Boone, Johnson and Wolf on the euro zone’s future

This post was written by John McHale

Peter Boone and Simon Johnson raise an alarm here.  

Martin Wolf reviews Germany’s options here.   From Martin’s piece:

Now turn to the second issue: how does Germany want the euro zone to be organised? This is how I understand the views of the German government and monetary authorities: no euro zone bonds; no increase in funds available to the European Stability Mechanism (currently €500 billion); no common backing for the banking system; no deviation from fiscal austerity, including in Germany itself; no monetary financing of governments; no relaxation of euro zone monetary policy; and no powerful credit boom in Germany. The creditor country, in whose hands power in a crisis lies, is saying “Nein” at least seven times.

How, I wonder, do Germany’s policymakers imagine they will halt the euro zone’s doom loop? I have two hypotheses. The first is that they believe they will not. They expect life for some of the vulnerable economies will become so miserable that they will leave voluntarily, thereby reducing the euro zone to a like-minded core, and lowering risks to Germany’s own monetary and fiscal stability from any pressure to rescue the weak economies. The second hypothesis is that the Germans really think these policies could work. One possibility is the weaker countries would have so big an “internal devaluation” that they would move into large external surpluses with the rest of the world, thereby restoring economic activity. Another is that a combination of radical structural reforms with a fire sale of assets would draw a wave of inward direct investment. That could finance the current-account deficit in the short run, and generate new economic activity in the longer run. Maybe German policymakers believe it will be either harsh adjustment or swift departure. But “moral hazard” would at least be contained and Germany’s exposure capped, whatever the outcome.

I still believe there is a third “hypothesis”.   Germany is willing to move (if hesitantly) from some of these “no” positions, but requires certain assurances and demonstrations of intent.   Will these assurances be forthcoming?   Will it be enough?

54 Responses to “Boone, Johnson and Wolf on the euro zone’s future”

  1. PR Guy Says:

    The first hypothesis is looking odds on favourite at the moment.

  2. David O'Donnell Says:

    Read, and linked, the Boone and Johnston piece yesterday. It is one of the most devasting critiques I’ve read of EU policy … yet it need not have been so.

    This crisis demands, and has demanded ab initio, a serious upgrading on the remit of the ECB. The system is not fit for purpose - yet ‘long live the system’ is the mantra.

    Incrementalism is death. When the system is kaput, and when strong interest groups oppose essential change to ensure life, then dictatorial transformation is the only option to ensure survival. BasicStrategy101

  3. David O'Donnell Says:

    Ergo, Germany must lose.

  4. Actuary Says:

    I believe in the first hypothesis.

  5. Kevin Donoghue Says:

    John McHale: Germany is willing to move (if hesitantly) from some of these “no” positions….

    They say they are not. They act as if they mean it. Most people believe them, I think. It might move the conversation forward if you gave a reason for your belief.

    My belief is that Germans in general, and especially those with clout, never much cared for EMU. The French and Italians pushed it and the Germans said okay, but we’ll only do it on our terms. They have stuck pretty consistently to that line.

    I’m quite sure I can document my story in tedious detail. Can you document yours at all?

  6. Ceterisparibus Says:

    I had read Martin wolf’s article but the Boone and Johnson article makes for grim reading.

    This bit struck me

    “Whenever nations fail in a crisis, the blame game starts. Some in Europe and the IMF’s leadership are already covering their tracks, implying that corruption and those “Greeks not paying taxes” caused it all to fail.  This is wrong:  the euro system is generating miserable unemployment and deep recessions in Ireland, Italy, Greece, Portugal and Spain also.  Despite Troika-sponsored adjustment programs, conditions continue to worsen in the periphery.  We cannot blame corrupt Greek politicians for all that”

    And Madame Lagarde pays no tax on her half a million salary.

    John McHale is definitely an optimist.

  7. John McHale Says:

    @Kevin

    We have moved from a “no bailout” situation, to a tempoary bailout fund (with large bailouts), to a (scaled up and accelerated) permanent bailout fund; from ECB purchases of government bonds being anathema, to the purchases of sovereign bonds on the secondary market under the SMP; from short-term liquidity support to the LTRO (which was to a significant degree a front for primary sovereign bond purchases). Some of these elements followed the agreement of the fiscal compact in December and certain demonstrations of political intent in Italy and Greece.

    @Cet. Par.

    If that is your definition of an optimist, I’m sure glad I’m not a pessimist.

  8. David O'Donnell Says:

    FYI Der Spiegel

    High-Stakes Referendum
    Ireland’s Test Vote on Merkel’s Fiscal Pact
    By Carsten Volkery in London

    Though past referendums on European Union issues in Ireland have proven to be problematic, this time things are expected to go off without a hitch. When the Irish vote on the EU “fiscal compact” treaty on Thursday, their clear approval is expected. Polls predict that some 60 percent of the voters will tick the Yes box on the controversial treaty, which commits all ratifying members to fiscal responsibility.

    But as certain as a majority vote may appear, German Chancellor Angela Merkel will nevertheless be anxiously focused on the activity in Dublin on Thursday. In the past, the Irish have repeatedly proven to be both unpredictable and resistant to being told what to do. Should they reject Merkel’s fiscal pact, it would be a further setback for the German chancellor following the election of Socialist François Hollande in France.

    http://www.spiegel.de/international/europe/irish-engage-in-intense-debate-over-euro-zone-fiscal-pact-referendum-a-836006.html

    NO .. er .. comment.

  9. Ceterisparibus Says:

    “The European Commission has warned that the eurozone faces ‘disintegration’ unless it takes swift steps to address the crisis. In its latest report on the economic health of the region, the EC called for closer banking ties, for the European firewall to directly recapitalise struggling banks, and for joint borrowing to be introduced. The EC also warned that the economic climate was troubling.”

    I interpret “troubling” as meaning dire and I wouldn’t bank on John McHale’s third hypothesis that Germany is prepared to move on her “no” positions. Germany has gone very quiet…not a good sign when Scheauble is silent.

  10. Tullmcadoo Says:

    KD,JMH,
    I think it is clear that the hard core do not want to move but have been forced by events to move as John describes. Each step has been a dollar short & a day late. It is probably too late now - recessions have turned towards recessions and bank balance sheets have been hollowed out. The last throw will be QE. After that a messy break up and every man for himself.

  11. anonym Says:

    @Kevin Donoghue

    Merkel’s recently been quoted (not for the first time) as saying that she’s willing to consider Eurobonds under the right circumstances and in the fullness of time. So it seems it isn’t clear whether or not the German government is really just hanging tough to get the best possible deal for itself before making more concessions - another chicken match. (I seem to recall a Spiegel article after the last Greek rescue which also came to the conclusion that this was the German government’s strategy and that the German public understood and accepted it?)

    And it may be that even Merkel herself doesn’t know what she’ll really do when the chips are down. So far in the GFC, whatever political leaders have been telling themselves or others about their bottom lines or their plans, in fact they have been following the jellyfish strategy: at any given time, move in the opposite direction to the most immediately painful stimulus.

    And in fact, even if Merkel and the CDU are unshakably committed to no Eurobonds, no massive QE, no deposit guarantee and so on, it’s not certain that Germany will hold those lines. I don’t think it’s impossible that an SDP government could get in and give the green light for Eurobonds. (This would effectively be Merkel getting her own taste of the European do-over medicine spooned out to Berlusconi, Papandreou and Irish Lisbon voters.)

    (On the other hand, even if you assume that Germany isn’t really committed to hold the line no matter what, it doesn’t meant that Eurobonds or whatever will save the day. It’s possible we’ll go from too-early-for-Eurobonds to too-late-for-Eurobonds without ever passing through a Goldilocks moment where the crisis is bad enough to provide enough political cover for the German, Finnish etc. governments, but not so bad that collapse is unstoppable.)

  12. DOCM Says:

    @ All

    What is missing from the commentaries referred to, and a deal of the comments on the thread, is recognition of the fact that Germany is a democracy like any other and what it will decide to do is uncertain and will certainly be a reaction to events rather than leading them. Merkel has shown that she is incapable of doing anything else.

    Nevertheless; “Germany is the most admired country in the EU and its leader the most respected”.

    http://www.pewglobal.org/2012/05/29/european-unity-on-the-rocks/

    What the opinion of Ireland would have been had we been included can only be guessed at. Just as well!

  13. grumpy Says:

    @John mch

    Those are both very insightful pieces.

    Wolf:

    “The second hypothesis is that the Germans really think these policies could work. One possibility is the weaker countries would have so big an “internal devaluation” that they would move into large external surpluses with the rest of the world, thereby restoring economic activity. Another is that a combination of radical structural reforms with a fire sale of assets would draw a wave of inward direct investment.”

    I have almost no doubt that German political leadership and, more obviously, public opinion, is out of its depth. It doesn’t know. Politicians plug a line, an idea, a dumbed-down set of arguments about economics that are either designed or have evolved to resonate with enough voters to result in election to office.

    There is everywhere, a mixture. A few are self-aware enough to realise that is all they are doing, most don’t care as long as it works, and some are genuinely deluded.

    It is wrong to expect their response to the reality that the Euro was a stupid idea to be coherent or inspirational, or economically brilliant, as it is not even possible to get people who understand the economics, politics and financial markets better than they do to agree on very much. There is not even a public consensus that it was a bad idea yet.

    Politicians and nations will revert to type, go with their instincts, and incrementalist, knee-jerk reactions that are defensible in public debate with reference to one piece or school of analysis or another will be wheeled out, always with local politics and self-interest as the deciding factor.

    “I still believe there is a third “hypothesis”. Germany is willing to move (if hesitantly) from some of these “no” positions, but requires certain assurances and demonstrations of intent. Will these assurances be forthcoming? Will it be enough?”

    I think the Germans could be persuaded to go all-in, if the states that want debt federalisation were also prepared to go all-in. They are not. It is, from the German perspective, mere “assurances” and “demonstrations of intent to do the minimum possible so we can stall while we wait for the Germans to realise they are wrong” that have been and will continue to be provided.

    If the Germans are to be persuaded they are wrong, they will have to be shown they are wrong in a way that overcomes prejudices that run the opposite way they do in Ireland. Watching a country that does not collect taxes descend into chaos, or a country that insists its public employees and certain other sectors must be paid far more than they are in Germany will not be sufficient.

  14. aiman Says:

    Dogmatic misdiagnosis of the core problem - the European (and entire Western) banking systems’ insolvency - has been rampant since the credit bubble burst in 2007. A misdiagnosed ailment cannot be cured, except by implausible accident.

    The interbank market has been broken for nearly five years - no bank will lend to another, except on a collateralised basis - and acceptable collateral has nearly run out. Monetary policy has no transmission mechanism.

    Germany, with the ECB to the forefront of the misdiagnosis tendency, cannot afford to leave the euro without facing a guaranteed collapse of its banking system, and the loss of competitiveness that a swift and savage currency revaluation will bring it.

    Germany equally can’t afford to stay in, or the slow-motion train-crash that’s happening now - all too predictably - will cause exactly the same effects, only they just might happen over a slightly longer timeframe, if markets continue to believe that no country could be so stupidly self-destructive.

    Just like I’d have a grudging admiration for the likes of Nick Leeson or John Rusnak if they’d squirreled their hundreds of millions in a Swiss bank account instead of blowing it, I’d have the same feeling if Germany were moving along a path to maximise its own gain from the current and persisting travails. However, I think it’s a case of them, and the ECB, not having a clue what they’re doing, and at this stage afraid or unwilling to change tack, as to do so would be to admit the repeated policy failures of the last five years (and probably more).

    To throw another Greek word into the mix, what the whole system needs is some form of catharsis - and as things are going it will be uncontrolled and unmanageable.

  15. seafóid Says:

    “Germany is a democracy like any other and what it will decide to do is uncertain and will certainly be a reaction to events rather than leading them”

    Italy used to be a democracy but I believe someone from the House of Goldman is running it at the moment

    I think the Germans will go to the edge of the cliff and take a look at Switzerland and come to their senses. It’s time to leave the 1930s behind, gell.
    The Bild Zeitung can sell whatever smoke is necessary to the Volk. I mean they sold the loss of Pommern, Ost Preussen and Schlesien to them in the late 40s so whatever Euro deal is necessary should be doable PR wise.

    JMc observes all the movement to date- they have tended to leave it late so the next one will probably have to be el gordo.

  16. Gearoid an sassenach Says:

    The current economic landscape is scary, it seems to me that Irelanrds influence in shaping what will unfold is minimal. It is important that irrespective of what unfolds at EU level , we deal with whatever is within our control

    A significant part of our economic woes can be laid fairly at the door of Fianna Fail led governments. Last years election was an opportunity to kick them out, and this was done. A consequence of this was the arrival of the Fine Gael/ Labour government. They rode in as white knights to rescue the country from the wasteland that Fianna Fail had left.

    This represented an opportunity to make a truly new beginning with significant political, economic and social reform. It has not happened; and it wont happen.

    Voting yes in tomorrows referendum will simply ensure a continuation of policies that are incapable of solving our many problems

  17. Gearoid an sassenach Says:

    the best that is offered is access to more unsustainable borrowing.

    A no vote may, just may jolt the political establishment into the realisation of the massive changes that are needed to turn this country into a prosperous, fair, just and equal society

  18. Mike Hall Says:

    John McHale

    I wonder at what point you (& others) are going to take a step back & see if you can see the full reality behind this mess.

    The Euro is deeply flawed by design & was the product of an ideology & flawed macro economics driven by the narrow interests of the financial sector elites.

    At every stage of the last four years, from one crisis to the next, within Ireland & beyond, the interests of the financial elites have been followed assiduously & only marginally challenged at the very brink of meltdown.

    Every creditor made good, no matter how reckless & at whatever cost to citizens. Punitive interest rates on gov borrowing required to do this. Democracy bypassed or junked, policy dictated by financial sector elites at the ECB & EC.

    The only reason ‘growth’ has now entered the PR wall of spin (no substance, mind) is because Greece & Spain are taking us to a new brink.

    Authorities could otherwise care less how many unemployed there are.

    Charles Hugh Smith explains exactly what the underlying agenda has been throughout & it has not changed. Nor will it be changed unless voters demand a thorough examination of the mess & a radical, negotiated & complete package of reform to be put forward before we sign up to or vote on anything else.

    “The E.U., Neofeudalism and the Neocolonial-Financialization Model”

    http://www.oftwominds.com/blogmay12/EU-neocolonial5-12.html

  19. PR Guy Says:

    @Ceterisparibus

    “not a good sign when Scheauble is silent.”

    Is it safe?

  20. PR Guy Says:

    Interesting view on the No side posted on Dr Gurdgiev’s blog.

    http://trueeconomics.blogspot.com/2012/05/2952012-fiscal-compact-one-very.html

  21. genauer Says:

    when I look at the Pew Poll, and the recent BBC popularity survey,
    I see that DE is astonishingly very popular, in France even more than at home.

    And Germany is practically the last country to believe in more integration.
    But since debt liability can not be had without common control over it,
    it could be better that the Euro is blowing up now than later.
    That makes it easier for everybody to go his own ways.

    And Spain can focus on what to do with 10 % of the working population not needed anymore in construction for at least 10 years, Greece on how to rebuilt a state after total breakdown.

    And it makes it much easier for everybody, when they stop thinking about how to extract money out of Germany.

  22. Al Says:

    Completely off topic, but…

    The prime minister Jean-Marc Ayrault, aware of the unease at fat-cat excesses weeks before the parliament elections, took a hard line, announcing in an interview with the weekly L’Express that the executive pay-cuts would apply to those already in their posts rather than only new contracts. “I believe in the patriotism of company leaders. They can understand the crisis requires the political and financial elite to set an example”. The president and cabinet have cut their own pay by 30%.

    http://www. guardian.co.uk /world/2012/may/30/ hollande-france-clamp-down-fat-cat-pay

  23. Mark Says:

    ‘’since debt liability can not be had without common control over it,
    it could be better that the Euro is blowing up now than later.
    That makes it easier for everybody to go his own ways.”

    - If sanely and consciously chosen, the dismantling of the currency, in stages could work. The danger is the still-existing shadowy forces (not alleging secret brotherhoods; just facing up to how in-the-dark we all are about the wrangling of those factions) - such as Barroso with his oaths of allegiance to the currency and Federation - and how far they’re willing to go for the Cause, especially when they get desperate.

  24. grumpy Says:

    @Al

    What on earth makes you think that is remotely off topic?

  25. Al Says:

    Probably a lack of confidence…
    But you couldnt tell in person!

    “I believe in the patriotism of company leaders. They can understand the crisis requires the political and financial elite to set an example”

    Ayrault, J.M.

    Maybe we are missing a gene over here or something…

  26. Ed Says:

    The third option sounds like the conclusion of McWilliams Punk Economics 4

  27. seafóid Says:

    German 2 year now yielding 0%

    http://www.ft.com/intl/cms/s/0/7fc8b916-aa7d-11e1-899d-00144feabdc0.html#axzz1wOMVNgXK

    tick tock
    Surely the finger will be gotten out

  28. Eureka Says:

    @ John McHale
    Many thanks for this.
    I have often noticed how people who are wrong with conviction are so much more highly valued than those who are right with circumspection.
    We don’t know how this is going to pan out. Our task is to position ourselves in the least bad situation for all eventualities. It’s unsexy and its boring but the least bad situation generally involves not making unnecessary enemies

  29. David O'Donnell Says:

    Have a Minsky Moment …

    Policy Brief No. 124, 2012
    The Mediterranean Conundrum: The Link between the State and the Macroeconomy, and the Disastrous Effects of the European Policy of Austerity
    C. J. Polychroniou

    Research Associate and Policy Fellow C. J. Polychroniou traces some of the domestic political roots of the eurozone’s economic crisis. He demonstrates that while political and policy developments in the periphery should not be written out of the recent history of the eurozone’s troubles, the part played by southern European political regimes is quite the opposite of that which is commonly claimed or implied. Instead of out-of-control, overly generous progressive agendas, the countries at the core of the crisis in southern Europe—Polychroniou singles out Greece, Spain, and Portugal—have seen their macroeconomic environments shaped by the dominance of regressive political regimes and an embrace of neoliberal policies over the last two to three decades; an embrace, says Polychroniou, that helped contribute to the unenviable position their economies find themselves in today.

    http://www.levyinstitute.org/publications/?docid=1544

  30. grumpy Says:

    @Paul Krugman

    Excellent Newsnight programme. A classic K-Crusader vs Tory ‘business leader wisdom’ finale. Spot on about the Euro.

    Recommended viewing for all.

    How come you kept declining Paul Mason’s invitations for so long, and in particular prior to the last general election?

  31. zhou_enlai Says:

    @David O’Donnell
    “Incrementalism is death”
    A phrase for all time. How apposite now.

    @grumpy

    “I think the Germans could be persuaded to go all-in, if the states that want debt federalisation were also prepared to go all-in. They are not.”

    The Irish population have been deluding themselves abaout the openly discussed ultimate destination of the EU project for may years. A dysfunctional political system and useless media have not helped. We are now unprepared for the BIG debate. All we know is corporation tax.

    @Spiegel
    “the Irish have repeatedly proven to be both unpredictable and resistant to being told what to do”
    That’s us and proud of it.

    @All

    Boone & Johnson’s piece suggests to me that the sooner we are out of EZ the better. How grim is that?

  32. Ceterisparibus Says:

    @Zhou
    “how grim is that”

    About as grim as the following…
    ““We’re in a situation of total emergency, the worst crisis we have ever lived through” said ex-premier Felipe Gonzalez, the country’s elder statesman.”

    I think it is getting serious!

  33. Ceterisparibus Says:

    For the full article by AEP….
    http://www.telegraph.co.uk/finance/financialcrisis/9301270/Spain-faces-total-emergency-as-fear-grips-markets.html

    Note. Only facts..no comment….dire.

  34. Brian O' Hanlon Says:

    @ John McHale,

    I’ve studied the Boone and Johnson piece a little bit, and I liked it. I liked the way in which it attempted to frame the scale and dimensions of events as have happened, and are likely in the immediate future to happen. I liked the way in which they attempt to describe Germany and its relationship to the periphery of the EUROPEAN UNION.

    I would wish to bring in the observations of one currency speculator into this discussion, if I may. George Soros, I can recall described better than almost anyone I know who gets public platforms in these debates, what really did occur around the time of the financial collapse in the United States in 2008, and the subsequent ‘flight to safety’ of capital, into things such as south American commodities after 2008.

    Soros, then quite neatly described, that following some of the guarantee mechanisms put into place by the US federal government, resulted in capital again switching its location back to the centre - and how the GLOBAL periphery got side-swiped again.

    The point, I am trying to make, is that capital in the modern era only very reluctantly wants to locate itself at the centre of the GLOBAL financial system. Indeed, as Soros would also point out, that perhaps the reason why so many reserves did end up in north American markets following the series of Asian collapses in the 1990s - was indeed, that flight away from risk at the GLOBAL periphery - to the markets at the core of the global financial system, which were supposedly sophisticated enough to ration out same to purposes most well becoming.

    So we have to accept for the time being, that what may be holding a lot of capital at the centre of the GLOBAL system, at the moment, is the series of financial supports instituted by the US federal system - to prop up its own main street - but which is also (only barely), managing to create a ’safe’ haven for funds at the time being. The US is operating like a large hydraulic brake in the system of global financial flows.

    What we have basically, is something akin to a large, un-wanted, and difficult-to-control, volume of capital - something like when a river swells up from too much rain. We are looking for ways to delay the flood, and make ponds almost, for it to accumulate. My amateur-ish guess is though, that it will basically boil down to large creditor nations such as China and the middle east, and how they deem necessary to respond to the situation.

    My best amateur-ish guess, is that the last thing those large creditor nations ever want is to see that capital flooding back towards themselves. We have probably witnessed a number of decades now, in which those large creditor nations have proven themselves very, very poor in initiating their own plans to create their own markets for management of their own capital. In effect, to take some of the pressure off of centres such as London or New York.

    What seems to have characterised much of the late 2000s crisis, was an unacceptable kind of financial relationship between western and eastern markets. We probably do require a couple of more centres of capital management to come back to the fore, such as Japan, Australia and one or two Pacific rim locations - and maybe even Russia. As for advanced markets in India in the near to medium term, it is probably asking for too much. BOH.

  35. Brian O' Hanlon Says:

    @ John McHale,

    I suppose, what Boone and Johnson may be describing most in their piece, is a need for countries even Ireland, to remain standing for long enough, that it may delay that deathly rush of capital from the EUROPEAN periphery to the German core of the system.

    It other words, the secondary and very important function performed by EUROPEAN peripheral states (be they in economic near ruin, or otherwise), is to prevent some EUROPEAN wide area cataclysm from happening. One must then ask the question, how long will it remain feasible for such peripheral EUROPEAN nations to stay stuck in this supporting role, will constantly putting off, any plans for development at a local scale? BOH.

  36. anonym Says:

    @grumpy

    Are peripheral governments (and electorates, and special interests) likely to want to stick as much of the burden of “saving the Euro” onto the core as possible, without any concern for what would be fair or proportional? Sure - or at least, true enough to be going on with. But the reverse seems to be more or less equally true of the core. Are the PIIGS likely to go wild with Daddy’s credit card as soon as EU debt is (further) mutualised? Sure. Is the German government determined to free-ride on the Spanish taxpayer’s indirect bailout of German (and other core) banks’ bad private-sector lending to Spain to absolutely the maximum extent possible, even at the cost of pushing Spain into external assistance? You bet you.* I don’t see much to choose between Tweedledum and Tweedledee in this struggle, do you? Each will simply take as much as he can get, without regard to fairness (except as a rhetorical weapon to use against the other), and only then decide to carry what’s left of the load. Or perhaps, not to.

    \* To be fair, there is of course the fact that as soon as the Spanish banks can borrow directly from the ESM then the Spanish government has an incentive to stimulate the Spanish economy by pushing losses onto the Spanish banks. If anyone wants to seriously tell me that German unwillingness to accept an EU bailout of the Spanish banks is solely based on this second-order concern about the size of the bank bailout, and not at all on the first-order concern of simply not wanting to contribute to it at all, then I have a flying unicorn to sell you.

  37. Aidan R Says:

    “I still believe there is a third “hypothesis”. Germany is willing to move (if hesitantly) from some of these “no” positions, but requires certain assurances and demonstrations of intent”.

    I would not be so sure. I am just back from an ILO conference in Geneva. There was a presentation from an ECB representative, close to Troika team of advisers. He was quite explicit that their strategy (identical to the CDU in Germany) is for weak member states to engage in an internal devaluation (whilst defending growth enhancing fiscal consolidation) and labour-product market reforms.

    There will be no deviation from the current German (and ECB) position until the CDU are voted out of office.

  38. PR Guy Says:

    I think this one paragraph outlines the future for Europe (HT BBC) - the discussion was about Spain:

    “Last night the crisis was discussed in a video-conference call between Angela Merkel, Mario Monti, Francois Hollande and Barack Obama. Investors are fleeing to safer havens, however low the return.”

    Absent? Why, the key stakeholder of course. Spain was not involved in the conversation about them.

  39. anonym Says:

    “German (and other core) banks’ bad private-sector lending to Spain” above should read “German (and other core) banks’ bad lending to private-sector institutions in Spain”.

  40. PR Guy Says:

    One assumes that they are merely waiting until the ESM is set up on 1 July to give Spain it’s bailout? I’m assuming the ESM delivery is still on target for 1 July. I can’t see the need for a delay given how Spain’s goose tapas looks well and truly cooked.

  41. grumpy Says:

    @PRguy

    They are attempting to wait for the independent report on bank recap requirements with the intention of raising the funds without a bailout. That might be due out late June (don’t recall exactly when).

  42. grumpy Says:

    @anonym

    I think the currently ascendant German view is that there may be a case for propping up Greek banks, but not the Greek state. They might (though it might as you suggest be more complicated than they realise) sanction a recap so Euro liabilities could be at least paid in part (to the ECB!) while allowing local Greek payments (eg to state employees) to become Bonds / IOUs and by default Greek / Euros and in fact a local currency (see Hoganmayhew, grumpy et al. 2011).

  43. PR Guy Says:

    @grumpy

    I had assumed the report was the ‘official’ reason for the delay (though of course they need it to quantify how big a bailout is required). Are Blackrock still doing it?

    How are they going to raise the funds without a bailout? Slap a tax on anyone putting a towel over a poolside sun lounger before breakfast time? I suppose that’s one way of getting a ‘transfer’ out of Germany ;-)

  44. PR Guy Says:

    …and you will have to employ loads of people to enforce the new sun lounger towel tax, solving unemployment in Spain at a stroke!

  45. Values at Risk Says:

    Having read Prof Johnsons article, a few ideas seemed to me to be at odds with Prof Whelans Target 2 article over on Vox. Both argue that the Bundesbank is financing the capital flight from Greece through Target 2 credits at the Central Bank of Greece ( and soon to be Banco Espana)

    It is in the aftermath of propping up the troubled sovereigns where they appear to me to differ,
    “German taxpayers will begin to see through this scheme and become afraid of further losses” , “

    Prof Whelan here alludes to the role of a post EMU German government in acknowledging this bill. Recapitalising the Bundesbank through a fiscal transfer of 20% of GDP is one option. Writing a blank cheque for safe keeping in an empty vault seems to be the other option but is only implicitly alluded to by Johnson “Finally , German taxpayers will be suffering unacceptable inflation and an apparently uncontrollable bill”

    Prof Whelan “largely on the faith of its citizens that the currency will be kept in limited supply, is that the new Deutschmark will appreciate significantly, with the result being deflation rather than inflation”

    Given that the second approach results in the same amount of money in circulation, are Germans really incurring the level of risk implied by Prof Johnson

  46. grumpy Says:

    @values

    This bit: “The end of the euro system looks like this. The periphery suffers ever deeper recessions — failing to meet targets set by the troika — and their public debt burdens will become more obviously unaffordable. The euro falls significantly against other currencies, but not in a manner that makes Europe more attractive as a place for investment.”

    precedes your quote form Mills and Boone, no, scratch that, that is the Irish political establishment reference library - sorry, Johnson & Boone.

    I think they are referring to a pre-break-up scenario there where Euro depreciation pushes up prices in Germany, facilitates wage rises there, is visualised as occurring in tandem with printing by the ECB, and is ‘unacceptable’ to the German psyche. Whelan (without reading the piece, admittedly) is I think concentrating on Bundesbank printing after German Euro exit.

    @PRguy

    “How are they going to raise the funds without a bailout? ”

    Lorenzo Bin Smug & Wrong will announce to the investment community that they are being irrational, Spanish yields drop, and we all form an orderly queue to throw money at Spanish banks

  47. PR Guy Says:

    @grumpy

    “Lorenzo Bin Smug & Wrong will announce to the investment community that they are being irrational, Spanish yields drop, and we all form an orderly queue to throw money at Spanish banks”

    Sadly, that sounds like a better plan than the current real plan :-(

  48. anonym Says:

    @grumpy

    If this was the deal being offered to Spain today, or if it had been offered to Greece two years ago, then it might show Germany being willing to hold its end up. But as it is it just fits the pattern I described. The core will make sure that as much Spanish tax revenue as possible is poured (indirectly) into the core banks; only when the husk is more or less dry will they then make up the balance (or perhaps do something else).

    (Also, weren’t the Greek banks (unlike the Irish or Spanish ones) more or less solvent back in 2009-2010, only to be destroyed by the gimmicks used to keep the Greek sovereign out of a normal IMF program and restructuring? That would make this case even more bitter.)

  49. Shay Begorrah Says:

    @Aidan R brings back news from the neoliberal’s den.

    There will be no deviation from the current German (and ECB) position until the CDU are voted out of office.

    I am not sure how many times the German government/ECB/both at once have to explain their position before the Irish establishment buys it.

    It does not matter that it is crazy for us or any other country on the periphery, it makes sense for them. Germany makes policy for Germany, and naturally so. The ECB has its stakeholders and will try to advance their interests. Why is it so hard to understand that we have opposing interests?

    Of course the Germans, literal and honest folk that they are, will take a Yes vote in the Irish referendum to mean with agree with them and will be encouraged not to reconsider their position.

    What an awful mess.

  50. grumpy Says:

    @anonym

    “If this was the deal being offered to Spain today, or if it had been offered to Greece two years ago, then it might show Germany being willing to hold its end up. But as it is it just fits the pattern I described.”

    If they had been offered that a couple of years ago don’t you think the political elite would have been as absolutely determined to keep all liabilities (not least to themselves) denominated in Euros? Isn’t that the free choice Ireland has made?

  51. PR Guy Says:

    Jeez is Draghi giving it the “it was all their fault guv’nor” or what?

    Has the guy given up the ghost?

  52. anonym Says:

    @grumpy

    And so what if they hadn’t? There is no conservation of guilt - if the Greek politicial establishment are fools and knaves it doesn’t follow that the German political establisment are largely in the clear. That ain’t real life.

  53. grumpy Says:

    @anomym

    Your “And so what if they hadn’t? ” follows my “If they had been offered that ” and “don’t you think the political elite would have”

    Sorry, I don’t follow.

    Anyway, how could the Germans have forced that ’solution’ if the local politicians didn’t want it at that point?

  54. anonym Says:

    @grumpy

    Anyway, how could the Germans have forced that ’solution’ if the local politicians didn’t want it at that point?

    Back in 2010 Greece was set fair to enter a proper IMF program probably incorporating an immediate or early default. That’s not the same as the devalue-a-quasi-currency plan you discussed above, but I’m certain you agree it would have been a clearly better course of action than the madcap EU/IMF debt-snowball “rescue” which was actually put in place instead.

    Now, all the German government had to do to effectively force Greece into that vanilla IMF program was do nothing. Greece was broke, it was a member of the IMF, it probably didn’t have any other options - or it wouldn’t have had any other options if the EU-controlled alternative “rescue” hadn’t been put together. The EU-led Plan B would not have gone ahead if the German government had declined to support it. In fact it wouldn’t have gone ahead if the German government hadn’t joined the others in scrambling to put that ad hoc plan - totally contrary to the design of the Eurozone as established by Lisbon - together.

    So in fact, not only was Berlin able to force Greece into the IMF with perfect ease - Berlin had to strive mightily to prevent Greece from having to go to the IMF. In fact, it may have gone even further. I’m not sure, but I do seem to recall EU member states threatening to use their votes in the IMF to block a vanilla IMF program for Greece - in other words, trying to force Greece into not taking the sane, appropriate IMF route. In the face of all this, that there was bad behaviour and bad judgement in Athens too (no surprise) doesn’t exonerate the rest of the EU very much.

Leave a Reply