Month: March 2013

The Cypriot fiasco

Colm McCarthy has a terrific piece in today’s Sunday Independent.

To his comments about money laundering hardly being something confined to Cyprus, I would add the following link.

It seems that we still don’t know how this crisis is going to end. But here is one big dilemma that I see. Implicit in Colm’s article is a recognition that a meaningful banking union is a pre-requisite for a sustainable EMU. That means common supervision, a centrally-funded deposit insurance system, and a common, tax-payer-friendly, and (where necessary) jointly funded resolution system. The core reference on banking union remains this piece by Pisani-Ferry, Sapir and Véron. This past week’s events have clearly reinforced the case for such a banking union, which necessarily involves some element of fiscal union. Without it, EMU is a dangerous place to be.

And here is the dilemma (aside from the fact that it is being made increasingly clear that the Germans are never going to be convinced that such a system would be one involving mutual insurance, rather than one-way transfers, and that the idea of a meaningful banking union may therefore be dead in the water in any event). Do the rest of us want to get even more deeply involved with a Eurozone whose decision makers are as incompetent as this lot? And do those of us who live in small countries really want to get more deeply involved in a club in which big, powerful countries and small, weak countries are not treated as equal members?

Update: according to the FT, German banks (among others) are going after the Russian business that has up to now been located in Cyprus.

Whatever it takes to save the euro?

This interview with Athanasios Orphanides will ring a few bells in Dublin. I remember in the autumn of 2010, when the ECB in a similar fashion threatened to pull the plug on the Irish banking system, thinking that this was not a credible threat, since such action would de facto mean expelling Ireland from the Eurozone. Would an unelected bunch of central bankers really be willing to do something so political?

I can understand why Irish policymakers were not willing to test this logic at the time, even though I was very angry with them for giving in to ECB pressure not to burn the Irish banking system’s creditors, and still think they shouldn’t have done so.

One thing seems certain however. The ECB cannot have it both ways. It cannot simultaneously threaten to expel a member state from the Eurozone, and also expect us to believe that it will do “whatever it takes” to save the euro.

What investors (and, to be honest, I) have forgotten is that Draghi qualified his pledge: the ECB would do whatever it takes “within its mandate”. It isn’t clear that investors will continue to believe that “it will be enough”.

IMF Completes Ninth Review Under the Extended Fund Facility with Ireland and Approves €0.97 Billion Disbursement

here.

Nicolas Véron on Cyprus

This piece by Nicolas Véron is well worth a read, even though it was posted yesterday and the situation is fast-moving.

Spring 2013 Brookings Panel on Economic Activity

papers here.   Includes:

Portuguese Economic Slump Caused by the Large Capital Inflows that Came with the Euro
Clues as to What is Happening Europe-wide; Outlook for the Future is Grim
by Ricardo Reis

Over the past 12 years, Portugal has been in a severe economic slump—growing less than the US during the Great Depression and Japan during the Lost Decade—and that slump was mainly caused by the country’s inability to efficiently allocate the foreign capital inflows it received after joining the Eurozone in 1999, according to “The Portuguese Slump and Crash and the Euro-Crisis.” Because Portugal was one of the first countries where the symptoms of the sovereign debt crisis were initially identified, it can help macroeconomists understand what has been happening in Europe more broadly. Portugal did not have a housing boom like Spain and Ireland, nor as rampant an increase in public debt as Greece, nor does it have Italian political instability: yet, since 2010, all five countries have been in a similar crisis.