Bundesbank on Banking Union

‘Talk of a banking union in the euro zone is premature, a key member of the executive board of Germany’s Bundesbank said Tuesday, arguing that such a plan could only follow deeper fiscal union.

“The recent proposals of a so-called banking union appear to be premature,” Bundesbank board member Andreas Dombret told an audience of bankers at a conference in London.’

Fiscal union, in Bubaspeak, means political union, which takes forever. So Dombret is arguing for a continuation of a currency union without banking union for many years to come. He presumably believes that this will prove sustainable.
Courtesy FT.Com:
‘Sabine Lautenschläger, vice-president of the Bundesbank, said banking union could only work in tandem with fiscal union – meaning some common cross-border binding rules on how countries could set budgets.

Banks in Germany have already signalled opposition to having their existing deposit guarantee schemes potentially used to rescue banks in other countries.The “decisive question” of banking union was the “interplay between liability and control” because a crisis in one country’s banks could require financial help from taxpayers in other countries, Ms Lautenschläger said. “Whoever accepts liability also has to have a right to control, especially when it is potentially a question of very large sums as in the case of a banking crisis.”

Speaking at a Bundesbank conference in Frankfurt, she said banking union without fiscal union would, in particular, benefit banks in weaker economies with higher refinancing costs. If those banks then bought more of their own countries’ sovereign bonds, they would, in effect, pass on cheaper refinancing costs to their domestic governments, Ms Lautenschläger said.

“The extremely important discipline of the market would be partially lost. Even more seriously, joint liability for banks would, at least, partially extend to the sovereign bonds of these countries,” she said. “The result would be joint sovereign liability through the back door – without the possibilities for intervention and control, and therefore the protection, of a fiscal union.”

Ms Lautenschläger also cast doubt on how quickly any banking union could be implemented, saying “comprehensive EU treaty changes” would be needed.

Readers will be greatly encouraged to learn of the Buba’s late conversion to the merits of market discipline. Does this mean market discipline only for sovereigns or for banks also?. Did the Bundesbank oppose the policy of the ECB on this matter in October 2010 when the Irish government was coerced into payouts on zombie bank bonds by the other central bank in Frankfurt?

There have been some flaky versions of the ‘banking union’ notion, including mutualised moral hazard for banks. Banking union means (funded) deposit insurance, centralised bank supervision and, critically, proper bank resolution, including the de-commissioning of the ECB’s moral hazard machine. Without bank resolution the sovereign debt crisis is not soluble. Could the Bundesbank be prevailed upon to address two questions:

(1) Can the sovereign debt crisis be resolved with permanent moral hazard for banks and indefinite contingent liability for their sovereigns?

(2) What suggestions can the Bundesbank offer to resolve the current undercapitalisation of the Eurozone banking system?

The perception is inescapable that people who continually rule out the measures needed to rescue the common currency project are indifferent to its fate.



115 replies on “Bundesbank on Banking Union”

Perhaps people who continually rule out the measures needed to rescue the common currency project are not indifferent to its fate; perhaps they really want to finish it. I certainly hope so. Obviously it won’t be blown up without a lot of collateral damage, but it has to go. Let’s get it over with.

@Colm McCarthy

You will get no answers to your two questions.

Readers will be greatly encouraged to learn of the Buba’s late conversion to the merits of market discipline.

When I read that in the FT I gave a little snort of amusement, the cognitive dissonance among German’s establishment must be nearing dangerous levels.

I remember reading about Schauble giving a speech where in quick succession he sternly insisted on the absolutely necessity of strict market discipline for the sinning peripheral states and then explained that a financial transaction tax was also an absolute necessity to calm those crazy markets down.

In a similar way moral hazard European Union style only applies when Germany’s interests or the ECB’s mandate are not threatened. Humpty Dumpty makes an appearance again.

“When I use a word,” Humpty Dumpty said in rather a scornful tone. “It means just what I choose it to mean – neither more or less.”

“The question is,” said Alice, “whether you can make words mean so many different things.”

“The question is,” said Humpty Dumpty, “which is to be master – that’s all.”

Germany is having a very good crisis and their establishment is now mainly composed of the the overlapping sets of people fooling themselves and taking us for fools.

@ Colm McC

You are misreading the signals from the Bundesbank. It is but one player – if the most respected – in a complex internal German political situation. The protestations suggest that something is afoot.

@ Colm

I’m a fan, your Sindo articles give me the necessary weekly boost of common sense. But when it comes to this banking thing you do show a tad of street anarchy. I thought the comments from the Germans in your article just made such utter sense. If Germany/Holland/Finland/France gives a blank cheque to Spanish/Italian/Irish/Greek banks that is in effect a blank cheque to these profligate sovereigns.

Of course, with hindsight, the Euro project was a dreadful misjudgment. A collection of totally disparate personalities embarked on a boat and set sail. The boat is floundering with some of those personalities totally out of control. But nobody can escape, for that means instant drowning. Maybe some of the most unruly will be thrown overboard, but that very action will be very destabiliing in the short run.

The counter-question is:

(3) If market discipline is imposed on the European banking sector as a whole through creditor-burning bank resolutions, will a massive global financial crash (of the kind that was forestalled in 2008 by taxpayer bailouts alongside other things) be the consequence? If it won’t, or doesn’t have to be, the consequence, why not? If it will be the consequence, is that a consequence worth enduring?

The BUBU Vice President, Ms Sabine LautenSchlager, has inadvertently or otherwise disclosed the BUBU strategy of keeping the peripheries and their banks as weakened vassels:

“Speaking at a Bundesbank conference in Frankfurt, she said banking union without fiscal union would, in particular, benefit banks in weaker economies with higher refinancing costs. If those banks then bought more of their own countries’ sovereign bonds, they would, in effect, pass on cheaper refinancing costs to their domestic governments, Ms Lautenschläger said.”

In other words we do not want peripheral banks or peripheral states to have cheaper financing.
But we are very happy for our banks to be the recipient of capital flight because our banks can then pass on that cheaper finance to the German government.

The German position and its stranglehold over inaction in this crisis will have to be confronted by the other EZ and EU members.

Germany should be asked to make it mind up. If in Germany’s view, as it continually appears to be the case, the only options are Germany’s way or the Highway, then Europe should insist that it is Germany take the Highway on its own.

anonym: roughly half of the Western European sovereign bond market has been laid waste. Do you think this does not matter?

There is now an official and comprehensive moral hazard regime for Eurozone banks. Does this make another crisis (a) more (b) less likely?

The extremely important discipline of the market would be partially lost.

Do they mean the discipline of repeatedly and spectacularly imploding in the most expensive way possible? Yeah, we’re not too pushed about losing that.

From he DT “Bundesbank scuppers all talk of EU banking union”

Mr Dombret a key board member of the Bundesbank has said, a pan-EMU deposit-guarantee scheme and a debt resolution fund would require “a genuine, democratically legitimated fiscal union” and a new treaty.

The Bundebank’s vice-president Sabine Lautenschlaeger also hammered home the point in what is a clearly co-ordinated push to kill the plan. “The result would be a pooling of the governments’ liabilities through the back door,” she said. “Whoever is footing the bill must also have a right of control, particularly when it comes to the large sums that are seen in banking crises,” she added, alluding to rulings by German courts that unquantifiable EU liabilities breach Germany’s constitution.

Finally, Chancellor Angela Merkel endorsed the tough line at a party conference yesterday, insisting that Germany will not accept variants of debt pooling or eurobonds until Europe has created a machinery of joint government.

You can lead a horse to water but you cannot make him drink especially if he has sniffed it and knows it is poisonous.

“Speaking at a Bundesbank conference in Frankfurt, she said banking union without fiscal union would, in particular, benefit banks in weaker economies with higher refinancing costs. If those banks then bought more of their own countries’ sovereign bonds, they would, in effect, pass on cheaper refinancing costs to their domestic governments, Ms Lautenschläger said.”

This is quite a remarkable statement. It sheds a lot of light on Buba’s notion of the Eurozone, namely regional banks investing mainly its own sovereign’s debt. Is this why LTRO is somewhat palatable to Buba because it results in the balkanisation of the Euro financial markets along national lines? Anyone would think that the Bundesbank is preparing for an orderly break-up of the Euro, facilitated by the retreat of capital behind national borders. Perhaps this is why it gets so upset by Target 2 liabilities?

This argument should be slapped down by all right-thinking commentators and economists. Where in God’s name is Patrick Honohan when you need him? Probably at home thinking about how reasonable the Bundesbank’s position is. They are such clever people after all.

Of course there is another explanation for all this – that the Bundesbank and the German government are deliberately obstructing any comprehensive resolution to the crisis. After all, it doesn’t get much better than this for Germany – low inflation, low interest rates and a depressed real exchange rate. If the crisis were to be solved definitively in the morning, the Euro could appreciate by about 20% versus the dollar/yuan and then where would they be? They would then need a required looser monetary policy which would be, of course, strengstens verboten.

The fact is that Germanic monetary ideology is incompatible with its export economy competing in the globalised world. As a result, Germany essentially has no incentive to resolve the crisis.


Fantastic cartoon. Says it all.

re Capital Controls:
Will the first item on the agenda be:
1. Preventing the little guy from taking money out: or
2. Making the big guy bring back money that has already gone.


“Anyone would think that the Bundesbank is preparing for an orderly break-up of the Euro, facilitated by the retreat of capital behind national borders. ”

That has been BUBU strategy all along. They have been very successful at it. They have made monkeys out of the rest of the other countries euro with their diversionary and delaying ‘fiscal reform’ tactic.
But it has worked for them.

@ Shay Begorrah

As I studied cognitive dissonance at college I decided to look it up again due to your mention of it.

Leon Festinger shared his brilliance with the world when he, opposing all previous psychological behaviorist work, and created Cognitive Dissonance Theory. In his own words, he quickly sums up this quite complex theory: “If you change a person’s behavior, his thoughts and feelings will change to minimize the dissonance” (Groenveld, 1999, p.1). In order to decode this dense statement, we must first be aware that Festinger held to be true that humans have a deep abiding need in their psyche to be consistent in our attitudes and behaviors; we want to feel in agreement and unified in thought and action. Inner harmony sounds good to everyone, and so it was Festinger’s view that when we feel a disharmony, or dissonance, within ourselves, between two factors, we strive to decrease this tension by either changing our original thought, giving strength to the opposing thought, or letting go of the behavior. All three techniques are in the name of decreasing dissonance because it is threatening to experience such a large crack in our rationale that dissonance often creates. Say I realized the college I am attending is not offering me the classes I’m interested in. I am feeling a post-decision dissonance, now that I’ve chosen my school, within myself due to this logical inconsistency:

“If you change a person’s behavior, his thoughts and feelings will change (or want to change) to minimize the dissonance”

Presumably, Frau Merkel believes if a country is forced to change it’s behaviour initially there will be dissonance but attitudes and feelings will also change. She seems to be of the view that “austerity’ works and that while it may be harsh, at first, once the countries ‘get used to it’ and start to ‘benefit from it’ they will see the merits of having less violent swings in the recklessness of their fiscal behaviour. Don’t tell me our debt to GDP was o.k. in 2006 etc because our private banking system was marinated in debt which later had to be taken on to the sovereign and the only reason the sovereign had so much money was because of the same marination.

Personally, I think it is Ireland that is suffering from major “cognitive dissonance” we are mouthing platitudes about suffering “austerity’ when, in fact, our government is hooked on borrowing and bailouts along with the the idea of only having ‘fiscal rectitude’ for the select few.

As the psychologists would say, we need to decrease the degree of valence or action tendency component of our attitude system around austerity and fiscal rectitude otherwise we are going to remain the laughing stock of Europe and will never get back to bond markets and selective austerity and selective forced rectitude is not going to cut the mustard.

@Joseph Ryan

“re Capital Controls:
Will the first item on the agenda be:
1. Preventing the little guy from taking money out: or
2. Making the big guy bring back money that has already gone.”

I would imagine the big guys could stall that one for a few years. I will opt for 1. But of course, the EC have officially denied that such a discussion took place.

I reckon the Buba has made its mind up that there’s going to be a breakup so do everything to protect the mother ship and it’s banks. They clearly think Barosso et al are Klingons


“Could Osborne possibly make himself look more ridiculous?”

The guy has had years and years of practice. At Eton initially I think.

@Colm McCarthy

Well, it hardly matters what I think. As it happens I think it’s past time for bank-creditor bailouts to end, and I’m willing to see a prompt systemic financial collapse if that’s the price to (largely) end the bailouts. At the same time I have to acknowledge that such a collapse will likely be the consequence. At the cost of stating a platitude: just because one course of action is ugly doesn’t mean that there has to exist some alternative course of action or inaction that’s any better.

Yes – the market is not a cattle mart….. they don’t bid & bet for stuff with money tokens – the banks simply use their credit money mechanisms.

As long as the leverage remains in the system there can be no rational market – the “market” is simply a tool of extraction….. but the problem is the gaff (real capital) has been all extracted out by this process.

It all comes back to article 123 folks – the financial community completly decapitalised and destroyed the western technological base to sustain just one more year of interest payments… 40 years of that Lark and you are likely to be left with nothing of consequence as Lawson like Booms don’t do much for a country long term other them increase the debt /waste faster then Wealth creation
Credit hyperinflation / malinvestment and sovergin debt are two sides of the same coin as your deposits are taxed/ subtracted to pay the interest on sov debt…. to make this deception politically acceptable they hyper inflate credit…. whats really strange (the Irish are strange) is that we now accept a net subtraction of deposits to pay sovergin holders who do not devalue)

PS – watched the God awful Euro RTE thingie – many things pissed me off with that piece including Donal Donovon who gave this Dork the creeps.

But all of the economists mentioned Austerity without defining what it means.
Please inform the public what it is before yee go mouthing off stuff to people who do not understand this snakes and ladders act.
Austerity is the act of saving a stock of debt by stopping the flow….. this destroys the physical and human stock of capital through the process of entropy.
A return to the Punt will not or at least should not involve a drop of wages – whats the point of a punt conversion if you don’t give the serfs enough tokens to pay the debt contracts and thus restart the flow ?

The waste in the system is bank credit and its “investments” – not money production which will expose the true waste withen this Russian Doll economy.
Of course the bankers will blame “printing” for the waste.

Not even Stocks in the streets !!!
We don’t need reform in these islands – we need a Ballsy Norman King with money power.

@Colm McCarthy

To press you on this: are you saying that a “Creditanstalt moment” won’t be, or doesn’t have to be, the cost of ending European bank bailouts? Or that preventing another Creditanstalt is not worth the cost? And/or that preventing one may simply not be possible anyway?

This has weathered well :

Would a bank crisis now be more damaging to the European economy than a future debt write-off? Or, alternatively, is recognising reality and accepting a debt restructuring now preferable to increasing the burden on future taxpayers? At the end, it is a political decision, but it would be refreshing if things are called by their name. Euphemisms may be useful in the short run, but one finally recognises a Ponzi scheme when it persists.


@Brian Woods 2 – “If Germany/Holland/Finland/France gives a blank cheque to Spanish/Italian/Irish/Greek banks that is in effect a blank cheque to these profligate sovereigns”

Ermmm….profligate in the sense (ex-Greece) that they are on the hook for the debts and obligations of privately owned banks domiciled in those countries?

The European banking system has been broken for nearly five years, and it is, and was from the off, a major systemic problem, affecting all Eurozone, and many non-Eurozone countries, to a greater (Ireland, Spain) or lesser extent. The pan-European failure to recognise this has led to the sovereign debt crisis. To an extent this has been due to “appalling vistanomics” – the failure to accept back in 2007/08 that things were in fact as bad as they seemed, as to do so would have been, well, appalling. Nearly five years on there is no excuse.

The failure of the ECB to identify the nature of the problem, either at the time or since, has escalated it to the stage where it is difficult to see what could solve it, short of resort to the printing presses – a resort which their twin-pillar mandate currently excludes. Monetary policy, with a broken transmission mechanism, is a joke. Official interest rates are effectively meaningless although, at the margin, they are keeping some sickly banking patients alive on a day-to-day basis. Unfortunately, they are not being cured and even the relatively healthier ones are being infected.

Anonym: There will be Kreditanstalt moments indefinitely under the moral hazard regime. Aiman above expresses the problem well.

It’s a bit like the best time to plant a tree. The ideal time is twenty years ago. second-best time is now. The costs of the banking crash had already occurred four years ago. The refusal to acknowledge and distribute the costs allows them to grow.

So the Bundesbank which holds great sway in German politics is ruling out a banking union? That is a bit sickening. A banking union was cited as one of the main reasons for voting for th efiscal compact. It is not that we wanted to have fiscal transfers via the banks but rather that we want credible and less risky bank resolution to break the feedback loop to sovereigns.

However, a banking union would not happen over night even if all concerned welcomed it. In the meantime we have national bank regulation and a massive systemic crisis in the Euro area. We are also clear that Germany wants countries to pay for their mistakes so they don’t repeat them. Germany won’t pay out based on a promise of future integration.

Is there a split between the two banks in Frankfurt? Germany were the first to state clearly there woucl have to be default by Greece. Are they now saying spanich banks must default on their debts?

It strikes me that the obvious solution to the impasse is that Spain and other will have to put their insolvent banks through resolution processes based on national law. Bondholders will have to be burnt and there will have to be debt for equity swaps. The rest of the EU will provide a fund to recapitalise the resolved banks under the supervision of the IMF in order to give the process credibility and to stop panic amongst ordinary depositors. However, the sovereign will be on the hook for these funds.

Martin Wolf said in his recent blog post on the FT that the Germans seem to be coming around to the view that some nations may be better off out of the euro. One gets the feeling that the Germany will support nations helping themselves (e.g. Spain resolving its banks), but that Germany considers any additional assistance to countries which do not help themselves to be a dangerous waste of money which will weaken Germany but which will not solve the underlying problems.

@ zhou_enlai

I think you have put it in a nut shell and summed it up pretty well.

A Banking Union has some pros and cons as this piece suggests. However it can’t help resolve the debt crisis per se because it doesn’t really tackle the problem at the source.

Banks create the money supply through loans. Every euro has a corresponding debt and banks cancel money out of existence through loan repayments. Creating money this way is the root of the problem and if we have a banking union it won’t change the fact that all modern currencies only exist in parallel with debt.

We could easily put our economic minds together to figure out how much debt-based money and how much debt free money is required for a healthy economy to run smoothly almost all the time. If we didn’t like the idea of banks creating the national money supply in any form we could control this outright aswell. Issuing debt-free money has to become a viable solution as this crisis deepens. Indeed I can’t see how any other proposal is supposed to help.


We have the apparent aim:

banking licence = nobody, not owners of capital, their advisors if any, nor any banker, is required to think about what they are doing.

Without bank resolution this moral hazard ‘idiot capital’ version of capitalism will continue.

But this bit cannot be waved away, and I don’t think the Germans would buy the idea that Greece is the only piigs member that engages in ‘profligate’ spending compared to Germany.

“… she said banking union without fiscal union would, in particular, benefit banks in weaker economies with higher refinancing costs. If those banks then bought more of their own countries’ sovereign bonds, they would, in effect, pass on cheaper refinancing costs to their domestic governments, Ms Lautenschläger said.

“The extremely important discipline of the market would be partially lost. Even more seriously, joint liability for banks would, at least, partially extend to the sovereign bonds of these countries,” she said. “The result would be joint sovereign liability through the back door – without the possibilities for intervention and control, and therefore the protection, of a fiscal union.”

If piigs got rid of the glaring differences between their practices and German ones, it would make the job of Euro friendly forces in Germany much easier. Keeping them, on the basis that the piigs are really clever and have worked out that they don’t really matter much probably won’t wash.

The Bundesbank must see more problems coming out of the Mediterranean such as Cyprus pulled down by Greece’s 75% bond haircuts. On the other side of the world Argentina has imposed exit permits on its citizens who wish to travel abroad. Complete with declarations of the amount of Arg. Pesos along with the mandatory permit application to exchange Arg. Pesos to foreign currencies at Argentinian banks. There is now a thriving currency black market on the street paying premium of 20 to 30% over bank rates for Euros and other stable currencies. It is widely expected that Argentina the country that has immense riches is headed for a sovereign debt default. This will destabilise most countries in South America wiich will shake the ground under the Bundesbank.

@Colm McCarthy

As messy as they are, I don’t think one can describe any of the (past or future) can-kicking episodes in this crisis as a Creditanstalt moment, which implies the kind of thing you get when the can is not kicked any further. (Whether because the will or the ability runs out.) I agree that the longer a final reckoning is put off, the uglier it is likely to be in the end.

There have been some flaky versions of the ‘banking union’ notion, including mutualised moral hazard for banks.

That proposal from a few days ago was a doozy all right. It’s not just the big things, like a 10% cap on bondholder losses, it’s the little things, like excluding salaries and pensions from the liabilities subject to haircuts. (I hope I’m recalling correctly.)

The BUBA did not rule out a banking union: both of thier representatives cited above stated that such a union would require much greater political/fiscal union as a pre-requisite. The reasoning reflects the comment attributed to an un-named Dutch politician cited in today’s FT (link below): “We cannot push through a banking union when the French have just cut their retirement age to 60 and we have raised ours to 67”.

You might ask: what are the French doing to save the Euro? (Also: how would Irish taxpayers, who retire at 68, feel about subsiding the French to retire at 60/62?)

It’s doubtful that the Germans (or the Dutch) can be deflected entirely from their political/fiscal union requirement given their repeated insistence on it. It’s also clear that the necessary level of union cannot be achieved in a relevant timeframe.



re :You might ask: what are the French doing to save the Euro? (Also: how would Irish taxpayers, who retire at 68, feel about subsiding the French to retire at 60/62?)

This ‘taxpayer’ for one is very p***ed off at having to work until 67, if still alive, to pay the lump sums and pensions of the Irish who have retired at 55 or even less, may God spare them the health, never mind the French.
He get even more P***ed off when he know that some of the retirees are back in the PS for a nice little earner on the side.
He so confused about all this he is trying to learn French to see if it helps understand it.

Is there a chance that a union could initially be restricted to the top one or two banks in EMU countries that past another stringent stress test and became immediately subject to central regulation?

Merkel commented yesterday that the existing regulation setup has led to the European Banking Authority’s (EBA) remit being undermined by national oversight bodies acting “out of misguided national pride”, she said, blaming them for last year’s inaccurate stress tests which gave many struggling Eurozone banks a clean bill of health.

“No sooner had we finished the recapitalisation phase of banks from the EBA stress tests when it emerged that the Spanish stress tests were not correct,” she told business supporters.

I know it’s off-topic, though not so much as some might think, but will we have a post of Tol-dole-gate?

@ MH

This must be the intention as any other approach is impractical. Indeed, Paul Volcker a year or so ago in a very illuminating video interview with Gillian Tett remarked on the very small number of banks that mattered internationally, putting the number at no more than 20, a now even smaller number in the US as a result of the post-Lehman’s consolidation.

However, in the constellation, Germany has only one representative; Deutsche Bank, a reflection of the curiously weak nature of the country’s banking industry when compared to her industrial strength.

Hollande is seeing Gabriel of the SPD ahead of the European Council. Some element of self-financing of whatever scheme emerges will have to be found. If not an FTT, some form of insurance scheme perhaps, as adverted to by Martin Wolf!

These developments put the UK back centre stage. Unfortunately, Cameron appears not to have a clue as to which role to play. Another UK opt-out seems to be the likely outcome. The EBA could hardly remain in London.

Surely if there is to be a banking union, the Bundesbank should be shut down? (Along with all Central Banks and financial regulators in all Euro Countries) And a new fit for purpose Euro wide regulatory organization created?

On MH’s suggestion on restricting entry for banks… But why have any country quotas. Why support even 1 bank from a country if its not healthy… Why not frame it as “How can citizens of country X get access to a healthy bank”

Surely the focus should be on the citizens/consumers rather than the banks/nations/regulators.


Great piece.
The perception is inescapable that people who continually rule out the measures needed to rescue the common currency project are indifferent to its fate

Indeed, the Italian bind auction just closed – badly.

@ Paul Ferguson

Not sure if you are a disciple of Dork – “fiat currency is the root of all evil!”.

Of course, most money is debt backed. This has been as important a boon to modern economic civilization as any of the technological advances.

It is, unfortunately, like alcoholic liquor, capable of serious abuse. Unfortunately we in Ieland have shown a propensity to abuse both.

What do you mean by debt free money? Do you mean gold backed or do you simply mean central bank printed money? I presume you mean the latter, which has of course the capacity to dilute out of existence current indebtedness at the cost of hyper inflation and a massive transfer of wealth between and within the countries of the EZ.

For different reasons to BUBA, I’m against a banking union and eurobonds being introduced as some sort of an emergency fix. Perhaps there is some merit in further complicating the eurozone mess (i.e. dragging the core in more), but it doesn’t tackle the key problems – over-indebtedness and overspending in some of its member states.

Overspending can be addressed through reform programmes, time and hopefully some growth. The German solutions tend to ignore growth and that’s a mistake.

Over-indebtedness has to be tackled.

I’d prefer the discussion on a banking union or Eurobonds to be parked until each participating state can enter in a position of strength. Otherwise I fear too much time will be spent on something that won’t be acceptable to stronger states/won’t work.

Hans-Werner Sinn in the NYT today:


When Secretary of the Treasury Alexander Hamilton socialized the states’ war debt after the Revolutionary War, he raised the expectation of further debt socialization in the future, which induced the states to over-borrow. This resulted in political tensions in the early 19th century that severely threatened the stability of the young nation.

It took the experience of eight states and territories going bankrupt in the 1830s and 1840s for the United States to shed socialization. Today no one suggests bailing out California, which is nearly bankrupt but is expected to find its own solutions.

Greece has received or been promised $575 billion through assistance efforts, including Target credit, E.C.B. bond purchases and a haircut after a debt moratorium. Compare this with the Marshall Plan, for which Germany is very grateful. It received 0.5 percent of its G.D.P. for four years, or 2 percent in total. Applied to the Greek G.D.P., this would be about $5 billion today.

In other words, Greece has received a staggering 115 Marshall plans, 29 from Germany alone, and yet the situation has not improved. Why, Mr. Obama, is that not enough?


That the NYT should publish such arrant nonsense from anybody speaks ill of its standards.
“Greece has received or been promised $575 billion through assistance efforts”. Unsinn. Utter rubbish.

Furtyhermore, Germany, both through banks and bunds, has received up to one trillion gratis from other European countries as a result of capital flight.
This money should be returned to the respective country domiciles.
We have heard enough nonsense from Sinn.


Sinn believes that there is no political support for fiscal union and I am sure that he is correct. The immediate issue is this: does a transition from an unsustainable currency union to a sustainable monetary union require additional integration measures? Do these include fiscal union, or can a banking union be devised, short of fiscal (= political) union which will make the EMU work? This is the issue and all else is waffle.

@Ahura Mazda

For different reasons to BUBA, I’m against a banking union and eurobonds being introduced as some sort of an emergency fix.

Forgive me for saying so but it then seems like Ireland can never fix its private debt problem because it is not strong enough to join a banking union because it has such a serious private debt problem.

In the current situation where the EU position is that nations have unlimited state liability for their private banking debt Ireland could slash itself to a zero deficit and then have another economic shock introduce yet more banking debt. It is a nightmare that never ends.

At some point (forgive me, Internet) the Gordian knot of sovereign/bank debt has to be cut. The banks (well, international financial capitalism) started this crisis, EMU made it intractable – one or the other will need radical change for Ireland to escape. The current policy of striping states and destroying the real economy in the periphery to stabilize EMU and protect the financial sector is bizarre and immoral.

So given the balance of political and economic power in Europe a breakup of EMU seems our least worst option.

+1 and we might look at the savings from CP as well. It seems pay is down by 250m but pensions up by nearly 300m in 2012.

Hans-Werner Sinn, Colm McCarthy and the rest of Ireland agree on one thing:

Moreover, a bailout doesn’t make economic sense, and would likely make the situation worse. Such schemes violate the liability principle, one of the constituting principles of a market economy, which holds that it is the creditors’ responsibility to choose their debtors. If debtors cannot repay, creditors should bear the losses.



(And just before anyone queries why I’m still commenting here, I’ve being examining Eamon de Valera’s facility with the English language and some jesuitical texts to establish when a comment is not a comment. I’ve come to the conclusion that these are just secular ejaculations – as opposed to prayer ejaculations (and certainly not physiological ones).)

I would still go after glaring structural, financing and process inefficiencies, monopoly proft-gouging and rent-seeking across the private, public and semi-state sectors before I would tackle pay and welfare rates. Tol-dole-gate obscures consideration of the key question: why is the cost of living so high that pay and welfare rates at this level are required to maintain a basic existence for the unemployed and lower-paid workers?

Not surprisingly, Official Ireland and its legions of camp-followers and hangers-on are determined to avoid tackling these issues. They would be wise not to assume that governing politicians and policy-makers in the creditor nations share their selective blindness. As Colm McCarthy points out, either fiscal union is or isn’t required (all else being waffle). If, as is most likely, it is required, it certainly won’t won’t happen while this nonsense continues in Ireland with equally surreal variations in the other PIGS. Why should voters there pay to maintain the projection of this optical illusion?

Dean Baker joins the Sinn pile-on:

The appropriate analogy here is with putting water into a leaky bucket. Mr. Sinn is telling us how much water Germany has put into the leaky bucket of Greece. However it refuses to go along with measures that would patch the holes in the bucket. In fact, it doesn’t appear as though patching the holes is even on the agenda.

If Sinn’s views reflect the attitudes of German policymakers then the euro is doomed. Putting more water in the leaky bucket will not do the trick.


Herr Professor Sinn ….. pining and pining away for the lost romantic glory of the deutschemark … he’s turning out a bit like Nietsczhe’s ‘eternal recurring’ – like a bad pfenning that one keeps getting back in change …

Dig and ask the question: What is Sinn’s agenda?

What is Issing’s agenda? Ask the local AG of the ‘precious’_8!

… or ask the pragmatists J.Asmussen and .. er .. Axel Weber …

@Kevin Donoghue

I thought Germany were neither going to put more money into the leaking bucket nor patch the holes up? Especially if the vote goes ‘the wrong way’ on Sunday.

Greece is quickly starting to look like a candidate, “example pour les autres” (how do you say that in German?).

Comes across a bit as a death wish (for the Euro) though – or perhaps it’s just a death wish for the periphery and leave behind a stronger core thank you very much.

It’s hard to see the vote going the wrong way though given the PR barrage the Greek people have had to suffer over the past month and the fear-mongering that is going on. €700m withdrawn from Greek banks yesterday alone? It could well be another 0-0 draw (to use the current soccer parlance) this weekend – which I guess is not really a good result – or PASOK/ND might just squeek it together.

It seems no matter how much the lefties say they are not planning on taking Greece out of the Euro, all the media stacked up against them still say they are. Keep telling the lies long enough and loud enough and some are going to believe. But the reality is of course that if the lefties do get in by some miracle, moves will be taken to ensure they are ‘exited’ from the Euro anyway.

Who bought Sinn into the conversation? Threads always go to rat5hit when his name crops up.

@ Paul Hunt

“I know it’s off-topic, though not so much as some might think, but will we have a post of Tol-dole-gate?”

Somewhat odd that one has not been started by now, no?

@PR Guy: “Who bought Sinn into the conversation?”

Ctrl-F points the finger at MH. But since the topic of the thread is Germans who do the common currency project no good, he does merit a mention or two.

@Mr. Bond,

I suspect it’s a bit difficult, since it highlights the extent to which our ‘public intellectuals’ are captured, constrained, conflicted or compromised – apart from a few notable exceptions (and even they have to mind their ps and qs on occasion).

@ Colm McCarthy

Re. your reply MH, that is indeed the question but the equation “fiscal union = political union” is not correct.

The EU has an entitlement under the existing treaties to its “Own Resources”, included in which are “Traditional Own Resources” made up of tariffs and levies collected at the external borders of the EU and remitted to Brussels subject to a percentage being retained to cover administrative cost. The so-called VAT base is used as the central plank of the calculation of the remaining budget contributions the method being now essentially one of GNP related national contributions (much distorted by the UK rebate). There is no reason why an element of the actual VAT raised should not be remitted instead but this has been rejected over the years and, indeed, it has proved impossible to introduce an EU-wide system for the collection of VAT, “exports” between EU countries being zero-rated.

It is perfectly feasible to imagine a bannking union well short of a political union, the definition of which is, in any case, unclear. What has been lacking has been the willingness for the major players to negotiate a quid pro quo i.e. common supervision and implementation of whatever measure of agreement can be achieved. The only routes left open that do not require contentious national ratification are those contained in the treaties.

No doubt, there will be much hoopla about a further political integration and agreement to hold still another intergovernmental conference. But the substance of what is needed urgently can only be achieved through the old fashioned treaty routes.

@ Brian Woods Snr

I think a fiat currency has the required flexibility to meet out economic needs and I think a fixed finite currency such as that backed by gold isn’t suitable to a growing population with growing productivity.

I agree that money created in parallel with debt has some advantages but the money supply is rarely fit for purpose and owing money that exists can’t be the basis of a stable economy.

It’s also worth noting that mortgages take two careers to repay and so households are no longer ever increasing borrowers. This system of money creation looks set to stall to economy for the foreseeable future.

We’ve had debt free cash added to the Exchequer’s revenue for decades and still do but it’s insignificant at this stage and replacing it with some debt free digital money would not change anything conceptually.

“The perception is inescapable that people who continually rule out the measures needed to rescue the common currency project are indifferent to its fate.”

There is only “what is” and that’s it. “What should be” is a dirty lie.


@ Bond. Eoin Bond

Worms, cans that sort of thing comes to mind. A closing of ranks maybe?

@docm, colm mcc

Isn’t the thing the Germans are on about, the fact that centrally guaranteed banks can conveniently judge that purchase of their local state’s bonds is an appropriate investment, er, when it might not be. That would effectively allow fiscal policies that would otherwise be unfundable. They reckon they therefore require control of fiscal policy around Europe.

Why are they wrong?


This’ll give you a flavour of Tol-dole-gate:

And re your last query, it’s not just the Germans. They’re leading the charge by virtue of economic heft and number of voters, but you won’t find the Finns, Dutch, Austrians, Luxemburgers, Slovenians, Slovakians and Estonians far behind – with the Swedes and Danes (outside the Euro) backing this up and with the Poles, Lithuanians and Latvians broadly on board as well. They’re all damned if they’re going to pay for ‘business-as-usual’ in the PIIGS + FR & BE if they can’t, collectively, exert control of fiscal policy (and impose effective pressure to compel badly needed structural reforms).

@ Shay Begorrah,

“Forgive me for saying so but it then seems like Ireland can never fix its private debt problem because it is not strong enough to join a banking union because it has such a serious private debt problem.”

Or to paraphrase: “ we want to pass resulting losses to the others in the Banking Union. Along with Spain, Greece, Cyprus etc.”

Is this realistic? To date the crisis is about who picks up the losses and, understandably, the core aren’t volunteering. Given private banking losses have mostly been forced on to the national debt, we may need to default or Europe needs a ‘creative’ solution.

My own suggestion: Use ECB to create a 2/3Bn megafund. Initially, this fund buys sovereign debts in excess of 70% GDP. This debt will rank junior to other sovereign debt (making the privately held sov debt safer). Sovereigns pay 4/5% to megafund, which is used to reduce principal (i.e. no interest being paid).


I saw some article this morning about an ‘accidental’ Grexit.

Oops. Silly me, butterfingers?

@ grumpy

IMHO, this fiscal/political union business is a load of cobblers as is the carry-on about banks buying government bonds. The countries of the EU have had plenty of opportunity to create a fiscal union and it is clear that they have no stomach for it. Unfortunately, they also decided to have a single currency.

The immediate problem, however, is that the European inter-bank market has collapsed with investors running for safe havens, the number of which is rapidly diminishing. Either they fix this problem or its curtains for the euro.

To quote Roosevelt, they have nothing to fear but fear itself. Indeed, it is totally daft that the AAA rated countries have allowed the situation to deteriorate to this extent.

@ CMcC,

If those banks then bought more of their own countries’ sovereign bonds, they would, in effect, pass on cheaper refinancing costs to their domestic governments, Ms Lautenschläger said.

Sabine Lautenschläger seems to drawing our attention to a very important point in my opinion. It was probably this ‘addiction’, which successive Fianna Fail governments in Ireland in the 2000’s, to transactional taxes on large ticket consumer items such as residential property – which totally allowed the Irish sovereign to become exposed to such a fantastic level of risk – when its real costs of borrowing began to become more apparent in the late 2000s and early 2010s, when that fig leaf of borrowing vicariously through its own citizenry was pull away.

Of course, this is the plain fact that numerous intelligent external commentators on the ‘Irish situation’ have failed consistently to acknowledge – namely, the analysis of well known, household brand economists such as Krugman and others – who always reach for that old reliable (and false analysis), that Irish governments had balanced their books during the early years in the Eurozone in the 2000s decade.

They, (successive FF administrations), only succeeded in doing so thruogh means of accountancy trickery, and moving risk about, and taking advantage of the fact for too long, that the markets were not watching – or choosing not to watch. BOH.

@docm, colm mc

” The countries of the EU have had plenty of opportunity to create a fiscal union and it is clear that they have no stomach for it. Unfortunately, they also decided to have a single currency.”

..and that was very silly – but it doesn’t seem to answer my question?

@ All,

Deputies of the Left Wing Alliance here in Ireland seem to call for ‘more control’ over our banks in Ireland. They point to the mountains of public monies which have been thrown into the coffers of Irish banks during the crisis years, in the absence of our gaining any level of control over credit re-distribution throughout the Irish economy.

But what deputies in the Left Wing Alliance here in Ireland, seem to fail to appreciate I believe – is how large a creditor, the Irish banks had been – to the Irish sovereign, throughout the reign of terror known as the Irish property boom.

The fine deputies of the Left Wing Alliance in Ireland, ought to be more careful in what they wish for. Ultimate ‘control’ over the banking institutions, by the Irish government, is precisely what the Irish sovereign managed to achieve in the 2000s decade – and look at where it got us!

One has only to look at the example of the Irish glass bottle site debacle, as one very prime example, of where government in some degree was involved, in a property investment and ended up paying double market valuations at the height of the bubble. That was responsible for setting a new ceiling to Irish commercial property at the time. It was no coincidence, that it was the Irish sovereign itself, who was at the front of the crowd, bidding up the Irish property prices – as it did consistently throughout the bubble years – precisely, because it was the Irish sovereign that stood to gain most by the fact that private banks in Ireland were behaving as they did.

Many analyses nowadays talk about the fact that Anglo Irish bank may have been in charge of the Irish government – but too few analyses today, consider the very unpalatable alternative possibility – that Anglo Irish bank may have been controlled (long prior to its nationalisation), by the Irish sovereign and ruling party. Golf courses, ministers for finance and all of that. BOH.

@ All,

It is so hard to have a decent ‘banking inquiry’ in Ireland, because it would mean in practice, it would have to become a ‘government’ inquiry.

That is simply not tenable.

Sabine Lautenschläger is the first high profile public official from Europe, that I have read, who may actually understand that and its political implications at local member state level. BOH.

Kevin Donaghue
“For those wanting to discuss Tol, Brian Lucey has a post up”
tut tut… two NamesO’doom in one post.. the naughty step for you….

RTE News is getting stranger.
After the Headline News……….
1. Glorified county councilor engages in some strange Foregin affairs in deepest Georgia.
http://www.youtube.com/watch?v=N1AMGdaxqq4………..something about golden rules or something

2. In a interview (see headline above) a “little Leprechaun minister” declares we are sovereign and are merely engaging in dialogue with technocrats (the higher operatives of the owners)

3. Cue mandatory final piece that always – I repeat always declares how docile & stupid our working class is…..now based in Poland………

Meanwhile in Azerbaijan

Could we please end this .
If we are to cede our sovereignty can we end these pretend foreign affair games .
I mean when the IMF entered the UK in the 70s for a more official second time they took away their Ark Royal Carrier simply because it was of little use to a nation that accepted it was now non sovergin to a bunch of bankers appointed by a bunch of foregin and indeed domestic treasuries to exercise executive power.

The least we could do is give up our foregin affairs department and save a few Bob by knocking down these Chinese walls.

I would suggest that if Scotland goes down a Home rule route we follow it – as this country has no concept of what Independence really means anyhow.

De Gaulle was indeed correct about us.
A hopeless bunch of arselickers


re” Isn’t the thing the Germans are on about, the fact that centrally guaranteed banks can conveniently judge that purchase of their local state’s bonds is an appropriate investment, er, when it might not be. That would effectively allow fiscal policies that would otherwise be unfundable. They reckon they therefore require control of fiscal policy around Europe.
Why are they wrong?”

They may not be wrong if the ‘guarantee’ is the full Irish dog’s breakfast.

However, a deposit protection scheme would not cover bonds, yet that too is off the agenda.
It should be quite possible to work out an EZ bank resolution scheme, to be funded by a FAT tax, and that prevents the kind of abuse you mention, if Germany was wiling to do so.
But Germany is not willing to do so but is very willing to be the recipient of deposit flight from its ‘partners’.

@ All,

Thesis: One of the biggest objectors to a proposed banking union in the Euro area of countries, may indeed be, the governments of individual countries themselves.

I don’t know why this may be the case. But I will attempt to speculate, that in the total absence of ‘levers’ to adjust in the economy, following setting up of the Eurozone system from the late 1990s onwards, that governments in member countries decided to experiment with ‘levers’, which they had hitherto not used with the same level of aggression. One of the serious flaws in the early implementation of the Eurozone was the removal from governments of access to their own local control mechanisms at too early a phase in the Eurozone system birth.

It is always dangerous to remove control mechanisms from governments – because children who are used to receiving generous allowances, on a regular basis – when you take it away, they are lightly to use all kinds of ingenuity to redress the balance.

Thesis: One of the surprising finding that a full scale and proper banking inquiry in the Irish state would be, to paint the Irish banking institutions in a much better light than before (in particular that of Anglo Irish bank), and to paint the Irish government is a much worse light, than is currently the case. In the absence of traditional mechanisms to adjust the economy in a local, democratic and transparent way – the governments in Ireland turned to institutions such as Anglo Irish bank – as an analogue for the same, and therefore Anglo and its appointed management became instruments for the Irish government.

In 2006/07/08, when Irish property developers were in the process of de-leveraging their books, and became of the opinion that the property market was cooling off – they were strongly encouraged to become bullish about property again – by management of institutions such as Anglo, who were merely acting as agents to the Irish government. Property, in Ireland in the 2000s, as such became the simple tool by which the Irish government was attempting to manage its local economy, in the absence of a sense of real control.

I can recall vividly for instance when Mr. Sean Fitzpatrick was dispatched in that capacity as an agent to the Irish government, to actively manage the building of a large commercial building in Dublin’s docklands. Although, the simplistic analysis nowadays would suggest that Anglo Irish bank had infiltrated the DDDA, that was not the case. The fact was, that the managers of Anglo, as agents of the Irish government, had infiltrated the DDDA in order to boost the property speculation – which had become the ‘main tool’, by which the Irish government tried to manipulate its local economy – by the late 2000s.

As I said, what a true banking inquiry in Ireland would definitely reveal, is institutions and members of banks painted in a much better light – and those in government at those times – painted in a much worse one.

The biggest lie of all, told to the Irish citizenry, is that lie to do with the Irish bank guarantee. As early as 2006/07, the Irish government were worried that Irish property developers were losing their ‘bullish’ conviction in regards to Irish property. As early as 2006/7, the Irish government had gained a huge degree of control over the banking system, and had effectively co-opted it as a monetary control instrument. An instrument through which to implement its own ‘policy’, behind the backs of the European Union.

Even after the infamous Irish bank guarantee of September 2008 (itself, in its breath and dimension almost a proof statement, that the Irish government was using the nation’s banking system as its own instrument, and had developed the confidence to do so), the Irish government was pushing one of its agent, Mr. David Drumm in front of the property elite – the Chartered Surveyors Institute of Ireland – to instruct them, that Ireland was about the take over the world, in terms of property.

Move onto the name legislation one year later.

Having paid one of the economic ‘heads’ in Ireland to come up with a devious plan for a management agency to manage property loans – that same architect, a Mr. Peter Bacon, is now reduced to speaking on morning radio shows with Mr. Pat Kenny, to explain how his plan was never adopted as he envisaged it. That is, instead of inviting the best property management talent in the world, to enter into joint venture partnerships with the Irish state – instead NAMA as it is known – contains all of the old talent from the Irish property bubble days, who all still are running their busted property development companies.

In other words, we have now moved to the stage where the Irish government, has seen the potential of an institution such as NAMA, to act as a gagging device, so that the extent of the Irish government’s intervention into the Irish property market, following entry into the Euro monetary system, would remain un-spoken of. The extent of activity and role, of agents such as Mr. Sean Fitzpatrick for instance (who I personally witnessed on numerous occasions running the development company, responsible for development of his headquarters facility in Dublin) – the extent of this activity and nature of his role – while remain un-documented for as long as is feasibly possible.

The fact that the Irish Left Wing Alliance do not seem to realize (and it is unfortunate, because I belief strongly in the need for a strong left wing to Irish politics), is the extent to which the Irish government did control the nation’s banking system covertly, for almost a decade – and those same branches of government today – can do everything in their considerable capabilities now, to prevent that realization from coming to light.

In Summary: Sabine Lautenschläger, seems to know exactly what she is talking about. And is perhaps, one of the very few. The problem is not a lack of government, the problem is government. BOH.

So there is a claim that a banking union is needed because some banks are too big for existing regulators to handle?

Wouldn’t it be easier to deal with the banks that are too big by shrinking them?

Or do people seriously believe that banks will stop growing and never outgrow a new bigger regulator?


As I tried to articulate above, at considerable length, is that in the case of Ireland – it is more helpful to think about that nation’s banking system, as an instrument co-opted by the government, to implement economic policy at local level.

Therefore the issue with regards to banking regulation in the Irish banking system, in the period following Ireland’s entry into the Euro currency system – is a little bit hard to fathom – because in order for the regulation of the Irish banking system to be effective in those years, it would have had to regulate the Irish government, which is a democratic and elected ‘executive’ body within the state.

I am no political scientist, but the idea of a non-elected branch of the Irish state, regulating an elected executive branch, was never going to be possible.

Perhaps some of the policy makers in charge of the Euro’s design and implementation should have anticipated this very local manipulation of the financial system by a sovereign executive, in order to replace a control mechanism it had lost, on foot of joining the Euro. But it is also distinctly possible, that European policy makers were just so focussed on making it work at the larger end of the scale – in the core – that they simply did not know how to address an issues that may have arisen at the extreme periphery, in places such as Ireland.


I would simply like to make the distinction between a banking system in a small peripheral nation such as Ireland, to that in the larger core European economies.

The Irish banking system was so small, as of 2002, that it became possible for the Irish state to gobble it whole, and pump it up between 2002 and 2008, because the banking system, was being used as an agent, by the Irish democratic executive.

That is a very different problem, from the one that you describe where banks are quantitatively speaking, just too big.

It also explains a lot about the Irish banking guarantee also, that when one considers to the Irish banking system, to be merely a branch of the Irish government by 2008 – that the first and most natural instinct of the state executive – is to respond by protecting itself, by throwing the weight of the entire Irish population in the path of the €440 billion liability.

By 2008, even pre-guarantee, the Irish banking system was just indistinguishable from the sovereign – in administration terms – if not yet in legal terms. The cleaning up of the legalities, and the transfer of the private bonds to the sovereign bonds, was just another one of the administrative tasks that inevitably would need to be carried out.

Except the economic fraternity in Ireland, it seems to myself, are incapable or unwilling, or both, to analyse the progression to that level of depth. Perhaps, they do not have enough distance from the subject. BOH.

@ PR Guy

Accidental would be if Syriza won the election and then lost a game of chicken ?

I think the EZ would reap the whirlwind. They are not going to have a plan if Greece goes. They have yet to come up with a plan before the event. Any event.

The EZ is a bit like Constantinople in 1453 . If those walls go all hell will break loose.

I feel really sorry for the Greeks. They have been put in an impossible situation.


That’s because the position seems reasonable to me, yet I somehow think most Irish observers will think they are being unreasonable. I’m inviting people to persuade me.


I’m not going to try to persuade you of anything at this hour, but there are only two passably decent outcomes to the Euro crisis: a United States of Europe or the multi-currency system we used to have. It seems both are currently impossible, which means we’ll be stuck with a decidedly crappy outcome for quite some time. In particular, trying to set fiscal rules for EZ states when there is no EU (federal) fiscal policy just won’t work.

FWIW, the Buba gang don’t strike me as unreasonable at all. AFAIK they never wanted the Euro in the first place. Since they were lumbered with it their line has been, pretty consistently, that others must always go a lot farther than half-way to meet them on every issue that arises. That’s how powerful actors tend to behave in this world. They are an uncompromising bunch but that’s in their interests, it’s not irrational.

@Brian O’Hanlon – are you seriously suggesting that private enterprises have no capacity for independent thought? Nor their owners no concept of risk?

While this may not be the thread on which to refer to the issue, I found it interesting in today’s Irish Times to read the article by a Michael Walsh, of Mercer’s, in which he claimed “pension fund values were being decimated by the financial crisis that shook the very foundations of the world’s capital markets”.

Leave aside the misuse of “decimate” – had Mercer’s advised their clients to invest in bonds as opposed to equities, the financial crisis (which they didn’t foresee, for all their expertise) would have provided a windfall for these fee-paying clients. De facto, through their reliance on faulty models – as immaculately mathematical as those models may have been – Mercer’s and their ilk fouled-up by recommending to clients an over-exposure to overvalued assets.

What asset splits were Mercer’s recommending to fee-paying clients in the 1997-2007 period? Did they at any stage attempt to adjust their models or recommendations to capture the increasing overvaluation of equities, based on multiple expansion?

Did they heck.


There is no doubt, that outside the narrow little confines of the island known as Ireland, a lot of different rules do apply, and private enterprises do operate on levels, and in ways in financial systems that I do not understand as well as others. What I am trying to offer as a hypothesis though, is that within the confines of the island of Ireland, we ought to be very careful of how we project that analysis of ‘private enterprise’ that may be very valid in another context, in another economy, onto the tiny economy that is that of the Irish one.

It is reasonable to suggest, that on the island of Ireland, the boundary between where the state ended and what is supposedly ‘private’ enterprise, has never been well defined.

I suppose, that at certain times in Ireland we are lucky enough to have the existence of some private enterprise, and we may benefit from range of new services and products that such enterprise makes available to us. But even the birth of those enterprises, can entail a very messy kind of relationship between the state and the nascent company.

I believe the points that you have raised above in relation to equity markets and pension fund investment is a really, really fertile area for research and further understanding. I understand where you are coming from, in terms of looking at the current financial mess globally (and destruction of wealth, and added burden placement on middle classes), and how the operation of equity markets is at the root of the causes of such.

The observation that you raise in relation to debt investment also, is crucial. I watch on television the odd time, those teenager soap operas about kids growing up in Orange county in California. It is interesting, that in the current times, the vernacular teenager speech in those trash-y soap operas, when it comes to matters financial, always seems to suggest – that the clever thing to do with the teenager’s wealth fund – is to buy up European debt.

I guess, what has become obvious nowadays, even in popular culture on the TV programs we import from the United States – is that they are telling us in those shows today – that they aren’t speculating any longer on their own dot com shares or such, but instead are busy buying European sovereign debt, and probably betting against Europeans states into the bargain.

I do find this popular cultural artifact really interesting. Those Orange county teenager sprooks, seem to view ‘Europe’ as this distant place on another planet, that is just hanging there like some ripe fruit, waiting to be gorged. I would refer readers here, I guess, to a work such as The Enigma of Capital, by David Harvey, were he speaks insightfully I believe, on the creation of these weird new markets, which have arisen out of the fact that capital nowadays is so mobile and powerful, over labour.

When speculation on European sovereign junk bonds has made its way into Californian teenage soap operas, then we really have entered into a new age. But I suppose, one hundred years ago, the Europeans were the ones with the capital, and they speculated on the economy of the United States. BOH.

@ Aiman,

The point I am making I suppose, is that in the olden days in north America, success financially speaking was always linked psychologically to values such as hard work and enterprise. That is a major reason, why Americans like to invest in equities, in order to pass some of the old wealth back to the next generation in the creation of new enterprise, opportunity for employment etc.

What has happened today, is that for this current generation of Orange county teenager, the way to wealth is through buying up of dodgy Greek bonds, and keeping ones fingers crossed, for a second, third or fourth sovereign bailout.

It is far from being the teenagers of Greece who benefit however – but the kids riding on surf boards – in those trashy American soap operas. BOH.

@ grumpy

Taking up the challenge, the position of Buba – there is no one “German position” – is unreasonable, because it is going well beyond its mandate and acting as a state within a state (as various institutions in Germany appear to have a habit of doing, based on an extremely legalistic approach to any action of government).

The fact that the authors of the Maastricht Treaty made provision for the Council (governments) to be given the power grant the ECB supervisory powers indicates that they thought such action might be necessary. (The fact that the issue was probably contentious is reflected in the specific exclusion of insurance undertakings from the relevant provision).

They were right!

The euro is not just the Deutschmark writ large. Buba has yet to come to terms with this, secure in the knowledge of its standing with the German electorate.

The UK has clearly indicated that it is on board provided, as usual, it can opt out. That may be the major stumbling block to action, or the most convenient excuse for none.

Is the root of BuBa’s opposition to central EU bank regulation the fact that the Landesbanken have a different capital structure to other banks in Europe?

I heard this cited as a reason Germany had tried to water down the most recent Basel capital requirements.

From DOCM’s WSJ link:

Bqe de France Gov, Christian Noyer: “Building on the success of the single monetary policy we must now establish a single supervisory system ….”

Eat your heart out, John Cleese.

@Kevin Donoghue on the slightly different perceptions of EMU inside the EU establishment and in the so called “real world”

Bqe de France Gov, Christian Noyer: “Building on the success of the single monetary policy we must now establish a single supervisory system ….”

Eat your heart out, John Cleese.

Such a parochial vision Kevin!

* Has EMU been successful in a narrow economic or broader social good sense ? Obviously not.

* Was EMU successful in gathering power for unaccountable European institutions away from mildly accountable government and state actors? Yes.

So you are the kind of person who thinks “Ever Closer Union” is more important than “Ever Better Union” then you might be less amused by this claim of success and go a little teary instead.

It makes a certain empty kind of sense, “Ever Better Union” requires making value judgments, something the EU is loathe to do (outside of implementing market dogma) as it involves the political sphere and the input and consideration of the hoi-polloi, whereas “ever closer union” requires no analysis, it does not even need metrics for success.

EMU has therefore been a success on which we can build even more successful European Union integration as every act of European integration is by definition a success. DG VERITE is all over this.


I’m not really referrimg to the details of a technical capacity to introduce a supervisory system, but rather the basic point the Buba makes about what might follow from central guarantees for banks – and that Germany taking the view this would be inappropriate without even closer fiscal union is reasonable.

@Kevin Donoghue


I had not read that Slackwire piece and it is a brilliant synthesis. I can not recommend it highly enough, you should mention it on the next thread here about EU/ECB monetary and economic policy.

It is a long post but it in my opinion it renders most of the debate on the Irish Economy about the banking crisis and the role of the EU/ECB irrelevant – think of this article as the piece that DOCM would rather you did not read.

I find it impossible to take seriously any more people who support the current organization and direction of the EU who are not anti-democratic Hayekian liberals on the sociopathic hard right of the political spectrum or part of the network of feudal relationships that describes modern financial capitalism.

Either they do not get what is going on, or they are fooling themselves or they are trying to fool us.


‘… they are trying to fool us.’

The financial system ran riot; they are passing the bill to the citizen serfs; this is one of the most, if not the most, enermously odious generational and intergenerational transfer of economic, social and phychological value from labor to capital since the advent of the industrial revolution.

This is WAR. A war being fought for the soul of the European Project.

@ grumpy

One has to differentiate, it seems to me, between “supervision” and “guarantee”. On the first, it is clear that it is opposition from the existing national institutions, notably in Germany and the UK, that has blocked any movement and that the transfer of authority – not money – can be done on the basis of the existing treaties.

On the second, it all depends on how the guarantee is organised and how it is financed. Berlin is posing the question in terms of black and white – i.e. nothing other than on the basis of a fiscal union – but there are many shades of grey; what banks? what countries? on what basis?

Merkel appears to have shifted on supervision. The curious nature of the German banking industry – as adverted to by Zhou-en-lai above, and the nexus they provide between politics, big business and organised labour is her real source of difficulty. They are happy the way things are. Some, indeed, are already setting up their own banks.

I saw that slackwire post(which i agree is utterly essential) over at jacobin which is a pretty fantastic site itself. For a taster :


HT DT: “ECB council member Jens Weidmann says the future of the euro is not subject to market timeframe, as markets change their focus every two weeks. ECB has reached the limit of its mandate.

Meanwhile, Moody’s says Irish home prices will fall a further 20pc.”

I would have thought the ECB admitting something like they had reached the limit of their mandate would leave the markets ‘smelling blood’?

I’m not sure why the Irish home prices thing was tagged on to the end of that. Is that 20% from peak or from where they are now? I had always assumed MK was right and that we would be looking at a total of 80% or so from peak. Sounds about right. Those shoebox 2 bed terrace houses in N Co Dublin that were going for €450,000 at peak aren’t really worth even six figures. All that so-called wealth down the drain. All those hopes and dreams dashed into the mud in the postage stamp garden.

@ shay

“I find it impossible to take seriously any more people who support the current organization and direction of the EU who are not anti-democratic Hayekian liberals on the sociopathic hard right of the political spectrum or part of the network of feudal relationships that describes modern financial capitalism.”

Me too. They are going bring the whole kit and kaboodle crashing down, the gobsh*tes.

FYI Der Spiegel

Bargain Borrowing Costs
Euro Crisis Will Help Germany Balance Its Budget

Low interest rates on German bonds are translating into billions in savings. Now economists have calculated that the country should be able to balance its budget by next year — something that is likely to increase criticism of Germany’s crisis management. Meanwhile, Chancellor Merkel has warned that Germany could be “overwhelmed” by efforts to solve the crisis.

The European sovereign debt crisis has plenty of losers, but arguably one clear winner: Germany. Demand for German bonds, seen as the safest haven in the euro zone, has pushed Berlin’s borrowing costs so low that some investors are effectively paying Germany for the privilege of lending it money.

The European Commission is, however, standing firm in its refusal to loosen the conditions on Greece’s bailout. A spokesman for Olli Rehn, the EU commissioner for economic and monetary affairs, told the center-left daily newspaper Süddeutsche Zeitung on Wednesday that the Commission was sticking to the agreed terms of the bailout.

Although that appeared to contradict an earlier report that the EU was planning to discuss softening the terms of Greece’s bailout, sources in Brussels told the Süddeutsche that the Commission was taking a tough stance for tactical reasons. Representatives of the so-called troika — which consists of the European Commission, the European Central Bank and the International Monetary Fund — are getting ready to travel to Greece to examine the situation as soon as a new government has been formed, the Süddeutsche reported in its Thursday edition.


There have been a few thinly veiled remarks seeming to suggest that the ‘slowness’ of fiscal(de-facto political) union should be overcome with some sort of ‘declaration of emergency’.
If that doesn’t happen (& considering the amount of violence that wd. follow such a move, let’s hop it doesn’t), the ‘treaty-change’ option could only be railroaded through by engineering the situation to include a self-destruct button that wd. be activated by countries who reject it.
Not a stable scenario either.

But there is no stable solution in anything the ECB government are envisioning.
We’re still dealing with the after-effects of empire today – as per The Charter of the United Nations established, in Chapter XI (Articles 73 and 74), the principles that continue to guide United Nations decolonization efforts, including respect for self-determination of all peoples.
The principles are the same.

re – PR Guy

I think they mean that they have lapped it (their mandate) again. It’s a borderline of the imagination for them.


It is off-thread but I can confirm that in the period just before the “tech wreck” of 2002/3 Mercer, if not actively promoting the idea ,was acquiescing with trustees and sponsors who wanted to raise the equity content of defined benefit schemes . These schemes were already loaded up with equities to the tune of 70-80%.

Oh my goodness! Incredible article dude! Many thanks, However
I am having troubles with your RSS. I don’t understand why
I cannot join it. Is there anyone else getting the same RSS problems?
Anybody who knows the solution will you kindly
respond? Thanks!!

Comments are closed.