Landon Thomas outlines some of the reform ideas doing the rounds in policy circles and profiles some of the key participants in this NYT article. He includes the ESBies idea proposed by our euro-nomics group and a member of our group Markus Brunnermeier, as well as Daniel Gros and Graham Bishop.
I am not entirely sure if it belongs in a post with this title heading but Hans-Werner Sinn makes his own proposal in this FT op-ed.
7 replies on “Economic Thinkers Try to Solve the Euro Puzzle”
With regard to Sinn’s proposal, I’m not sure that I understand the point. The pain of leaving the euro is almost all about the problems of leaving, and his proposal will do nothing to alleviate those. Having left, it would take a special sort of masochism to want to get back into a currency that is fundamentally broken for the reasons Kevin O’Rourke outlines in the paper he posted yesterday, and will still be just as broken if Sinn’s tinkering is implemented.
Sinn’s proposal would bust the Solidarity Principle into smithereens …. and would set the European Project back a generation …. the vulture funds would love it …
Full scale WEuro_Bonds appear to be a step too far for the Deutsche Mindset at this time …
ASBies and variations on the theme as proposed by two of the others have merit … and could probably be sold to German Citizenry by a strong Chancellor who would have to admit to telling porkiers on the real origin of the crisis to her citizenry [e.g german banks lending dosh to Greece so that Greece can buy a few German submarines]
Moves on the ESM/EFSF are prob more likely … a banking liscence with central supervision of ALL EZ financial institutions ….
Stepping back a litte – all of the above are designed in one way or other to Placate Gemany …. as distinct from being EZ driven ….
So over and above them all stands the imperative to provide a nEU Remit for the European Central Bank with the handcuffs of the bUndesbanke removed. Draghi can handle a Big Bazooka … what he can do without one is probably not enough …
I have a lot of sympathy for the sentiment expressed by the analyst at the end of the article – 2 of the solutions presented therein mostly involve elaborate mechanisms for rejigging risk in the hope that investors won’t notice that the debt overhang and banking liabilities remain with the peripheral states.
While both of these ideas have some merit, they make the mistake of trying solve two things at the one time: the clean up of the current crisis and the future-proofing of the structure of the Euro. These issues should be separated and the current crisis dealt with in a ruthless manner involving all the monetary firepower available to the ECB. Otherwise, the Eurozone probably will not survive this crisis, nevermind the next one.
I think most solutions can be characterised by the emphasis that they place on monetary or fiscal policy. At the end of the day the risks and losses will have to be assumed either by the ECB or by governments directly. The German positions is that individual states must assume risks and costs and maybe, at some point in the future, this could be done collectively, after political union has been achieved (i.e. never).
The Gros proposal is interesting as it would ultimately fall into the first category involving the backstopping of peripheral sovereign debt by the ECB. Undoubtedly this is less painful than having core or peripheral states assume the risk and losses. An expansion of the ECB’s balance sheet may lead to increased inflation in the core and, indeed, this should be deliberately targeted in order to reduce the overall debt burden and stimulate demand.
As far as I can tell, the main obstacle to all this seems to be the idealogical opposition of the Bundesbank. I thought Schaueble looked very nervous at the weekend. I think even he realises that the least worst solution involves pushing the ECBs mandate to the maximum and perhaps even changing it in the long run. The result of loose monetary policy would, ironically enough, be a boom in the core, but I think the collective idealogical opposition of the Bundesbank, the FDP and the German economic establishment is enough to scare any politican into submission.
In the end, I think, the Draghi will come good, but only following an intense escalation of the crisis where either Spain or Italy are on the verge of default.
Agree 100% with your post – I made almost the same post as yours on the FT website.
Actually, having thought about the matter some more, my best guess about what he is up to is giving governments political cover to leave the euro or to let others leave without a fuss. Two types of political cover – one about it becoming perfectly communautaire to leave, and the other giving some pretend comfort to electorates of stressed economies that like the idea of the euro despite the pain it is inflicting upon them.
CARTOON OF THE DAY
1 August 2012 The Times London
Begging for the Bazooka
Europe’s Dangerous Dream of Unlimited Money
An Analyisis by David Böcking
This week, some euro-zone members have been calling for the permanent bailout fund to be provided with a banking license that would provide it with unlimited access to money from the European Central Bank. The “bazooka” option might help crisis countries in the short term, but it would entail massive risks in the long run.
The bazooka debate heated up after a suggestion from some countries, including Italy and France, that the permanent euro rescue fund, the European Stability Mechanism (ESM), should be equipped with “unlimited firepower” through a banking license. In concrete terms, it would enable the ESM to borrow unlimited amounts of money from the European Central Bankand use it to shore up euro-zone member states threatening to buckle under the weight of the crisis.
Given that billions of euros have already been deployed in the euro crisis, the idea of unlimited credit seems risky to say the very least. Not surprisingly, the reactions have been intense. “A banking license for the ESM would mean firing up the money printing machine, which means inflation and nearly unlimited liabilities,” Patrick Döring, the general secretaty of the business-friendly Free Democratic Party, the junior partner in Chancellor Angela Merkel’s government coalition, told SPIEGEL ONLINE. “That is why the FDP cannot and will not allow a banking license to be issued.”
Switzerland Leads the Way
Supporters of the bazooka solution say that pressure on euro-zone countries won’t relent as long as a concrete number is affixed to the scope of the bailout funds. Regardless whether the view comes from genuine conviction or pure speculation, the idea is that time and time again investors might decide that support is insufficient and thus drive interest costs up again. Only a safety net with unlimited scope — at least so it is hoped — would put an end to that kind of speculation.
Most recently, the Swiss national bank proved that such a deterrence strategy can work. After the Swiss franc rose sharply as a result of the crisis, monetary authorities pledged to defend the franc at a rate of 1.20 francs to the euro through unlimited foreign exchange purchases. They were largely successful with the strategy.
In the end – if there is one, the plan that will succeed wil be a reversal of the ‘plan’ that got us here in the first place. Stands to reason. Eh? Well maybe not. The machine does not appear to possess a reversing mechanism. So maybe will will just go on “slip slidin’ away”.
Back to the model shop I am afraid. Those bozoes do have one and it ‘peers to be Permagrowth. I hope I am wrong, ’cause Permagrowth is the economic Model-in-Use that got us into this mess, so it sure as hell won’t extract us.
And folks could we hold the ‘pain’ bit. Real folk are experiencing desperate hardships. Their lives have been upended. That’s not pain, its a social disaster. Tell it as it is, a human tragedy caused by a toxic amalgam of ignorance, stupidity, arrogance and an overbearing paternalism.
Whether we continue with a flawed currency or dump it it matters little to those folk already in distress. All most want is food, cloths and a place of shelter to raise their families. You pull that out from under them and you will fetch up in real trouble. As I said above. The economic Model-in Use is naive, illjudged, inadequate and hazardous to human health.