INET Council on the Euro Zone Crisis

I am part of an INET-sponsored group that has been considering whether and how a collapse of the Euro can be prevented. Details of our discussions to date are available here.

24 replies on “INET Council on the Euro Zone Crisis”

Congratulations on your involvement in a very sensible and much-needed project, Kevin. I presume there is a wider campaign to get this proposal to those who need to hear it both through direct, private channels and indirect public ones?

New economic thinking? This seems to be a re-heating of the multiple ingredient fricasse served up over the last few years by the responsible soft left, as opposed to the know-nothing, learn-nothing hard left – with little discernible impact. There also seems to a re-layering of the ingredients prior to the re-heating to distinguish between proposals for recovery and proposals for reform. This might make it more palatable for the governing politicians, policy-makers and regulators, but I doubt it has a better chance of being consumed and digested than previous offerings. There is simply far too much pandering to those who are part of the problem, too much of a naive belief that they will miraculously convert to become part of the solution and there is a total absence of the fibre needed to force a purging of the economic and politcial system.

Congratulations Kevin–you have not been afraid to speak your mind. The media spin/propaganda in Ireland is very damaging.

No comments from the Dork? Is he alright?
Still, I see that Paul Hunt can, with a straight keyboard, decry reheated ideas. Pot, meet mr kettle.

Oh and Paul. Agree, there is a total absence of the fibre needed to purge, this site comment stream for one.

The bond market hasn’t gone on holiday. Bear flattening in Spanish bonds, the 2 year yield 5.7% to over 6.5% in one day. Obligatory panic short-selling bans in SP and IT.

Are there any circumstances in which the very highly paid officials and politicians currently littering the med would feel a holiday was inappropriate?

Thank you Mr O’Rourke, someone has to fly the flag for the reality based community.

I hope to have the time to dig through some of the contributions and I would be interested to know if along with the “whether” and the “how” of saving the Euro there is also a “why?”.

Is there a point at which the collective political and economic cost to the EU of maintaining the Eurozone outweighs the benefits or is this a death before EMU disintegration thing?

In July 1914 large numbers of european diplomats were in various salubrious places. Backchannel chats between them took place at various Baden Whateverenburgs. In that context, and bearing in mind that that was not so long ago in chancellory time plus a much much greater crisis than a mere currency crisis, no. Plus, the odd chat over a glass of prosecco/cava/retsina might be useful. Chill .

@ All

From Gavyn Davies

“The Brookes/Daoud model also has some interesting things to say about the sell-off in bond markets like Italy and Spain. They argue that, in these markets, disaster risk is accompanied by a rising risk of outright default on sovereign bonds. When the risk of default becomes sufficiently large, these bonds no longer have much value as “insurance” assets and start to behave like equities. They therefore experience sharp sell-offs as economic disaster risk rises. When this happens, bonds and equities fall together. They become positively, not negatively, correlated.”

The perilous situation of France may be noted.

Edmund Phelps sets out the basic parameters of the debate;


“Behind the differences of technical matters, however, is a split between those who want to go on with corporatism and Keynesianism, and those who want some approximation of well-functioning modern capitalism. What we are seeing is another battle in the war between these two world views.”

He is, however, mistaken regarding Germany. The benefits of the credit spree have been shared in Germany much as in any other developed economy – with the exception of the US – and this is, in fact, confirmed by him.

For those initially bemused by the fluffy front page, the meat and potatoes are here:

Interesting stuff. For the FT to pick out the minority view that the ECB should move to a dual mandate is dispiriting little englander stuff. Personally, I think it should not, there is plenty of room in the eurocracy for an agency that targets NGDP growth.

As for the main part of the document, lots of good basic ideas, none of them particularly new, but equally, few of them particularly contentious at this stage – FDIC for Europe, bank resolution, individual country credit reserve requirements (I quite like that one 😀 ) and so on.

Oh wait, I’m off on holiday, sorry, talk to you again in September… 😀

@Kevin O’Rourke

Neat line up …

Minor Point:

‘[Members] recognize the large gains of preventing a euro zone breakup and share at the outset a vision of a common Europe, one that is socially and economically desirable as well as politically and socially sustainable.’

Suggest adding ‘psychological’ to the above as in:

[A common Europe] that is socially, psychologically and economically desirable as well as politically and socially sustainable.’

Magic formulas remain elusive and even in Norway, Europe’s richest country with a huge sovereign wealth fund, happiness also appears to be elusive.

The right-wing anti-immigrant party has regained its popularity and according to Der Spiegel ‘the Roma have finally arrived in Oslo. This has sparked hateful tirades on Norwegian Internet forums, where the Roma are disparaged and death threats are made.’

How brave those vermin virus that pollute the web are, when their identities are hidden.

As regards the manifesto, Daniel Gros, council member, said last May that the urge to be seen to be ‘doing something’ is leading Europe’s policy-makers to rely on the few instruments with which the EU can claim to foster growth. But they should recognise that today’s growth crisis is quite different than it has been in the past. In his view, the real bargain should not be austerity plus a Marshall Plan for the south, but rather continued austerity plus labour-market reforms in the south, combined with more infrastructure investment in Germany and other AAA-rated countries like the Netherlands.

Growth is going to be low for the foreseeable future and even if reforms were agreed but for later implementation, there is no guarantee that a new government would not reverse them.

Armchair experts are only likely familiar in detail with one economy while each economy has specific problems and hurdles to surmount.

The question is, if a longterm adjustment by being so-drawn out with massive public spending waste continuing, can make reaching a viable solution worse?

Daniel Gros wrote last February that a lower deficit must lead over time to a lower debt ratio, even if this ratio worsens in the short run. After all, most models used to assess the economic impact of fiscal policy imply that a cut in expenditure, for example, lowers demand in the short run, but that the economy recovers after a while to its previous level. So, in the long run, fiscal policy has no lasting impact (or only a very small one) on output. This implies that whatever short-run negative impact lower demand may have on the debt ratio should be offset later (in the medium to long run) by the rebound in demand that brings the economy back to its previous output level.

France is really the key player.

It needs to get its fiscal and trade deficits under control. However, if it just does the minimum, what can be expected of others and the already difficult political climate towards external support in Germany will only harden.

@Michael Hennigan

“After all, most models used to assess the economic impact of fiscal policy imply that a cut in expenditure, for example, lowers demand in the short run, but that the economy recovers after a while to its previous level.”

Only the “models” that completely exclude the factors regarding the balance-sheet problems, the same ones that have completely failed to explain what has been going on since 2008.

Supply-side microeconomic arguments are absolutely useless in our situation. I’m surprised that anyone, other than those whose job is to maintain the status quo, still clings to those all-powerful universal “models”.

Well done, Kev, on getting the term ‘catastrophic loss insurance [re banks] included in the section on the problem of fixing the structural flaws of the euro zone for the long term.

But it is not included in the section, ‘Urgent short-run measures’, addressing ‘legacy issues’, and not even in the section, ‘Exceptional emergency macroeconomic and monetary policy measures’. The emphasis is on longer term loans and guarantees for future borrowing.

Catastrophic private bank losses (such as in AngloNationwide), foisted on the public, is one of the ‘legacy issues’. At a minimum, it deserves a heading in a report such as this.

I read the INET statement in diagonal. I did not see the words ‘immediate and large-scale monetary easing to return to normal inflation’. I am sorry, but this statement is worthless.

@Kevin O’Rourke

Der Spiegel take here:

The euro crisis has returned with a vengeance this week, with Greece potentially facing bankruptcy, Spain teetering towards a bailout and even Germany at risk of losing its top credit rating. A group of prominent economists are calling for a radical restructuring of Europe and the euro zone to prevent a disaster of “incalculable proportions.”

A panel of respected European economics experts are ringing the alarm bell this week over the euro crisis — direly calling on all European leaders to move swiftly to deploy the most powerful tools available to halt the currency’s downward spiral.

“We believe that as of July 2012, Europe is sleepwalking toward a disaster of incalculable proportions,” the New York-based Institute for New Economic Thinking (INET) stated in a report warning leaders they need to move faster and more decisively to save the common currency. Otherwise it could very well disintegrate.

The study’s publication on Tuesday couldn’t be any timelier, given the recent dramatic developments in the euro crisis. Greece’s recession is proving to be far worse than previously expected, it is getting tougher for Spain to raise money on the markets (on Tuesday, interest rates on 10-year Spanish bonds rose to an unsustainable 7.6 percent) and Germany’s top triple-A rating is also at risk.

Supportive write up on the report by Evans-Pritchard in the Torygraph:

“The 17 economists said Europe’s political waters have been muddied by disputes over eurobonds, debt-pooling, subsidies and fiscal union. None of this was necessary to break the logjam, they said.

They claimed the system could be stabilised immediately by creating a lender of last resort to back-stop the bond markets, either by mobilising the ECB or by giving the eurozone bail-out fund (ESM) a banking licence to borrow from the ECB.

The deeper problem can then be managed through a European Redemption Fund that takes over a chunk of the “legacy debt” left by the errors of early EMU, much like Alexander Hamilton’s sinking fund in the US to clear up the mess after America’s revolutionary war.

The proposal is based on a plan by the German Council of Experts. Each country puts all debt above the Maastricht ceiling of 60pc of GDP into the fund. Each would be responsible for its own debt but would be able to borrow through joint bonds, raising money on Germany’s credit card.

The debt would be paid off over 20 years, with each state putting up foreign reserves, gold and other collateral to ensure compliance. It is the opposite of fiscal union: the eurozone would return to fiscal sovereignty and, since the liabilities would be fixed and the fund self-liquidating, it would comply with Germany’s constitution.

The authors say such a move would be the “game changer” missing since the crisis began. It would be costly for Germany, but “orders of magnitude” cheaper than the alternative. The German Council of Experts has said the country would suffer €3 trillion (£2.3 trillion) of damage if EMU blows apart, a claim hotly disputed by eurosceptics.

In a veiled rebuke to hard-line politicians in Germany, the economists said the root cause of the crisis has been the boom-bust effect of rampant capital flows over the past decade – not delinquent behaviour by feckless nations. “The extent to which markets are currently meting out punishment against specific countries may be a poor reflection of national responsibility,” they stated.

But they said the current course had become hopeless. Deepening recession is “tearing at the social fabric of the deficit states”.

The lack of any light at the end of the tunnel is leading to a populist backlash in both the debtor and creditor states. The only question is whether the North or the South succumb to revulsion first.”

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