The bullock possibly has no idea of his fate as his admirers circle around him smacking their lips.
No doubt the big European banks smacked their lips, toasted Ireland and counted their continuing bonuses.

Having experienced the two headed monster, I do hope it is killed off quickly and never allowed to develop a third head in the form of a European Debt Agency.

A European Debt Agency:
To do what. “Manage debt issuance and Deficit control”. Now what would this agency do ?

It would collect debts. It would be the supranational equivalent of the money lender in Mrs Brown (The Angelica Huston film). This agency would hold the National Childrens’s Allowance book.
The European Debt (Collection) Agency would ensure that countries were well impoverished and servile before handing over the National Children’s Allowance book.

The Eurocrats just don’t seem to get it.
Nobody trusts them anymore. Not in Ireland anyway.
C’est fini.

I was expecting significant losses on the market today. I am pleasantly surprised that the consensus appears to be that the plan for a plan on examination has been deemed acceptable. The 500 kilo gorilla that is the US is seen hovering in the background and when he moves the earth will shake. There was a time when I was grateful to Serbia for keeping Ireland off the front pages. Now it appears that the EZ will soon turn over the spotlight to the US.

Hope springs eternal in the human breast;
Man never Is, but always To be blest:
The soul, uneasy and confin’d from home,
Rests and expatiates in a life to come.

-Alexander Pope,
An Essay on Man, Epistle I, 1733

Hope springs eternal in the human breast.

In the FED system, the Federal Open Market Committee (FOMC),
meets about 8 times a year to det monetary policy. They set down whether reserves are to be bought or sold and they set the interbank lending rate.
Liquidity is furnished to the economy primarily through the purchase of Treasury bonds by the Federal Reserve Bank.

“The Eurosystem uses a different method. There are about 1500 eligible banks
which may bid for short term repo contracts of two weeks to three months
duration.[11] The banks in effect borrow cash and must pay it back;
the short durations allow interest rates to be adjusted continually.
When the repo notes come due the participating banks bid again.
An increase in the quantity of notes offered at auction allows
an increase in liquidity in the economy. A decrease has the contrary effect.
The contracts are carried on the asset side of the European
Central Bank’s balance sheet and the resulting deposits
in member banks are carried as a liability. In lay terms,
the liability of the central bank is money, and an increase
in deposits in member banks, carried as a liability by the central
bank, means that more money has been put into the economy.[12]

Schepers above is proposing what we have now ie the IMF working in tandem with ECB, just extra bureaucracy, a new european monetary fund branch of the IMF….more mess.

Those proposing euro bonds or ESM or EFSF solutions should know that the ECB was never set up to provide these mechanisms. The repo contracts were supposed to require collateral and assets on foot of these by member states.

It seems to me that in a situation of large scale sovereign default as faced by the peripherals, the ECB has no mandate to be the lender of last resort and provide funding for states who have now become pure liability on the ECB.

The EFSF and the ESM were not part of its original mandate.

If the ECB steps in through the ESM or EFSF, the bill will be paid by the stronger countries, simple as that. The peripherals want this, the stronger countries do not. Right now across the EMU even in the core, debt servicing cost led by the markets is accumulating and multiplying.

There is no end in sight as to what the ultimate cost of all this will be both monetarily and politically. There is the danger of pouring more petrol on the fire with ESM and EFSF funding; there is the huge risk of pouring good after bad, of not enough funding to go around to Italy or Spain.

There already is a democratic deficit at the heart of decisions that are being taken. Any proposals to address changes involved should be put to the people. The eurocrats would appear to have empowered themselves to the point of ensuring democracy will not have its say in any of this.

Because the European Banking Authority, staffed up with retreads from the national central banks, has worked so well.

@ JR

seo duit :

The crisis unfolding in the eurozone is a chance for radical and profound action. There is a growing consensus that the stability, indeed the viability, of the monetary union demands change to European Union treaties. Europe’s leaders should seize this opportunity to put in place a permanent structure for eurozone governance.

Any new structure must win the confidence of voters and investors alike. It should also acknowledge the real monetary risks of the European Central Bank being coerced into acting as a sovereign lender of last resort for the entire region. Such a structure should therefore be based on clearly delineated responsibilities for monetary, fiscal and funding policy. These three policy pillars would underpin the eurozone’s fiscal union, allowing member states to maintain national sovereignty over taxation and expenditure (provided their debt positions and related annual deficits remained sustainable), while benefiting from the efficiencies of common bond issuance.


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The ECB would fulfill the first of these roles, with independent responsibility for safeguarding monetary, financial and price stability within the eurozone. As such it would act as the lender of last resort only to the eurozone banking system, not to sovereigns.

A newly created European monetary fund would form the second pillar. It would be responsible for safeguarding medium term debt sustainabillty and would oversee the fiscal union, by assessing member states’ economic and fiscal performance; providing support programmes; and policing reform and adjustment programmes.

The third pillar would be a European debt agency, which would be the sole issuer of eurozone sovereign debt, with responsibility for financing all the eurozone’s member states. The credit standing of the EDA would reflect the eurozone’s overall strength, through joint and several guarantees provided by all its members. This would naturally be reliant on the stronger AAA-rated countries, but in practice would merely formalise the responsibility these have already assumed. The quid pro quo would be that debt could only be mutualised up to a level consistent with medium term debt sustainability, and that reform and adjustment would be overseen by the EMF. This should not be formulaic, but depend on a member state’s future debt profile.

To further mitigate the risk that stronger member states could face potential losses as a result of a future debt restructuring by a weaker member state, the EMF would have to be empowered, in the medium term, to impose losses on legacy sovereign bonds.

These debt reductions would be required in the event that reforms and adjustments alone proved insufficient to deliver sustainable debt levels over the medium term.

Bonds issued by the EDA would provide the market with a single, liquid and transparent eurozone benchmark bond market, rivaling the US Treasury market. The current fragmented, illiquid and distorted eurozone bond market would be replaced by a single benchmark yield curve representing the cost of capital for all eurozone member states.

Clearly the EU Treaty changes needed to establish the EMF and EDA will take time to ratify and implement. In the interim, there are several ways by which sovereign funding could be ensured. The ECB could fund the enhanced European Financial Stability Facility (EFSF) to purchase sovereign bonds; or the ECB could act directly through the Securities Market Programme (SMP). In either case, the stipulation would be that any sovereign bonds acquired in the process would be passed onto the EDA once established.

This three pillar structure would produce three tangible benefits. It would give member states more time to implement fiscal and economic reform and adjustment programmes, without the distraction of short-term volatility in sovereign bond markets. It would provide the EU banking system with stable collateral and more time to prepare for a potential restructuring of legacy debt. Finally, it would provide eurozone member states with a uniform, low and stable cost of capital – crucial to support economic growth during this period of fiscal adjustment and austerity.

Simplicity is the key to the acceptance of the three pillar plan. The three independent institutions, each with its own clearly defined role, would provide reassurance that fiscal union need not imply an open-ended commitment by some to fund the past fiscal excesses of others.

Once enshrined in the EU Treaty, these changes would lay the foundations for future prosperity and peace in Europe.

@Mickey Hickey

No truth in the rumour that the names of the three turkeys pardoned by O’Bama were named Kozy, Frankfurtstein, and Mir …

@Fellow Citizen Serfs in the USA

Happy Thanksgiving Day!

(I am not an expert on anything.)

The big sticking point here is this, from your previous post:

Recalcitrant Euro governments who failed IMF programme criteria would be booted from their bailout programmes in the normal way.

But this is completely incompatible with the No More Lehmans imperative which has been the #1 policy priority for the US, EU member states and the ECB since 2008 – the determination that, for reasons of systemic risk, no sufficiently large creditor can be permitted to default on sufficiently senior obligations, no matter what. ‘Sufficiently large’ and ‘sufficiently senior’ are somewhat fuzzy here, but everyone agrees that, oh, say, Italian public debt qualifies on both counts. And indeed the main purpose of their “Euro-rescuing” heroics of the past couple of years has been precisely to prevent defaults which would have happened as a matter of near-routine if a normal IMF process had been followed instead – such as Greek sovereign default, and Irish bank senior-debt defaults. It’s true that they (or some of them) have come around to the idea of limited, inadequate, fudged Greek sov. default in the past couple of months – but that only happened after all but the really unpalatable alternatives had finally been obviously eliminated, and only because the supporters brought themselves around to the idea that maybe a strictly isolated, sufficiently fudged etc. Greek default wouldn’t be too much of a systemic event, after all. It’s pretty clear that that argument can’t be extended to significant defaults by Spain or (again) Italy.

So, yes, the way forward is very clear if you’re willing to relax the No More Lehmans constraint – Italy, Spain, Ireland and so on can all go through a normal IMF procedure, one which is likely to involve major defaults either as an integral part of their IMF program or as a result of program exit. The only problem is that giving up on No More Lehmans means accepting the near-certainty of an immediate, worldwide financial collapse of unprecedented size. I personally think that the sooner we get to the global financial collapse, the better for nearly everyone, so that’s fine by me. But naturally many others, especially incumbents of various kinds, still feel otherwise. Conversely, then, if More Lehmans are still to be avoided at almost any cost, Eurozone countries can’t be put through a normal IMF procedure, both because any viable IMF program of the normal kind is likely to incorporate systemically-significant defaults, and because the IMF’s only means to compel compliance with its programs is to cut its support, inviting a sovereign default.

(More shortly.)


With the NY banks on the edge of the abyss any IMF procedure will be anything but normal.

There will be no tidy passing off of the heavily indebted countries, the main reason being they are part of the omelette and it is extremely difficult to unscramble eggs. Those countries are so heavily indebted to the core that the marriages although loveless must endure. Having said that I see Portugal doing the unthinkable without any prompting from the creditors, particularly after the Fitch downgrade.


Buiochas leat de barr sinn.

The ECB would fulfill the first of these roles, with independent responsibility for safeguarding monetary, financial and price stability within the eurozone. As such it would act as the lender of last resort only to the eurozone banking system, not to sovereigns.

No talk of bank resolution. So the banks would still hang like a Damocles sword over the sovereigns with the ECB holding the horses tail, threatening as always to let go at the first opportunity.

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