Redistributions in a monetary union
This post was written by John McHale
Karl Whelan has a good post on the exaggerated fears of ECB insolvency, rightly pointing out that standard ideas of bank or non-bank-corporate insolvency do not transfer well to a central bank with the power to create liabilities at will.
But I think Karl’s post underplays the importance of potential redistribution effects of monetary policy within a monetary union. (Although the ECB’s stress on price stability gets most attention, my sense is that the avoidance of redistributions between members plays at least as important a role in their thinking.) One way of seeing this is to recognise that the amount of seigniorage-related revenues available for ultimate distribution to member governments is fixed by the inflation target (given real growth and other determinants of the change in money demand.) Losses on asset purchases will lower these revenues.
This also relates to discussions of design flaws in the euro, and especially the absence of effective bailout mechanisms. The revealed fragility of creditworthiness within the monetary union shows the seriousness of this flaw. But the “no-bailout-rule” was there to reduce the risk of redistributions, and without it many countries would not have signed up. The revealed design flaw will have to be fixed if the euro is to survive. Yet I think there is a better chance of effective negotiated change if legitimate concerns over redistributions are recognised.