CESIfo: Bogenberg Declaration

A reader alerted me to this…

Yes, I thought this would interest you!

H.W. Sinn and his group of policy influencing friends are no exception, they are the rule, and reckless, in deed is just the first name.

Wishing all of you a peaceful time.

Best
Georg

That should have been reserved for April 1st, not for Christmas! 😉

this is intellectual bindweed, pernicious, strangling all before, apparently resistant even to the strongest arguments against it ( take a bow Karl) , and perhaps should be treated the same. What is the intellectual equivalent of Pathclear.

@David O’Donnell
From the list above:

Michael Kozikowski (Member of the Board, KPMG AG Auditors)

Really. Enough to lose the nice the very very well remunerated NAMA work that KPMG get.

I’m tempted to refer to this as a modern version of “the big lie”? but bloody Godwin ruined it for everyone!

Are target imbalances the 21 century version of indulgences.?
I see the former treasurer of HVB is on the list. Was he there when it took over Depfa?

Tull,

the €500 bill shelled out during the week are the modern version of indulgences. Get with the project!

the final line is so telling as in their interest

“Countries that are not competitive enough to repay their foreign debts should, in their own interest, leave the Monetary Union”

Colm,
Damn the modern world. It is near impossible to nail 16 theses to a metal door at the ECB.

And that link should be
http://www.economist.com/node/21541719

@ All

Sinn and his merry band clearly have a political agenda which makes it impossible to deal with their stance solely in terms of economic analysis.

This, in itself, is not all bad as it was not possible until the recent past for respectable opinion in Germany to be openly euro sceptic (the heavy lifting in this area being left to the constitutional court). The change is part of normal political development and underlines that Germany is, what it has been for some considerable time, a normal functioning western democracy.

This is best illustrated by drawing attention to the counter party to German euro scepticism in the UK which hardly raises an eyebrow.

http://www.ft.com/intl/cms/s/0/b44d678a-2c07-11e1-b194-00144feabdc0.html#axzz1hLwocJTV

It may also be noted that the pamphleteers actually concede the position of the Bundesbank in the sense that they do not deny the obvious facts that, in the event of a default, the cost would be shared between the remaining euro countries and would not fall solely on the shoulders of Germany and in the event that the euro collapses – although they do not concede this directly – no one really knows what would be the outcome of the negotiations between countries to share out the pain of the resulting financial chaos.

Their polemic also underlines what would be obvious even to a blind man; the crisis is one of trade imbalances between the countries of the Euro Area with the surpluses now being financed indirectly by the creditor countries because of the breakdown in the banking system or “strains” as the Bundesbank would refer to them. The solution has to be to correct the cause of these strains, not to wreck the machinery for financial transactions involved.

But the authors of the polemic are, in fact, blind. To take but one example; the view attributed to Lagarde – which I do not think is correct – that she was seeking an increase in wage levels in Germany. They say; “It is definitely not any government’s job to intervene in the price and wage structures of a market economy, because this distorts the steering function of prices and wages”. But this is exactly what the German government has been doing and more extensively than in many other countries due to the draconian reforms of the non-organised sectors of the labour market and stepping in, through financial support for short-term working, in the nominally totally independent “price and wage structures” of a market economy (which also, apparently, are inviolable under the constitution).

However, all is not gloom. There is ample evidence that people of common sense in Germany recognise that events are getting out of hand and that the attempt by France at marginalisation of the UK, in which Merkel seemed to participate, is an error which may be viewed in retrospect as an historical turning point if not corrected. Even the FDP, at 2% in the polls, and that would normally draw its support from the business community, some of whom evidently share the views of Sinn, has woken up to the fact that going the euro sceptic route is a dead end. We will see what the New Year brings!

Finally, the levels of probity in the conduct of government and business in Germany, while not in the top league, would put other countries in Europe to shame. For example, the President of the Federal Republic, Wulff, is in deep political trouble because of his acceptance of a cheap loan (“dig out anyone!”) from a friend and party supporter and it is unclear whether he will survive. His nomination was another inspired decision by Merkel.

Happy Christmas to all!

ZH on GS take on Target2

http://www.zerohedge.com/news/goldmans-take-target2-and-how-bundesbank-will-suffer-massive-losses-if-eurozone-fails

I’m off air. Merry Christmas and we’ll see about the New Year.

<iWho is the number 1 ranked economist?

Who is the leading female economist and where does she rank?

That is very good, I know …. zero, nada, zilch. 😉

@ Jesper and hoganmayhew

FYI

http://www.volkswagen.ie/en/sales/promotions/volkswagen_bank_solutions.html

I wonder how this bank fits into the Target 2 debate as viewed by Jesper!

http://www.ft.com/intl/cms/s/0/7dc5550a-168c-11e1-be1d-00144feabdc0.html#axzz1hInutupW

The same law should apply to all countries in the EU. A country cannot have the right to take over companies in other countries and not concede the same right with regard to its own.

The Euro is the established church of the EU, and its unconditional supports of the banks over the people are the indulgences of our time.

The comparison to Luther’s 95 theses is not an idle one. The continent is in need of a financial reformation, to displace an unresponsive, unaccountable, increasingly corrupt and despotic economic clergy.

I hope this is the beginning of a rollback; a rollback of the euro/banking putsch of EU in recent years. People and nations must take back control of their own economies, and their own futures.

@ Georg R Baumann

Well done for having a go Georg.

I’m afriad although the pattern of your answer is fairly sound, you only have 2 in the right place.

Still, that means if anyone else feels they can beat 2, they have a chance to win two tickets to what I think (and hope) will be a theatrical highlight of 2012.

The Shorter Bogenberg Declaration:

This time we don’t plan on losing.

@ Anonymous Rebel

“Instead of his increasingly bald rejections of Sinn’s views, I think it would be helpful if Karl Whelan set out rigorously his own idea of how TARGET2 works, and why he apparently does not think that Germany’s growing exposure is a problem for them.”

Pretending someone hasn’t responded to you, when in fact they have done so in depth, is a classic (and annoying) rhetorical device. I’ve written plenty about this. I’ve explained repeatedly why Target2 credits are not “loans to the periphery” and provided a long discussion of why even the extreme scenario of a Euro breakup, the loss of the Target2 credit should be at the bottom of German citizens list of concerns.

Your approach — repeating that if people think about this long enough, they’re bound to agree with you — risks coming across as a boor yourself, albeit an anonymous boor.

Rebel, I’m sorry if you think I’m wolly. On point 1, I really don’t see how I could be much clearer short of capital letters and exclamation marks: No, the Target2 credit does not represent Germany lending to the periphery — can I be clearer than that?

On potential losses due to a Euro breakup, I discussed all of this at length here in the original post and follow-up comments

http://www.irisheconomy.ie/index.php/2011/12/15/more-target-2-fun-bloomberg-edition/

Apparently you don’t like my position. Fine. I’ll get over it.

It’s Christmas and I’m spending time with my family. For now, I’m not going to spend any more time explaining my position to you.

@Rebel
Karl’s statement that “the Target2 credit does not represent Germany lending to the periphery” quite clearly contradicts your claim that “Germany is (effectively; ie via the ECB) lending to payment deficit countries through TARGET2.”

Have to admit the Sinn, Rebel.. et al points escapes me. It seems to me to boil down to this.
Somehow it would be better for Germany if the Irish, the Greeks, the Spanish and the Portuguese imported their goods from somewhere other than Germany. Is this correct – and would that resolve the imbalances in the Target system?

Amac, if the Irish, the Greeks, the Spanish and the Portuguese paid the Germans in dollars or sterling Sinn’s anxiety would presumably be much reduced (though he might start to fret about the US and UK clearing systems). If, in addition, the Germans paid for their imports in euros that would shrink their TARGET2 claims. Sinn should be happy as a clam.

But getting the man to admit that his argument has such bizarre implications would be difficult, I’m sure. He may be a crank but he’s not stupid. He can see a reductio ad absurdem coming quick enough to duck.

@ All

Sinn clearly has an agenda but, as Kevin Donoghue points out, he is smart enough to get out of the way of the absurd conclusions that can be drawn from his reasoning.

However, while he is confusing the thermometer with the fever, the thermometer still tells us that the patient is ill. Indeed, the Bundesbank does not shy away from this or from the reliability of the thermometer although one must have doubts about its view of the value of the collateral accepted by the ECB.

“In EMU, a claim in TARGET2 does not, in itself, reflect the relevant NCB’s exposure to financial risk. The risk exposure of the central banks forming the Eurosystem (i.e. the NCBs and the ECB) relates to the monetary policy operations themselves, not to the associated TARGET2 balances. As always, a central bank faces counter-party risk when implementing monetary policy. The risk associated with the provision of central bank liquidity as part of the implementation of monetary policy is mitigated by a risk management framework. The Eurosystem’s collateral framework is based on a public list of securities fulfilling the relevant eligibility criteria, together with risk control measures. In particular, securities pledged as collateral are valued on a daily basis, at market prices (where available) or using conservative valuation methods, with haircuts also being applied. The residual risk associated with the provision of central bank liquidity that
may emerge despite the risk mitigation measures, is, as a rule, shared among the NCBs of the Eurosystem in accordance with their respective shares in the ECB’s capital and is not related to the TARGET2 positions of individual central banks”. (pages 40 and 41 of Bundesbank report linked above)

The Bundesbank also deals with some of the other central claims by Sinn and his supporters.

“As a result of the financial crisis, private money is no longer flowing into the banking communities of those countries in quantities sufficient to compensate for their payment outflows. Access to the interbank money market is impaired and cross-border loans to these countries have
dried up, while previously received loans need to be repaid. In addition, banks’ funding tensions are being exacerbated by capital withdrawals of the private sector. The ensuing net payment flows out of those banking communities settled in central bank money result in their respective
NCBs displaying, in cumulative terms, liabilities in TARGET2. At the same time, the NCBs of countries which are net recipients of those payment flows display claims in TARGET2”. (Page 38).

On the supposed impact on availability of credit in Germany.

“It would be wrong to believe that TARGET2 liabilities that result from the provision of relatively large amounts of liquidity to banks in some countries have a negative impact on bank lending in other countries. Rather, banks in countries where the NCB displays a positive TARGET2
balance (see Chart C, middle panel) tend to be recipients of cross-border payment flows from other countries. Banks in such countries need less central bank liquidity than would otherwise be the case in order to continue lending to households and firms in their economies.”

On the settlement issue.

“The mechanism used in the United States to readjust interdistrict balances once a year has no influence on cross-border payment flows and essentially leads to the adjustment of the key used for the allocation of profits and losses of the US Federal Reserve System to the 12 district
Reserve Banks”.

I do not think that the arguments advanced by Sinn carry much weight any longer although Martin Wolf, surprisingly, seems to find some validity in them. One would assume that this is because it lends support to his general and, in my view, correct thesis that the crisis of the euro is one of commercial imbalances, now greatly exacerbated by a near complete breakdown in confidence in the European banking system leading to capital flight in an increasingly limited availability of directions.

@ RebelEconomist

I agree with the general position that you adopt with regard to how the debate should be conducted. I doubt, however, that there can be an agreed outcome simply because the two sides are discussing unrelated matters, the first the correct technical understanding of how the Target 2 system works, the second an inaccurate – probably deliberate – assessment of it as an element in a crisis which would exist with or without it.

@DOCM, I think that’s the ECB you’re quoting, not Buba. It wouldn’t surprise me if there are subtle differences in doctrine.

@Kevin Donoghue on December 27th, 2011 at 7:38 pm

I see nothing in that ECB piece that contradicts the proposition that Germany is (effectively; ie via the ECB) lending to payment deficit countries through TARGET2.

Can you tell me where you think it does please? (I suspect that you are really addressing a different point)

@Gavin,

I don’t suppose Karl Whelan’s efforts will be any more or less energetic as a result of our urging him on. It’s surprising that Sinn and Wollmershaeuser got as far as an NBER working paper with this, but since they did the weedkiller is going to have to be pretty strong stuff. An Irish Times piece won’t kill it.

I have mixed feelings about all this. In principle, faulty ideas ought to be discouraged. But EMU isn’t working and the least damaging way to break up the EZ would be for Germany to reintroduce the D-mark. If Sinn’s peculiar thinking helps to bring that about Europe’s unemployed may have reason to be grateful to him.

Amac / Kevin Donoghue

Yes, if the Greeks etc imported from elsewhere, the German TARGET2 surplus would stop growing, but I would not expect the German exporters to like that, because they do not see, and have a relatively small share in, the problem for Germany’s public sector building up at the central bank.

Paying in sterling etc taken out of Greece’s forex reserves would also do the trick, but not if Greece had to buy sterling by selling euros to, say, a British bank that held a euro correspondent bank account with a German or Dutch bank (page 39 of the ECB piece).

Does anyone know where there is an ungated copy of the Sinn and Wollmershaeuser’s NBER paper that Martin Wolf refers to?

Thanks Kevin!

@Amac

I doubt whether the German banks are so pleased to receive incoming deposits as you suggest. As it is, they seem to have too much liquidity, judging by the fact that they are repaying their refinancing loans from the ECB.

@DOCM
re link

The bottom line, then, is that a transfer union already exists. It is run by the ECB and is about to get a great deal bigger. The questions are whether it should be allowed to endure and, if not, what should replace it. Hans-Werner Sinn, has a clear answer: no.

Yes. A transfer union already exists. Several transfer unions in fact.
1. An unfettered capital flight ‘transfer union’ to Germany.
2. An unfettered bond purchase ‘transfer union’ to Germany.
3. A German /ECB grande theft ‘transfer union’ to private Irish banks so that German and other Euro banks gets paid.
4. A German /ECB grande theft ‘transfer union’ to private Irish DEAD banks so that German and other Euro banks gets paid.

@Kevin Donoghue

Interesting point.

I have mixed feelings about all this. In principle, faulty ideas ought to be discouraged. But EMU isn’t working and the least damaging way to break up the EZ would be for Germany to reintroduce the D-mark. If Sinn’s peculiar thinking helps to bring that about Europe’s unemployed may have reason to be grateful to him.

A breakup is in Ireland’s interest and the least damaging for everybody else except Germany would be for Germany to introduce the Dmark.

So we should not expect it to happen that way. Sinn’s article and the IFO agenda is propaganda to keep the pressure on the peripherals to leave so that Germany will not have to leave first.

This is an economic war and Ireland is losing the propaganda battle.

@Amac,

I would counter with a different analogy. The Germans are like Noah, who was ridiculed for building his ark in fine weather, and then begged for help when the rain came and he already had all the creatures on board that he had provided for.

@Rebel

At the moment my 8 year old German made is giving trouble. The vacuum assist on the brake fails intermittently. My excellent mechanic tells me that the brake vacuum assist gives trouble on many German models, Passat, Audi etc.

I may have to replace the car sometime in 2012, if I can afford it. In choosing I will be certain to avoid adding to Prof Sinn’s Target2 imbalance.

@Kevin Donoghue

I agree that Sinn is pushing Germany towards demonising peripherals and deliberately or otherwise bringing the euro closer to the edge.
His calculation is that the propaganda will force the peripherals out and that a core euro area will remain. That is a scenario that would please Germany.

The risk of course is that he will precipitate euro collapse in which Germany would be by far the biggest loser, not through any residual Target2/ECB loss but through loss of trade following massive currency revaluation.

Either way, Ireland’s interest is in the collapse of the euro rather than a singular Irish messy exit from it.

@ DOCM

So ECB\Buba “deny the fundamental distortions in the euro countries’ balances of payments which, as we will argue, are precisely measured by the Target balances”

Precisely measured, apart that is, from when they’re not at all precisely measured.

From the great professor’s NBER paper

“Ireland was affected by a massive capital flight, reflected in the fact that its cumulative current account deficit over the three years was only 14 billion euros, while its Target liabilities over the same period rose by 145 billion euros (to 142 billion euros).”

If Professor Sinn now wants to claim that his point is that Balance of Payments problems are precisely measured by Target 2 balances, then he is precisely wrong and contradicted by facts in his own paper. And in any case, we already have actual BoP statistics to measure this stuff.

This strikes me as “my actual point, and I do have one” kind of argumentation.

@jmg,

How can an argument be demolished when it’s just rubble? Karl Whelan has already written a Vox article about this nonsense. If he writes another somebody is going to do a Dryden on him:

“Soothed with the sound, the king grew vain:
Fought all his battles o’er again;
And thrice he routed all his foes, and thrice he slew the slain.”

Herr Sinn is astonishingly one-eyed when it comes to payment systems. For him, only Target2 exists. EURO1 and CLS don’t exist, despite the fact they carry a significant volume of transactions. Let’s put together a hypothetical example.

Bank A in London uses CLS to convert sterling to euros. It then uses SWIFT to transfer those euros to Bank B (as deposits) in Ireland. A number of transactions take place over a number of years. Bank A then grows a wee bit scared as a result of the collapse in Ireland and transfers those deposits, still in euros, to German via Target2.

Result? A negative Target2 balance for Ireland and a positive one for Germany.

Unless you take account of all the capital flows, you are entirely missing the point. It is like saying that the heart empties the body of blood because you only count the flow along arteries and ignore the veins.

@ Karl Whelan, Kevin Donoghue, HoganMayhew

Having finally managed to get through the Sinn paper, I am more convinced than ever that the problem for all concerned participating in the debate at a technical level is the unwillingness to face the fact that what is at issue is a political, not an economic or financial one.

The mistaken comparisons that Sinn draws with the US provide the key. The US was for many years a sovereign nation state (having fought a bloody civil war to prove it) without a central bank. The ECB – or, more accurately, the European System of Central Banks – is a central bank without a sovereign nation state. As the latter is not about to spring out of the woodwork, the conundrum to be resolved is the reverse side of that faced by US commercial banks before the Federal reserve was brought into existence (in a very curious form, it must be said, and which still raises questions on the relationship between Washington and Wall Street).

In fact, the “muddling through” by the EA17, as perceived by most commentators, is the only available solution.

Sinn just does not get it! Nobody could imagine a threat by Washington to exclude California, by way of example, from the US payments clearing system. A dollar is a dollar wherever it is located. The problem is that the euro is no longer a euro wherever it is located and the flight of capital denominated in euros to supposed safe havens is incontrovertible evidence of this.

Once this problem of overall confidence in the system is resolved, the supposed problem reflected in the debate about Target 2 will also resolve itself.

cf.

http://www.frankfurt-school.de/clicnetclm/fileDownload.do?goid=000000301934AB4

It must be said, in retrospect, that the creation of the euro was a very foolhardy undertaking. In his most recent Voxeu comment, Winkler leaves little doubt about this fact.

I might be wrong Karl, but you seem to be saying that because the change in Ireland’s TARGET2 balance does not equal its cumulative current account deficit, over the same period, Sinn must be doing something wrong. That is because Sinn essentially defines (Section 9 of his NBER paper) a country’s TARGET2 balance as its current account balance with the rest of the eurozone plus its capital account balance with the rest of the eurozone. In the sentence you quote, he is explaining that Ireland’s TARGET2 balance grew more because of capital flight than because of a current account / trade deficit.

No doubt thanks to his critics like Karl, Sinn’s NBER paper is much clearer than his earlier, less rigorous explanations. Like jmb, I urge Karl to write his own comprehensive and rigorous paper – actually a reply in NBER might be better because VoxEU is a little lightweight for such controversial subjects. As Clint Eastwood said, “go ahead, make my day”!

Happy New Year to all, even Sinn-deniers!

@ Rebel

By and large, I’ve said what I have to say on this topic in my shorter articles, which I don’t think are lacking in rigour. But I’ll think about writing something longer if I get the time.

But I’m certainly not going to waste more time on this thread.