Simon Wren-Lewis, the EMU chess game, Italy and the IMF

Simon Wren-Lewis has a nice post here. The whole situation makes you wonder whether, despite all the ECB’s talk of independence, there is a major Western central bank more subject to political constraints anywhere in the world.

I would add a couple of points.

First, the ECB and the rest of us are fixated on what will fly politically in Germany; but there are 16 other member states in the Eurozone, and not all of them are as pliable as little, eager-to-please Ireland. In particular, I have always thought that there were two reasons to avoid having Italy enter a bailout programme: not just the fact that EFSF/ESM won’t have enough money, but the fact that if this happens, Italy may decide to leave EMU. The reason why economists like Paul de Grauwe have been asking for ECB intervention is so that an Italian bailout becomes unnecessary; now it seems that Italy will only get ECB intervention if it enters a bailout programme. The whole thing seems upside down, and people are playing with fire here. Despite its large debts, Italy wouldn’t be having these difficulties on the market if it wasn’t in EMU: to ask a big, important country with a sense of its own dignity to give up sovereignty — and potentially enter the same death spiral as Greece, and now apparently Spain — simply so that it can remain in a single currency that isn’t working seems like a bit of a stretch to me.

Second, I agree with Simon that the ECB’s worrying about the moral hazard facing states like Italy in a situation like this is pretty stupid. (I would add that it is also wrong because it mixes up fiscal and monetary policy. Let the ECB stick to monetary policy, and let governments, individually and collectively, stick to fiscal policy.) But in our dysfunctional, destructive monetary union it may indeed be politically necessary for the ECB to insist on fiscal policy conditionality before doing the job of a central bank. Forcing Italy into a bailout programme seems like a particularly dangerous way of doing this, however.

There is a better way I think. The IMF is signaling that Spain and Italy are doing all that could be reasonably asked of them right now. Surely if the IMF is willing to certify that a country is running a sensible fiscal policy, this should be enough to allow the ECB to do what needs to be done?

UPDATE: Francesco Giavazzi is quoted here as making an obvious and very important point: for an unelected technocrat like Monti to steer Italy into a bailout programme, with the consequent loss of sovereignty that would be involved, prior to elections, would be unacceptable.

84 replies on “Simon Wren-Lewis, the EMU chess game, Italy and the IMF”

I think this is what is happening:
The ECB is using the prospect of unlimited secondary market bond buying to force the Germans to be more supportive of the ESM.
You might see a major announcement re EFSF or ESM in the next 3 weeks -eg fast-tracking it

The problem is (i) German domestic politics, and (ii) Naomi Klein’s point about what she termed ‘shock doctrine’ some years back.

The right in Europe has learnt nothing (perhaps deliberately) from the interwar period last century – or maybe even from the nineteenth century either. I still regularly hear on the idiot box people telling me how countries which had budget surpluses and insignificant debt up until the recession started were being dangerous profligates because of the existence of the social democracy net to keep the population out of misery (which advance in the human condition seems to be the real target here for sociopaths).


What happens if the BUBA is not playing chess but high stakes poker. Suppose they are really set on correcting the design flaw in the Euro by making it difficult for the peripherals to stay.
What cards do the peripherals really have?. If they leave the euro and probably the EU, that is the point at which the core ECB prints money and the core countries use their fiscal resources to bail out their own banks and insrance companies.
That would be the end of the European Project as we know it. But it might be more politically acceptable for the core than pumping something close to 2trillion euros into propping up Italy and Spain.

“to ask a big, important country with a sense of its own dignity to give up sovereignty”

But Italy does not have “a sense of its own dignity” in this way. See for example their very muted reaction as their prime minister was replaced by Monti, at ECB’s instruction. They’re just the sort of country that can be bulldozed.

France or the UK could not be treated in this way, but Italy, no problem.

Some Italians such as Silvio or the Clown might stand on ceremony but more sober N Italians fear that outside the Euro, Italy would quickly become Argentina- from an economic powerhouse to a non entity in a century.

Maybe Draghi knows Italy better than foreign spectators and the fact that Berlusconi has already signalled he may try to regain power in next year’s elections, must be a factor in the ECB president’s thinking.

Draghi was after all the central bank governor and saw the misgovernment at from a close vantage point.

The ECB president would surely be a fool if he did not take account of the Italian domestic situation, which he knows so well.

The whole situation makes you wonder whether, despite all the ECB’s talk of independence, there is a central bank more subject to political constraints anywhere in the world.

China’s PBoC? Bookending the central bank of the world’s second biggest economy, are the Fed and Bank of Japan.

The Fed has been the subject of relentless harrassment by Republicans in Congress in recent years. A former presididential candidate wants the central bank abolished while a Nobel laureate in economics was not qualified to become a Fed governor.

By early June, The BoJ governor had been summoned to appear before the Diet more than 20 times in 2012.

0n every occasion, the governor gets the same line of questioning: Why is the BoJ not providing more economic stimulus?

Every time, Masaaki Shirakawa respectfully explains that whatever is holding back demand, it is not the cost or availability of credit. He often says that what is important in spurring economic growth is raising Japan’s potential growth rate by getting more women and old people into the workforce and increasing productivity — issues which are beyond the control of the central bank.


Having read the Paul De Grauwe excellent article (July 2nd), one gets the distinct impression that the new Draghi ECB has been taking most of his advice.

Recognition that the ESM would fail because of limited resources and the proposal of the ECB to buys bonds implicitly at a certain yield ceiling.
Recognition that the previous SMP did not work for the reasons given and its replacement by an open ended short term bond buying program, subject to conditionality set by an ESM (which would be a Euro equivalent of the IMF.)

But why would Italy not enter a bailout program. It will have to do virtually all of what a bailout program will require even if it objects to entering a ‘program’.
From recollection Draghi did not use the term ‘bailout’ or ‘program’ during his press conference. He just mentioned strict conditionality as a prerequisite for the ECB to consider bond buying. This may have been an attempt to avoid the pejorative bailout phrase. Combined with express admission that the ECB believed that the bond market was being distorted to unsustainable levels, my view is that Draghi’s proposal was more in the nature of an exhortation to apply for the new bond buying than the heretofore ‘bailing out the feckless peripherals’ attitude.

While De Grauwe’s criticism about the stupidity of the ECB’s business model in terms of having its own sufficiency of capital has not been dealt with, is it not likely that this would be tested by a significant short term bond buying exercise.

Ironically the very fact that short terms bonds have come down, in anticipation of both Italy and Spain availing of the new proposals, may well mean that they may not have to apply for such a program, as they may be able to fund themselves using short terms market funds at the reduced rates


“Every time, Masaaki Shirakawa respectfully explains that whatever is holding back demand, it is not the cost or availability of credit…”

One has to wonder whether the increased concentration of wealth and therefore money at the top of the pyramid, has diminished the effects of lowering interest rates on the general economic activity.

As an extreme example, if the approx 1 trillion of LTRO funding that has been given to European banks, had instead been given directly to European citizens in the form of three year repayable loans, what would the economic effect have been.

@ Joseph Ryan

“There is no limit to the size of the losses a central bank can bear, except the one that is imposed by its commitment to maintain price stability.”

At least De Grauw puts in the qualification (which some Irish economists fail to do).

The core issue remains unchanged. Germany and the other AAA rated countries will not accept the idea of there being “no limit” to the size of the losses of the ECB under any circumstances and the ECB can only take the risk of beginning to test the proposition against the wishes of the first-mentioned (or at least the Bundesbank) if there is certainty that the countries involved are not misusing the opportunity being given to them to put their budgetary houses in order.

Wyplosz has the right take on the situation (as do the two Irish MEPs).

Should Italy have even been allowed into the Euro? One of the convergence requirements was a debt/GDP ratio of at most 60%. A political fudge was made and Italy was allowed in regardless of the fact that it was well over this number.

I doubt the markets would be as spooked by Italy, if it had much lower levels of national debt.

It has also had very low levels of GDP growth while in the euro, so a back of the envelope calculation would suggest it is in no position to re-finance past debts at any but the lowest interest rates. But Italy’s crazy politicians (e.g. Berlusconi), mean that markets need a higher interest rate to offset political risk.

Low birth rates and an aging population also suggest Italy will not have the resources to finance the older generations’ past mistakes.

The political fudge chickens are coming home to roost.

@ Rory Mc Monagle

Quite right! However, the generally accepted explanation given for the decision to allow Italy to join was the fear of the German motor industry of being undercut by the Italian competition pricing its products in a depreciating lira.

Italy has done little or nothing to correct a poor starting position. Spain, on the other hand, failed to make use of a relatively good one.

What is missing from the debate of the economic issues, however, is that both the EU and its most federal expression – the euro – are political, not economic, undertakings and they will stand or fall on the basis of political compromises not dogmatic dictation by the central bank of the most economically powerful country.

Bill seems to have misread Draghi…..

“Draghi is saying Spain and Italy should take the first step, make a request, and then something might happen,” said Gross. He added that the ECB’s Thursday announcement was simply “placating the waters.”

Investors seemed to find Draghi’s statement underwhelming, especially in light of his promise last week to “do whatever it takes to preserve the euro.” Markets headed south in Europe and the U.S. on the news that no immediate action from the central bank seems to be forthcoming.

Gross told Liu that if the ECB doesn’t act soon, investors could come to regard Spanish and Italian bonds as radioactive.

“I think it’s perhaps passed the point of patience,” he said.”

The above was written on the 2 nd and as we know now the markets have reinterpreted Mario’s statement.

As regards AEP, I thought he was more on the money than Gross despite his well known views on the Euro project. Unfortunately, he is right.

“not all of them are as pliable as little, eager-to-please Ireland.”

I think thats supposed to read responsible Ireland acting in Europe’s and the national interest.


yet despite the fudge you refer to Italy is the country with the lowest combined debt, and almost (IIRC) running a primary surplus.

So fudge at the start yet debt wise now one of the ones with most leeway

“Low birth rates and an aging population also suggest Italy will not have the resources to finance the older generations’ past mistakes.”

You’d almost expect a country with that problem to implement child friendly policies.

You would but then this is modern Europe and unless you are in scandinavia then you wont get comprehensive efforts to make society child friendly bar flinging a few grand at people and letting the figure out the rest.

That worked in the old days now I’d prefer to see investment in childcare and other child friendly policies than backing corrupt business interests


the neither the absolute height of debt nor the deficit in a single year is by itself a certain sign of doom. The US and the UK have paid back debt of 160 and 250 % GDP in the past.
Even a fiscally arch conservative like Sarrazin remarked, that in the nineties there was a lot of progress to be seen in countries like Italy.
That it was not so easy to give them not the benefit of the doubt.

It is the reaction to this, and if people have reasonable plans to change that. And that was totally missing with Berlusconi. The timing of the rising risk premia for Italy correspond for me pretty closely to the growing disbelief that anything is done to get the situation under control.

Mr Gross is getting pretty desperate to sell his US bonds, before they approach the fiscal cliff.

@Kevin O’Rourke

As I have noted a good few times on this blog, we are witnessing a return of Franco-German Gaullism, which Walter Halsteing first pres of the EU Commision warned against, with Dr Merkel as the arch-gaullist [comparisons to the Iron Lady are off the path] and essentially the EZ Dictator in terms of power relations.

@all The view from Italy

Pride and prejudice
6 August 2012 La Stampa Turin

Despite the efforts of Italian Prime Minister Mario Monti to appease German public opinion, his own countrymen deplore the nationalist and anti-European mood in Germany. The blame lies with preconceived ideas – and with Italy’s position too, writes La Stampa.

How can we convince the Germans that we are not after their money? In an interview given to the Spiegel Online, Mario Monti went all out this time. Using all his expertise, he tried again to explain that we Italians were paying much more than the Germans were for the bail-outs to Greece, Ireland, Portugal.

Given current rates of return on sovereign debt bonds, it is the Italians and Spaniards who are in fact subsidising the Germans, and not the other way around.

Indeed the did, after the defeat of Axis powers post WWIi, but that required a period of relatively strong nominal GDP- an outcome that seems unlikely. German Debt/GDP also fell from unsustainable levels post WW II helped by debt forgiveness by the victorious allies.
Again a policy that seems anathema to the current core countries.

The long and the short of it, and it is not the first time I have heard Gross saying this.

“Interest rates over and above each country’s nominal GDP growth rate will inevitably add to a country’s debt as a percentage of GDP, even if budgets are in primary balance.

At current yields, growth rates, and deficits, the spread may incrementally add 2-3 per cent to Spain and Italy’s tenuous debt ratios every year.”

This is Ireland Bill we are different! Of course Irelands economic political policies, are threadbare, basically consisting of trying to preserve the status quo and avoidance of burden sharing (internal) at all costs. Even as the economy shrinks before our very eyes we would rather go on holidays and hope someone cuts us a deal on debts that should never have been redeemd in the first place. Even German citizens have bauked at socialising German bank debt, but not us, shame on them.

‘Attack on Democracy’
Monti Comments Enrage German Politicians

With his appeal in a SPIEGEL interview for national leaders to be given greater independence from parliaments in euro bailout decisions, Italian Prime Minister Mario Monti has sparked intense anger in Germany. Members of both Chancellor Angela Merkel’s government and the opposition have labelled Monti’s demands “undemocratic.”
Italian Prime Minister Mario Monti is concerned that the euro zone is inflicting serious damage on Europe. In an interview with SPIEGEL published on Monday, he said: “The tensions that have accompanied the euro zone in recent years are already leading to a psychological dissolution of Europe.” The 68-year-old warned that if the euro were allowed to become a factor in Europe drifting apart, “then all the foundations of the European Project will be destroyed.”

But one statement in his interview in particular has sparked a contentious debate. Monti said that European leaders needed to defend their freedom to act against parliaments. “If governments allow themselves to be entirely bound to the decisions of their parliament, without protecting their own freedom to act, a break up of Europe would be a more probable outcome than deeper integration.”

In his interview with SPIEGEL, Monti warned of the possible break up of Europe and called for euro-zone governments to have greater independence from parliament in decision-making. Of course governments needed to orient themselves based on parliament’s decisions, he said. “But every government also has the duty to educate parliament,” Monti said.

Read On:

Buying Bonds against the Crisis
How the ECB Plans to Use Its Bazooka

The European Central Bank has come up with a new plan to buy the bonds of debt-ridden countries in a bid to fight the euro crisis. Under the new approach, the ECB would only intervene if governments commit to reforms. But experts criticize the plan as dangerous and undemocratic. By SPIEGEL Staff

ECB Executive Board members Jörg Asmussen of Germany and Benoît Coeuré of France began to develop a version of the program that could placate critics’ doubts. The effort also involved Thomas Wieser, permanent chairman of the Euro Group Working Group, as well as senior German officials Thomas Steffen of the German Finance Ministry and Nikolaus Meyer-Landrut of the Chancellery. Finance Minister Wolfgang Schäuble, who met last week with his American counterpart Timothy Geithner on the German resort island of Sylt, was also kept constantly in the loop.

The group came up with a classic compromise: The ECB will intervene in the bond markets so as to fulfill Draghi’s London promise, but it will also require the countries benefiting from the action to continue with reforms.

There are considerable reservations, both in Germany and in Southern Europe.

So far, the government in Rome has strongly resisted filing an official request for assistance in Brussels, and it regards demands that it do so as an impertinence. The Spaniards, for their part, could only bring themselves to request aid for their troubled banks.
In Germany, too, Draghi’s plan is by no means popular. On the contrary, there are great concerns that it will lead to the Frankfurt central bank abandoning even more of the principles that are considered sacrosanct in Germany.
Read On:


“Members of both Chancellor Angela Merkel’s government and the opposition have labelled Monti’s demands “undemocratic.”

?. I though Merkozy and Trichet installed an unelected Monti on a somewhat democratic Italy.
Either way it is a good diversionary tactic from Monti’s main point. That being that capital flight from Italy and Spain (and other peripherals) is funding Germany rather than Germany funding Italy and Spain.
It is a truthful narrative that needs to be get a little more airing.

That Interview: Fresh off the Press in English

Interview with Italian Prime Minister Mario Monti
‘A Front Line Between North and South’

In a SPIEGEL interview, Italian Prime Minister Mario Monti says Europe is showing traces of a “psychological dissolution” in the debt crisis and that leaders are doing too little to stop it. He also warns that governments cannot allow themselves to become “fully bound” to parliament in determining policies to save the euro.

Read on …

@ wow

italy has a primary surplus, but as bill gross points out, it has and has had little or no nominal GDP growth over the last ten years.

@ genauer

yes, but I would guess that UK/US paid back the massive debts you mention by printing money, italy doesn’t have that option. Italy could do that in the past, hence its very weak currency. (you needed about 2000 lira to buy one DM)

The attack on Parliament in a country with Germany’s history is amazingly stupid. Whatever happens now the Euro project is very badly damages.

Hard to predict the fallout from things becoming so unhinged.

@Joseph Ryan

The German ‘public sphere’ has adopted the narrative spun and peddled by Angela, a narrative that contains numerous ‘porkies’ on those ‘feckless PIIGS’ and this narrative latently strategically remains silent on the short term gains for Germany such as getting as much dosh as possible back for its banks, the capital flight from the periphery to German bunds and banks, and the saving of at least €120 billion in sovereign debt management due to artificially low yields on its sov bonds. Monti, in the PresssEurop and Spiegel piece is simpy setting certain realites straight ….

Prob for EZ is that Angela is hog_tied by her dodgy narrative …. which could, conceiveably, bring down Europe.

Based on my knowledge of Ireland the “porkies” about the feckless Piigs are certainly true. If anything they are under exaggerated. We were idiotic to borrow all that money and pump into the building sector and public sectors. The construction sector is gone but the PS is still a very fine extractive industry aided and abetted by their unions, even though, the money is not there any longer and a good deal of it has to be mined from our bailout fund.

The contrast between the PS and the construction sector could not be more instructive. The difference being, that market forces dealt with one bloated sector but is unable or forbidden to ‘deal with’ the other. It is capitalism for the private sector but socialism for the public sector. Did Bertie not tell us he was one of the countries last great socialists?

Have you forgotten, that those that tried to shout stop, were told to go and commit suicide? Then ,we had that German ambassador who spoke of our silly profligacy who was practically run out of the country. Now we want to change the narrative to one of mother Ireland being put upon and beaten up. There are a lot of people earning 700 euro an hour with NAMA or earning 500,000 to sort out a credit union in Kildare. We cannot have it both ways with high court judges complaining about profesionasl “feasting on the carcasses’s of firms” while at the same time it is poor old us.

If there is one thing that annoys me about the narrative, it is the failure to go in deep and see where the money was/is really being wasted.

This country has weaved a deceptive lie of mass entitlement not funded by growth but funded interminably by debt. It was our idea to do the “blanket guarantee” not the Germans and even if it was a Germans idea, we are a sovereign state (at least were) and could have said, No! In truth, when push came to shove we loved the idea of a bailout where else was the money going to come from to fund government policy, and grabbed it with both hands. Just as we will grab the second one with both hands.


actually the times, when US and UK paid down the WWII debt, until the early 70ties, had in general very little inflation. But they did primarily pay the interest (after inflation and tax being close to real zero) and grew their way out of the debt. With an aging population this is difficult for countries like Italy.

I think the end was 1 DM per 1000 Lira, starting at 5.6 in 1973. And I think it was that, easily to observe, every summer vacation, inflation, Germans are afraid of, not this one-summer hyperinflation in 1923, as the uiversally trotted out myth goes.

@ Joe

Monti’s remarks are no different to what many people are saying in Ireland – that governments, who have been given a democratic mandate to lead their countries, should not have to seek parliamentary approval for every aspect of their decision making (or in Ireland, there shouldn’t necessarily be a referendum every time we have a decision on our relationship with Europe). The process of getting parliamentary approval from all 17 EZ members for each new initiative means that the lead time to implementation is enormous and so the EZ cannot react quickly enough to the constant stream of problems facing it.


Monti is, of course, right. However, he might have been wiser not to have said it. The example was set by Denmark decades ago when it made ministers subject to very strict negotiating mandates. However, if all participants arrive to a negotiation with inflexible fixed positions – which cannot be changed without reference back to parliaments – the result is predictable; gridlock. This is the point that Monti was trying to make and German negotiators would certainly agree with it; except that it is politically impossible for them to do anything other than to say that they believe the opposite, a fact of which the Commission is well aware.

The issue arises in an Irish context in relation to the ESM. The recent Supreme Court judgement puts the matter as follows;

“On the first issue considered as a matter of urgency, the Court is of the opinion that the ESM Treaty does not involve a transfer of sovereignty so as to make it incompatible with the Constitution, when applying the principles set out in Crotty v. An Taoiseach [1987] I.R. 713, such that a referendum amending the Constitution is necessary to permit the State to ratify the ESM Treaty on behalf of Ireland. The decision of the Court will be to treat the ESM Treaty as one which does not involve any impermissible transfer of powers from the Executive, but rather as an agreement to pursue a defined policy of the Government. Judgments will be delivered at a later date.”

The key phrase would appear to be;

“The decision of the Court will be to treat the ESM Treaty as one which does not involve any impermissible transfer of powers from the Executive, but rather as an agreement to pursue a defined policy of the Government.”

Hopefully, there will be a welcome clarification of the executive role of the government in the conduct of international relations if in relation to a particular topic.

The point can be made in another way. If national parliaments are to be in charge of international negotiations, what is the point in sending ministers to councils to negotiate? Why not send a representative of the parliament instead?


I should add that the comments above should not be read as trying to limit the role of pariaments with regard to establishing the broad lines of government policy; far from it! What is at issue is that of preventing a very damaging confusion to emerge between the roles of the Legislature and the Executive.

Monti seems to have a difficulty with communications. It was naive to say it and he must have known the reaction it would provoke. Question is…what is the real agenda? Technocrats ruling countries?

h/t naked capitalism

Tuesday, August 7, 2012
Is Draghi’s EuroRescue Plan Coming Unglued?

No sooner had some astute Euro commentators noted that Draghi might have found a path through the Euro mess to keep it patched up long enough for to impose austerity on the periphery and drive all of Europe into a lovely depression, various elements of his plan look as if they were coming unglued.

First, careful readings of the German press suggest, as we had warned, that the commitments he has gotten to bond buying, both from German pols and from northern central banks ex the Bundesbank, are qualified: only near term maturities (less than two years) and only in limited amounts (“limited” has not been translated into a particular number, it appears). Yet the media seems to think quite the reverse, that Draghi is going to engage in unlimited bond buying. A representative quote from the Financial Times:

After denying for months that Spain will require anything resembling a sovereign bailout, Madrid hinted on Friday that it could, after all, take up Mario Draghi’s conditional offer of buying short-term debt.

Unlimited bond buying by the ECB would surely soon follow

Um, no. It appears that anything like that would lead to a revolt by the northern bloc. Absent a September 2008 level meltdown, it does not look like they will give the ECB what it wants quickly or easily.


@Robert Browne

Briefly: and digging a little deeper, Angela is spinning the narrative of ‘fiscally feckless; i.e a fiscal crisis – in reality, this is a banking/financial system crisis – core is the mountain of unregulated capital flows from core to periphery – and locally the individualist free mawrket ideology peddled by Mick€ Mar€, Charl€ & Bert€ (especially the 2002-2007 admin) laid the foundations for madness of the 200 to wreck the joint locally. [pls less use of the collective ‘we’ not all citizens went mad albeit they are supposed to pay off odious financial debt to core – and much that you note I agree with]

@Joe, BEB

Time – and how many summits now? 23, 24? etc and no real decisions at the EU level or decisions to show a way out of crisis, as the solidarity bond reaches its breaking point …

Europe is in real danger …

Report out today shows Swiss foreign reserves rose 71% in the last three months. And that’s with some negative returns…you are right David, we are in deep doo dah.

@ Fiatluxjnr

Absolutely not! Rather national parliaments no longer having confidence in their own governments and taking the wrong steps to correct the situation; indeed, making it worse.


‘Lammert stressed on Monday that the inclusion of parliament was not only necessary for constitutional reasons, but that it was also an essential precondition for acceptance of decisions by the German people. He said it was “more acceptable for markets’ expectations to be disappointed by democracy than for the country’s legal order to take a back seat to markets.” ‘

Lammert and Co have entered the Maze. Hoist with their own ‘free markets’ petard. The great End of History vision is steadily turning into a political and economic nightmare. Lammert is defending ‘democracy as business’, but he forgets that such a principle, universally applied, corrodes all pre-existing solidarities, including the Bundestag. These markets, by definition, have no loyalties or principles, so Merkel is caught between a rock and a hard place.

Having just finished Philip Bobbit’s otherwise magisterial Shield of Achilles, it is strange how someone so bright could have failed to see the internal contradictions which would bring down the Market State. Or notice the fundamental difference between the market for goods and services, and the market for assets. Pervasive post Berlin Wall hubris I suppose.

The bankers’ financial ‘engineering’, with its speculative dominance of real economy actors, and its plutocratic subversion of existing political institutions, has turned out to be the Achilles Heel. The late Michael Polanyi would be amused.

Off topic…good to see our Finance Minister telling it as it is to the President of the High Court.
From RTE
“Minister Michael Noonan wrote to the administrators in June and said the new figure was a matter of substantial concern particularly when considered in the context of the very difficult financial environment the country was now grappling with.
He said it was “remarkable” that the figure continued to climb by substantial amounts in relatively short periods of time.
In a later letter in July, the Minister said he could not understand how the administrators as highly remunerated professional administrators with the support of highly remunerated actuaries and auditors could not have had greater insight into the total increased cost at an earlier stage.
Mr Noonan also said he was concerned by the manner in which the Government had been mislead by incomplete information and estimation.”

The High Court judge who drew attention to exorbitant fees last week would appear to be on the right track.

To be fair to the administrators, they were only out by about 850 million and the central bank stood over this.

@Bond. Eoin Bond
It is not referendums that are casuing the democratic deficit it is the idea of an executive but in reality a small clique within the executive running the country by dictat with decisions effecting generations being made in a vacuum.
Surely one of the problems we have is that the democratically elected government implimented a decison in the smal hours of the morning without consulting with anyone other than a few well placed cronies and advisors, the result of which, was to socialise all bank debt.

Is it true that the governor of the ICB is now saying these losses will be in the region of 137bn? Two and a half years ago he was telling the late Brian Lehihan that they “were manageable” at 40bn plus, which lead to a splurge on bond redemptions under the suicidal policy.

Germany have an ageing, conservative population who are not going to join in or underwrite QE or the “venetian cunning of Mario Draghi”. By 2050 their population is forecasst to fall from 82 million to 62 million so they may not want to embark on junking up the ECB balance sheet any further.

@David O’Donnell

re “Um, no. It appears that anything like that would lead to a revolt by the northern bloc..”

So 16 to 1 is not a majority after all.
Perhaps it is time for the 1 to leave.

The problem isn’t the Euro but the debt-based monetary system. If Italy were to leave the Euro and have their banks create lira with a corresponding debt nothing would change in principal.

Still every Lira would have a matching debt and would cease to exist when the debt is repaid. It would still be the case that for Italy’s economy to expand someone would have to go into a bank and organise a loan. For this to happen en masse at a time when mortgages have reached their limit of 30 years repayment is unfeasible.

Allowing Italy’s central bank to create some debt-free digital money as well as cash would get them further down the road of recovery than a bailout.

Though it pains me to say it, LBS is largely correct on this occasion.
The idea of an automatic trigger at a given spread seems a good one, if one could prevent dealers from taking advantage of it.

OXYMORONIC comment of the month:

“A very relevant contribution by LBS.”


Well said Sir/Madam.


WeatherHead Center for International Affairs

Scroll down to find:

Perhaps the most troubling aspect of Europe’s current malaise is the replacement of democratic commitments by financial dictates—from leaders of the European Union and the European Central Bank, and indirectly from credit-rating agencies, whose judgments have been notoriously unsound.

Participatory public discussion—the “government by discussion” expounded by democratic theorists like John Stuart Mill and Walter Bagehot—could have identified appropriate reforms over a reasonable span of time, without threatening the foundations of Europe’s system of social justice. In contrast, drastic cuts in public services with very little general discussion of their necessity, efficacy or balance have been revolting to a large section of the European population and have played into the hands of extremists on both ends of the political spectrum.

Europe cannot revive itself without addressing two areas of political legitimacy. First, Europe cannot hand itself over to the unilateral views—or good intentions—of experts without public reasoning and informed consent of its citizens. Given the transparent disdain for the public, it is no surprise that in election after election the public has shown its dissatisfaction by voting out incumbents.

Second, both democracy and the chance of creating good policy are undermined when ineffective and blatantly unjust policies are dictated by leaders. The obvious failure of the austerity mandates imposed so far has undermined not only public participation—a value in itself—but also the possibility of arriving at a sensible, and sensibly timed, solution.

Amartya Sen: The Crisis of European Democracy

“the replacement of unaffordable populist bribes to sections of the electorate by the harsh reality that there is nobody is willing to finance these openended commitments”

There fixed that for you

Pimco-the World’s biggest bond manager told everybody to get out of Dodge, presumably after he has left. There ain’t nobody left to pay for European Social Democracy. It is deader than Monthy Python’s dead parrot.

The new (old) LBS

When the facts change, he changes his mind. Or, as Bourdieu would put it, he maintains his (finance insider) position by changing his (monetary) stance.

‘Either the Eurogroup is considered legitimate, or it should be made legitimate, as soon as possible’

Sovereign bonds have got to be fixed somehow by the ECB, because a) they are playing havoc with core bank balance sheets and b) no bank can be rated higher than its sovereign. Shoring up the EZ banks requires increasingly desperate monetary measures, for which the Eurogroup is to provide the political cover.

Social democracy is holding up pretty well in Scandinavia and northern Europe generally . More generally (and as every one knows by now ) the problem is one of the structure of the euro, wealthy non eurozone countries( and indeed surplus eurozone ones to) are enjoying all
Time low interest rates ( again as everyone knows ).

@ All


It is clear that the parties to the late-night negotiation of the summit communique came away with differing interpretations of what they had agreed or, more likely, they did not know what it was that they agreed and now seek in its ambiguous wording support for the position that they are now adopting.

The stand-off, however, probably suits all the parties. Everyone needs a bit of a holiday.

With all due respect to some of the comments above, I would consider the views of LBS to be rather more relevant, especially this one.

“There may be uncertainties about these effects, but the ECB could reduce them by not waiting to implement its new policies until more countries request an adjustment programme. It could already apply its policy to countries such as Ireland and Portugal, which have a programme and are “on track”. Indeed, the spreads on these countries’ bonds clearly reflect a systemic risk, including euro exit, and are distorting the transmission of monetary policy.”

With regard to the Euro Group, he is referring to the fact that – on UK insistence during the relevant treaty negotiations – it can only meet informally.

@ All

The UK is viewed on the Continent, not without justification, as playing less than a constructive role with regard to economic and monetary union. Indeed, the agitation in the UK with regard to whether the country should be in the EU at all has reached a high point without, it seems, the slightest impact on the debate in Ireland, the other country most likely to be impacted in the – unlikely – event of a “Brixit” coming to pass.

The reality, however, is that the UK has virtually no cards left to play, a fact of which the author of The Economist seems painfully aware.

@ PQ

“Sovereign bonds have got to be fixed somehow by the ECB, because a) they are playing havoc with core bank balance sheets and b) no bank can be rated higher than its sovereign.”

Draghi expressly mentioned “convertability premium” last week and i think everyone has noticed the mentions of the Euro being “irreversible”. What we are seeing is a de facto move by the ECB to ensure that investors will not worry about an EZ country leaving the Euro as a result of pressures on its sovereign bond yields. It is a massive, if belated, step for them to take, and goes beyond simple worries about credit worthiness (which the ECB still considers a purely fiscal matter). This is about long term Euro stability and transmission of their monetary policy. Through this understanding, the remit of the ECB to intervene is potentially, as Draghi noted, unlimited, both in scale as well as scope.

Also, on your second point, some banks can be rated higher than their sovereign, although it is relatively rare. Banco Santander and BBVA would be examples in Spain.


Great quote from William Hague circa 1998. The logic of living beside a burning building where no one seems interested in putting out the fire is to evacuate
It seems obvious as well that one or two of the occupants of the burning building may jump as well.

@ paul quigley

When the facts change, he changes his mind.


Do facts change?

“’When the facts change, I change my mind,’ is a banality often attributed to John Maynard Keynes, although there is no evidence that he ever said this,” Sir Samuel Brittan recently wrote in the Financial Times. (What he might have said is simply:
“When I change my opinion, I say so.”) However, Sir Samuel did also say that there are times even for a banality. 

It has been suggested that Keynes would have swiftly pointed out that facts do not change. There may be new evidence, indeed new facts coming to light; but facts are facts: they do not change.

“The whole situation makes you wonder whether, despite all the ECB’s talk of independence, there is a central bank more subject to political constraints anywhere in the world.”

Ah, come on. Seriously?

OK so Italy leaves the euro. Now you pay the police and pensioners with worthless Lira? No matter what you do you get back to who will end up with less than they were expecting. While it is tempting to say the rich should pay, the problem is the rich do not use much fuel, food and medicine as a group. The world supply of food, fuel and medicine is being stretched thin and the usual suspects, Asians are no going to accept the full brunt of austerity this time.

Things that might solve the problem: New oil exploration and exploitation, eliminating bio fuels, getting South Africa and Zimbabwe to restore their agricultural productivity, perhaps new sources of energy. Europe may also need to favor food production over other land uses.

One source of austerity cuts, perhaps unnoticed to the Irish is the military. So why does Europe need so many (usually German) submarines in the Mediterranean? Actually the number of capital ships of all Mediterranean countries is way too many. And if they serve some purpose, why shouldn’t it be the Germans that pay for the ships, crew, and military pensions? After all they are defending the delicate underbelly of the same Europe Germany is in the middle of. My guess is that the EU could keep all surrounding nations at bay with the current French military. Now refugees, asylum seekers and the like are a different story.

@ All

Quentin Peel on the forthcoming judgement of the German constitutionaal court.

To take an Irish expression, it is clearly a court which has lost the run of itself, especially Vosskuhle. 35,000 plaintiffs? This is only possible because of an impossibly expansive view taken by the court in earlier rulings of its own role.

The fundamental issue, apart from the pending decision on the euro, is the role that the court is assuming in relation to the ECJ, the court on which the entire legal order of the EU depends.

“On Lisbon, the judges ruled that the primacy of European jurisdiction, when exercised in Germany, “only ex­tends as far as the Federal Republic has agreed to this . . .and was constitutionally entitled to do so,” says Christian Calliess of Berlin’s Free University. “Such national reservations are very sensitive issues from a European perspective – on the basis that there is no unity without primacy,” he wrote in a recent paper for the College of Europe in Bruges. “If the 27 constitutional courts of the member states were to follow the example of the German constitutional court, European law would become a fragmented legal system indeed.”


what German submarines in the Mediterranean ? As far as I know, only the Israelis got them, and I dont think they paid for a single one of them.

But I am very interested, if there would be some paying customers for that.
Do you know, who bought how many ? Maybe even some estimate of the price paid ?

As a German,
I am very, very sensitive, that our military is only used in absolutely legitimate self defense.

We contributed to the anti-Osama war, after NATO Chapter V was declared.

We refused to participate in the 2nd Iraq war. I remember well the day, when Colin Powell gave his testimony before the UN Security Council in 2002, making criminally false statements. I taped it, and I remember my deep frustration with his obvious shameless lies.
I stood with the formerly blacklisted Pete Seeger in front of a US mall, protesting, when this was not exactly popular.

As far as I know, German military was withdrawn immediately and completely from the Libya campaign 2011, as soon as it became clear, that it is not longer covered by UN resolutions, but open participation on one side of a civil war.
But please tell, if you have reliable information, that is in contrast to my present knowledge.

@ B-E-B

thanks for the links !

The way I read them, there is actually not a single German built submarine cruising the Med. Portugal is at the Atlantic, Korea much further away. The S-120 is rotting in Kiel, Germany. And the 3 built in Greece are not commisioned yet, in order to avoid payment, and have to sulk in some harbor.
“On 29 September 2010, the contract for the acceptance of all four ships was signed”.

Given that Portugal and Korea operate their copies, ordered much later, I see it as highly likely that the Greek issues are mainly about actuall paying for what was delivered, and that the “new contract” in 2010 is basically a face saving operation for actually paying for the order from 1999, including interest.


Quite simple really. Part of the Bailout of Greece consists of Euroepan and other (IMF) taxpayers funneling money to Greece not to bail out the lazy Greeks but workers in the German arms industry.


having lived in the US, I am aware that some folks over there believe that they are the new roman empire, and find it “incomprehensible” that a vassal like Germany does not just deliver the number and type of auxiliary troops, as ordered. On a good day we even dare to talk back, like Joschka Fischer 2003 Wehrkundetagung to Donald Rumsfeld “I am not convinced”.

In contrast to Berlusconi, Sarkozy, Blair, we were not shmoozing with Ghaddafi before we bomb him. But we also keep our distance to whoever is now coming after him.

With respect to German Arab arms deals, I think the only thing that has changed is that Israel is now happy with it : – )

In general I find it a good thing that Germany is “normal”.


With respect to German Arab arms deals, I think the only thing that has changed is that Israel is now happy with it : – )

After Saudi activity in Bahrain) the sale of tanks highly suited to suppressing popular protest and crushing domestic opposition was clearly a bad idea, regardless of whether the Israelis gave Germany their permission or not.

In general I find it a good thing that Germany is “normal”.

This might be a case where the rest of the world should have become more German rather than the other way around. Once you leave the moral high ground it can be difficult to climb back up.

On the faked case for invading Iraq presented in the UN:

I taped it, and I remember my deep frustration with his obvious shameless lies.
I stood with the formerly blacklisted Pete Seeger in front of a US mall, protesting, when this was not exactly popular.

I know that feeling.

Those were darks days for Western democracy, the legitimacy of the UN and Iraq (and continue to be so), we may need to be less mannered in the protests to stop the next illegal war.

@ genauer

On the subject of Germany becoming a normal country, I agree entirely. Getting other countries to accept the fact is the problem. I also agree with the point made by TMD. It explains a good deal of the willingness to come to the assistance of Greece on the part of Germany and France (apart from bailing out their own banks).


I understand you and your argument very well. I am furious taxpayer too.
I was not as clear, as I wanted to be. The article just mentioned the French and US sales, and then goes over a full page over the German submarines. And it irks people like me, more than I like it, that US, UK, France weapons sales are taken as normal, and about Germans there is a big fuss.

I took a closer look at the Type 214 wiki page and with regard to the timing, the reference there
What I take from the google translation of this, is that the „new“ contract was signed on 18 March 2010, 5 weeks before Greece had to go the IMF on 4/23/2010 and there came a Troika into existence. It also states that 806 millions are “outstanding payments” for the contract from 1999.

Additional information:
a) 2 additional subs for 515 millions, 257 a piece, wiki: 330 million $, implicit exchange rate 1.28 $/Euro, sounds reasonable.
b) Turkey signed up for 6 roughly equivalent subs on 2 July 2009, with an alleged locally produced content of 80% (wiki). Lets assume that this content is only 70% for “German” subs built in Greek shipyards, that leaves 30 % times 515 = 155 Mill. Euro contract volume for Germany.
c) Take a generous profit estimate of 10 %, and you end up with 15 Million, spread over 8 years until August 2018, 2 million per year. Dividing this by 1.4 trillion yearly German export volume, you get a fraction of 0.000 001 4. For a person weighing 75 kg this would be 0.1 gram dirt under the finger nails. I am very aware that this crude assessment of the economic relevance sounds pretty arrogant, and that the argument is getting lengthy, but how would you say it?
d) Germany sells a lot of things to global customers, who do rely on long term stable contracts and service supports. Not cell phones people throw away after 2 years, cars replaced after 8 years, but Telecom infrastructure, production machinery, power plants, stuff people expect to be supported reliably for 100 years or more.
e) In the moment Germany makes sales dependent on political whims or short term payment difficulties, those customers go somewhere else.
f) When Greece got ridiculously low interest rates on the bailout loans, Ireland and Portugal demanded the same on the same day. There was no discussion about that, previous contracts or so, and I certainly do not blame you for what I would have done also. But in the very moment, I stop insisting on getting paid for past contracts of Greece, many other customers will also immediately get these funny ideas, that contracts do not have to be honored and debt due not being paid.

Now the question for you, Tullmcadoo, and in general:
At what point in time should who in Germany, the contractor TKMS or the government, cancel that contract, based on what legally valid reason?

your link to the IRNA news outlet of the Iranian regime lacks any specifics with regard to Germany. What kind of weapon delivered to whom, when, used how ? Just plain nothing there. Wild allegations, no links nor evidence. “prominent Bahraini activist”. I have never heard of him. How can a future weapons sale impact what happened in the past ? Why should I believe anything people like this say?

@ Genauer

i think the basic concept of the “German arms sales” argument was that Germany was complaining about having to lend money to lazy Greeks, when ultimately much of this money was going to be used to repay Germans own corporate interests. So maybe people want the Germans to stop moralising and whinging about it all. Ditto with the Irish taxpayer taking assistance from Germany (amongst others) to repay German banks.

@ Genauer

there’s a website called “Google”, you should check it out.

“In June 2011, the Federal Security Council, a nine-member body made up of the chancellor and several ministers that meets behind closed doors, approved a preliminary application to sell more than 200 Leopard 2A7+ model tanks, Germany’s most modern tank, to Saudi Arabia….Human rights issues haven’t played any role in these considerations. Indeed, the Saudi regime numbers among the most repressive in the world, and it even sent in troops and tanks to help Bahrain, its neighbor, suppress an internal pro-democracy uprising during the Arab Spring.”


it is a long established practice of the West, to restrict weapons and technology sales with commonly drawn lists. The CoCom list started in the 60ties, the copy of the 85th version in 1993 in front of me is 196 pages long. It lists the Saudis as all clear. There are successor lists like the Wassenaar arrangement, and probably more. I am not current on that kind of stuff. The way I read
is, that Saudi Arabia has today also no restrictions, but certainly Iran.

Where did and do the Saudis get their weapons from? Our NATO partners. But somehow Germany is measured to a very different yardstick, and I take issue with that. And I am not buying into the demands of Iran and their clientele in Bahrain.

As I showed in great detail, this “new contract” was drawn before Greece got into severe disarraers, and it is mainly about paying already long outstanding payments. I do in deed insist on getting paid and I do not break a contract without having a legally valid reason, I have asked people for that here. I didnt get an answer.

@ Genauer

again, i think you’re missing the point. The “inability to pay” rational was why private sector holders of Greek government bonds suffered large haircuts on their holdings. The simple question then being thus: why do private sector arms dealers (alongside other suppliers of numerous goods/services to the greek government) not suffer similarly?

On the German govt allowing arms sales to Bahrain, i have no problem with that, other than you seemed to suggest that it may not have existed, above:

“What kind of weapon delivered to whom, when, used how ? Just plain nothing there. Wild allegations, no links nor evidence.”

A four second search of Google would seem to prove the point, so perhaps you could apologise to Shay….


how did we get into this discussion?
Some “George” who later on was not heard of again, claimed that the Med is full of German built submarines, and that we now should pay for the foreign soldiers on them, for the ordered ships and pensions. Do you find that demand worth to discuss?

DOCM provided a guardian link, which actually states, that they still owe the 1 billion outstanding since around 2004, which also reveals, that there is no talk anymore about the 2 more subs for which they signed the order before they went to the IMF.

Looking at the links you provided, it turned out that there is actually not a single sub of your type floating in the Med. There may be some very old ones from the 70ties, which should have scrap metal value.

To add an ironic twist to this affair, one of my ancestors actually built and sold a military submarine to the Russians, 150 years ago. They paid. As do the Russian roaming the streets of my city. Full, up front cash, I like it. In remarkable contrast to our “Allies”.

For Shay and his reference to the Iranian Government claims (IRNA), I should have said it more clearly, and harsher: I don’t believe anything the Iranian Government says, beyond that they don’t like it, if somebody sells weapons to countries, Iran is openly threatening. Either he finds a much better reference, or I am done with it. I am not searching around, guessing what he might refer to.

In general, what surprises me more and more, what kind of claims people make, what Germany owes whom for what reasons.
We have treaties, laws, international business practices, all that doesn’t seem to count anything for a lot of people, I considered civilized, a few years ago.

I just read the guardian article to the end.

“It’s vital that if the European Union wants to speak about fair deals it should at least guarantee Greek borders [with Turkey] .

Now, will Ireland sent her soldiers to the Greece / Turkey border ? What do you think?

“Germany became Germany partly because for 62 years it did not have to think about military expenditure,” said Angelos Philippides, a prominent economist.

Aheem, how about the 495 000 standing west german soldiers, until the late 80ties? Ready to grow up to 2 Million within 2 weeks ?

Let me cite Paul Kennedy 1989 “The rise and fall of Great powers” page 707: In the moment the Bundeswehr (German Army) is not only the largest NATO army in Europe, it is also of extremely high quality and very well equipped.

When you read Colin Powell, you can hear the frustration when German draftees easily outcompeted US “Pros” every year in NATO competitions (Boselager).

Just another 2 cases of complete Greek disconnect to reality.
It is the complete shamelessness of the whole Greek political class making endless hilarious claims and demands, which makes people doubt, that they belong to a similar culture.

@ Genauer

“Either he finds a much better reference, or I am done with it. I am not searching around, guessing what he might refer to.”

I think in Ireland we refer to this as ‘taking your ball and going home’. You’re welcome to google that, but your probably not bothered. As I said, I think your stunningly missed the broader point here, and focused on some irrelevant issues around the sides.

I stated clearly, that I would look at a more credible and specific evidence from Shay.

And I will listen to you about what “the broader point” is, in your opinion.

@ Genauer

Genuinely, there’s only so many hours in the day. If you don’t get it yet, you aren’t going to. Constantly demanding that things be proven or explained gets a tad boring after a while.


how that looks from my side, is, that people are constantly throwing wild allegations against Germany, many downright slander and very often very obvious lies. I say this in general, and not towards you, to avoid any misunderstandings.

I want to explicitely state here, that I appreciate it, that with you this does not deteriorates to insults, as it happens with surprisingly many people.

Point is, that I most likely dont accept, what I in the moment only can assume to be your “broader point”.

I have been over the last 18 month through a lot of discussion, where people allege, that Germany does somwhow bad things, is unfair, unnecessarily stingy, many stuff.

Following up on this stuff serves 2 purposes: a) checking whether there is actually something “bad”, which needs to be changed, and b) also trying to convince people that the overwhelming majority of these allegations turn out to be not true, in the moment you take a closer look.

I am painfully aware, that a lot of people like you have this feeling, “isnt that kind of obvious” that Germany has to be more flexible, more giving, etc. It is the vast majority of what you read, from the Wall Street Journal to the Irish Left review, I know.

But we will not give in to slander and blackmail.

I am still here to hear you about legitimate demands, wishes, arguments.

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