More on the Moody Rating

Eamon Quinn interviews Kristin Lindow in this article on the WSJ site.

Political asymmetries and EMU

In a must-read article, Chris Pissarides states that “far from the currency bloc acting as a partnership of equals, it is a disjointed group of countries where the national interests of the big nations stand higher than the interests of the whole.”

This sums up perfectly where the European project is today. Indeed, there isn’t even solidarity among the smaller countries, as Malta and Luxembourg seek to distance themselves from Cyprus, reminding us of many similar protestations by individual PIIGS in the past, Ireland included. Not that it did any of them any good.

Was it not bizarre to see so many anti-German posters in Nicosia last week, when by all accounts it was the Cypriot President (among others) who wanted to see small depositors hit? Actually, no, it wasn’t. We have seen several statements by German politicians saying that the Cypriot business model is dead, and I’m sorry, but irrespective of the rights and wrongs of the issue this is simply unacceptable. The IMF has the right, and duty, to opine on such matters. So does the ECB, which is supposed to care about financial stability, whatever about how it behaves in practice. Perhaps one could find a rationale for the Commission, or maybe even the Eurogroup, to express an opinion on matters such as this. But an individual member state? Formally speaking, and in any club such formalities matter, it’s none of their business. Even if it is an election year.

The EU is supposed to work according to a set of well-understood principles. If we want to re-regulate the banking sector, and we should, then the recent decision to cap bankers’ bonuses is an example of how the system is supposed to work (again, irrespective of the merits of the issue). There are proposals, there is a vote, there is a decision. Fine. I’ll have more of that please.

But that is not what we are seeing here.

It might be less difficult to swallow if the German government were caped crusaders seeking to bring the entire European financial system to heel. But we all know who has been undermining the drive to have a meaningful European system of banking supervision, and it isn’t Cyprus. And is Mr Schaüble really going to try to prevent German banks from touting for business in that island, as the FT recently reported? I don’t think so. None of this means that Merkel and Schaüble are any worse than anyone else’s politicians, but if you are the arbiter of other countries’ fates, and you aren’t any better either, then there’s going to be a backlash. Which is terrible news for Germany in the long run.

My quote of the week is from another must-read article, this time by Wolfgang Münchau, who says that

I have believed for some time that it is impossible for Germany, Finland and the Netherlands to be in a monetary union with Cyprus, Greece and Portugal. Either the two sides agree to adjust more symmetrically, politically and economically, or this experiment should end.

The argument about economically asymmetric adjustment has at this stage been done to death, and almost everyone understands it, although the German government remains resolutely, proudly, and vocally, macroeconomically illiterate. Another reason why anti-German posters at mass demonstrations are something that we will have to get used to, which is tragic. But Wolfgang’s point about politically asymmetric adjustment is just as important, and gets to the heart of the matter.

When the EU club works according to its rules, people accept the outcomes, but in crises policies are made on the hoof, and it is the powerful who call the shots. This is inevitable, but it is also very dangerous, especially since the decisions that are made at times like this have a much bigger impact on peoples’ lives than anything that typically comes out of Brussels. We have been in crisis mode for much too long now, the crisis shows no signs of going away any time soon, and the political asymmetry is becoming intolerable.

A meaningful banking union, that had the power to stick its nose into the German banking system, and had a set of ex ante mutually agreed principles regarding how to resolve banks in all member states, would help reduce political asymmetries. More expansionary monetary and fiscal policies would help make economic adjustment more symmetric. I suspect we’re going to get neither, in which case we need to end the EMU experiment before it drags the broader European project down with it.

Moody’s on Ireland

The developments of the past fortnight in Cyprus and at EU level play heavily in Moody’s assessment of Irish government bonds affirming their Ba1 rating (non-investment grade or ‘junk’ status) with a negative outlook. 

The statement can be read here.

The political benefits of staying in the Euro

On balance I agree with Paul Krugman’s views on whether Cyprus should leave the euro or not. And most people seem to also agree with him that there will be a Cypriot public debt crisis in the not too distant future. Given what is about to happen to their GDP, how could it be otherwise?

As regards the political benefits to Cyprus of staying in the Eurozone, which Paul advances as a possible counter-argument: the Telegraph links to a piece from the Netherlands suggesting that the EU is contemplating earmarking those future Cypriot gas revenues the island has been looking forward to, to ensure that the Troika gets its money back.

Completely logical, and utterly destructive.

There’s a Hole in the System (Gavin Kostick)

For those unfamiliar with the original – see here.

Gavin Kostick’s latest:

There’s a hole in the system, dear Draghi, dear Draghi,
There’s a hole in the system, dear Draghi: a hole.

Then fill it dear Olli, dear Olli, dear Olli,
Then fill it dear Olli, dear Olli: fix it.

With what shall I fill it, dear Draghi, dear Draghi,
With what shall I fill it, dear Draghi: with what?

With taxes dear Olli, dear Olli, dear Olli,
With taxes dear Olli, dear Olli: try tax!

But the tax take is falling, dear Draghi, dear Draghi,
But the tax take is falling, dear Draghi: it falls!

Increase them dear Olli, dear Olli, dear Olli,
Increase them dear Olli, dear Olli: whack’em on!

But tax take falls more now, dear Draghi, dear Draghi,
But the tax falls more now, dear Draghi: it fell!

Squeeze the sovereigns, dear Olli, dear Olli, dear Olli,
Squeeze the sovereigns dear Olli, dear Olli: squeeze them!

But the sovereigns are bursting, they’re bursting, they’re bursting,
But the sovereigns are bursting, they’re bursting: some burst!

Try the savers, dear Olli, dear Olli, dear Olli,
Try the savers dear Olli, dear Olli: try them!

The hole just got bigger, got bigger, got bigger,
The hole just got bigger, got bigger: it grew!

Then the bondies, dear Olli, dear Olli, dear Olli,
If you must it’s the bondies, it’s the bondies: burn them!

Now the system is creaking, is creaking, is creaking,
Now the whole system is dear, dear Draghi: it creaks!

[female voice]

Inflate it dear Draghi, dear Draghi, dear Draghi,
Inflate the system it dear Draghi, dear Draghi: inflate!

But I don’t have a mandate dear Christine, dear Christine,
But I don’t have a mandate dear Christine: don’t ask!

Well then print it, dear Draghi, dear Draghi, dear Draghi,
Well then print it dear Draghi, dear Draghi: please print.

But we don’t have a printer, dear Christine, dear Christine,
We don’t have a printer, dear Christine: there’s no ink!

Well who make money, dear Draghi, dear Draghi?
Well who can make money, dear Draghi: who can?!

Well the banks are supposed to, dear Christine, dear Christine,
Well the banks are that system, the banks: that’s who!

[All together now]

But there’s a hole in the system, dear Draghi, dear Draghi,
There’s a hole in the system, dear Draghi – a hole!