Simon Wren-Lewis on a different kind of Lender of Last Resort

Putting questions of immediate political feasibility aside, Simon Wren-Lewis asks in a new post if there is a better approach to establishing a fiscal Lender of Last Resort (LOLR) for the eurozone. 

As Simon notes, I expressed some sympathy for the Commission in a previous post.    The Commission recognises the fragility of the eurozone in the absence of a LOLR.   This follows from the well-know multiple equilibria problem (see here).   There is good equilibrium with low expectations of default and consequent low interest rates, creating a debt sustainability situation that validates the initial expectations.  But there is also a bad equilibrium with high expectations of default and consequent high interest rates, again creating a debt sustainability situation that validates the initial expectations.   In part to develop the political support for a fiscal LOLR to coordinate expectations around the good equilibrium (where it is thought to exist), the Commission has pushed the strengthening of fiscal rules and support programmes for countries in difficulty that lean heavily fiscal (and other) conditionality and intrusive surveillance.   

 Simon usefully asks it there is a better way, while recognising the huge political obstacles at present.   His proposal centres on a significant change in the approach to OMT.   Based on an assessment of debt sustainability by a collective of independent fiscal councils – effectively an assessment of whether a good equilibrium exists – the ECB would commit to the necessary bond market interventions to keep interest rates low.   Assuming no change in its mandate, the rationale for the ECB’s participation would presumably be that it would otherwise be unable to operate a single monetary policy where, without their own central bank capable of acting as a LOLR, many countries in the eurozone are susceptible to falling into a bad equilibrium, with the added risk the entire single currency project could unravel.   One question is whether countries facing debt sustainability concerns would be politically capable of making the necessary difficult adjustments without in the absence of programmes with explicit conditionality.

Another dimension of Simon’s proposal is that the fiscal rules should become more sensitive to the aggregate fiscal stance of the eurozone in the context of a zero lower bound on monetary policy, with the obligation to adopt less contractionary policies falling on countries with stronger fiscal positions. 

It is interesting to contrast this proposal with the recent widely discussed observations of Ashoka Mody on the relative merits of adjustment/assistance and default as a means of dealing with debt sustainability challenges (Morning Ireland interview here).    Ashoka’s view is informed by his reading of history of sovereign defaults as involving relatively low output costs.   A rather different reading of the history is given in this survey of the literature on sovereign defaults.    Moving to a regime with a low default trigger would also make private investors extremely wary of sovereign debt, increasing the fragility of market access.   For the long-term, such a low moral-hazard regime certainly has attractions — but it would be one hell of ride along the way.    

124 replies on “Simon Wren-Lewis on a different kind of Lender of Last Resort”

To quote the author;

“One of the advantages of being an academic is that your advice does not have to be bound by what is politically feasible. It is important that someone sets out what is best as they see it, and others can then modify it to satisfy political constraints.”

How true!

For the moment, the EU appears to be marching to the tune of an entirely different drummer.

People from Cork are human too, even people from Kerry think so.?

The Dork of Cork April 13, 2013 9:53 am

I was taken off the Irish economy site 3 times which is probably a record and I don’t think I am coming back.

As it is a rentiers mouthpiece.

My only talent it seems is pissing off people from both the left and right ends of the spectrum.

Again the problems in the eurozone can be most clearly seen in Ireland as the data is both quite good and extensive.

The most important piece of data is this.

See – table 4.5 for all that needs to be known about the Irish & wider euro economy

We left the Sterling peg in 1979.

There is a immediate Euro Soviet push to increase productivity & keep wages static

Why do we need a Lender-of-Last-Resort anyhow? Does this point to some fundamental (fatal) flaw/s in our existing monetary/fiscal setups?

What is that flaw/s? It must be actually real and finite.

@Prof Mc Hale: “There is good equilibrium with low expectations of default and consequent low interest rates, creating a debt sustainability situation that validates the initial expectations.”

“… debt sustainability…” Are you serious about this, given the nature of current financial chicanery. I would form the opinion that its a nonsense. An impossibility!

What would underpin such a sustainability? Do you honestly, sincerely and actually believe such sustainability is even possible – in practice, not in theory. Basic arithmetic says NO! So what gives?

I posted this on the other thread but it may be appropriate here….how to solve the crisis…grab all the criminal money and leave genuine deposits alone..

Interesting article by Neil Collins in the FT today about how to solve the crisis.
Basically the idea is to call in all 500 euro notes by a set date and anyone depositing them into a bank account would have to explain where they got them. I suppose you could use the Bertie horse explanation. Apparently there is 290 b in that denomination in circulation and the UK serious fraud people believe up to 90% is in the hands of criminals. As the author says the idea may not be as whacky as it sounds.

My impression of that literature survey is that while it talks up the size of output costs associated with default, the output costs it actually reports were relatively modest. It is quite possible that many of the countries covered by the research surveyed were more than adequately compensated for their small output loss with their lower sovereign liabilities.

I would be sceptical about how long lasting the output costs actually were. The sort of regression analysis reported upon in the review is fine for identifying short run output impacts, but it is much less useful for identifying medium run and long run impacts. In Ireland’s case, the key threat I see is that a heavy debt burden will act as a drag on growth for many years, and I think this is part of Mody’s concern too. I don’t believe the evidence reviewed in the literature survey does anything effective to contradict this.

The British are not now and never have been committed to the EU. The Germans are committed but are also committed to inflation not exceeding 2%. In fact both Britain and Germany are equeally committed to ensuring the EZ and the EU fail. It would appear that Germans firmly believe they will be denied their forty virgins if inflation goes over 2%. This economic obsession is just as destructive as British nationalism or religious obsession.

It is all getting too primitive, simple minded, public opinion driven and malicious. The gang of 17 that run the EZ economic policies are as inept and cowardly a bunch as ever graced the face of the earth. They hide behind Merkel’s skirts like a claque at La Scala in Milan applauding an Opera. Their favourite chorus is Ja Mein Frau.

We, through our government are enthusiastic supporters of this ongoing destructive farce. This will continue until France gets bitten hard by the austerity police at which time the French public will demand a return of the Guillotine.

On Treaty changes…no need…just subvert the necessary Treaty provisions as they have constantly.
An example of legally dubious thinking appears today in relation to the Greek effort to cull their civil service where workers have constitutional protection..
“In an apparent bid to pave the way for

layoffs, Samaras said in an interview with Imerisia newspaper on Saturday that the dismissal of state workers was not illegal if the positions they hold are abolished through the merging of state bodies. “The constitution doesn’t ban the dismissal of state workers whose positions have been scrapped,” he said.”

The following is the relevant extract from the speech made by the Commissioner responsible (Barnier) in Dublin.

” Financial regulation and long term investments are linked. Only a well-regulated financial system will inspire confidence and trust. And provide the right incentives for long-term investments. When I was appointed Commissioner three years ago, Europe was facing the worst financial crisis the world had seen for over fifty years. The crisis was largely caused by the absence of proper financial regulation and supervision. Leaders called for global action. Europe has acted on its global commitments.

Together with the European Parliament and the Council, we have agreed new rules to make the financial markets safer, more transparent and more stable. A final agreement was recently found on our CRD IV package for banks. This is no small step. It means that Europe is one of the first regions in the world to fully implement the Basel 3 agreement.

And this major milestone came just one day after another breakthrough: the agreement on a Single supervisory mechanism for banks. Of course, the final agreement departed from the Commission’s proposal in a number of ways. Those are the rules of the game. But the agreement delivers on the mandate of the European Council from June last year. It also preserves the Single Market. This was crucial for the Commission.

So being here in Dublin, I want to take the opportunity to congratulate the Irish Presidency for the excellent work done so far.

However, the Single Supervisor cannot be a stand-alone piece of legislation. As we have witnessed in Cyprus – transparent and clearly defined resolution procedures for banks are paramount. Most European banks, like Cypriot banks, have branches and subsidiaries in other European countries. So we need common rules. It is becoming truly urgent to adopt, within the next few weeks, our Directive on Bank recovery and resolution. Some Member States argue that we need much more flexibility and national discretion in the rules. We disagree.

Yes, every bank and every crisis is different. But we need to have one set of common, predictable rules. National authorities need some flexibility. But national discretion must be limited and properly framed.

One word on bail-in in this context:

Deposits under 100.000 Euros will always be protected. But shareholders, creditors and all other parties need to know in advance what to expect in case of resolution. So we need to establish a clear order of claims. The Commission proposed that the bail-in tool would be applicable from 2018.
The ECB and others have recently called for an earlier application. Let me be clear on this point: We are not against an application from an earlier date.

But the bail-in tool cannot be seen in isolation.

In order to avoid fragmentation in the Single Market, all parts of the banking union must be in place. This includes agreement on the complete tool-kit of resolution tools. And most importantly, common financial back-stops. We need to find a swift agreement on all these subjects. I look forward to the discussion tomorrow with ministers and central bank governors. We will also touch on the second element of the Banking Union – the Single Resolution Mechanism. The Commission will make proposals this summer. I believe we need one centralised resolution authority. It should have a light but efficient and credible structure.
And from a European perspective, it would make sense and be both more coherent and effective, for those countries which belong to the Banking Union to establish a common resolution fund.

As was the case for the Single Supervisory Mechanism, we need to ensure that Member States outside the Euro zone can join the system if they so wish.

I am convinced that we can do this under the current Treaty.”

It may be noted that the role of the Commission is to promote the “general interest” of the European Union and it seems to be meeting this obligation. The “rules of the game”, stipulate that it is the legislative authority (Council plus European Parliament) that decides. It would appear that Germany is being dragged reluctantly along every step of the way. It is not clear whether this is making the ultimate agreement more or less expensive for it. Probably the latter!

But the extract does illustrate the division of competences between the various players which simply cannot be dismissed as “political constraints”. They are part of the legal order that keeps the EU together.


“I am convinced that we can do this under the current Treaty.”

There we go..another example of dubious legal thinking.

So in a overly tight monetary environment, NC suggests,,,,further tightening. riiiight

@ Flj

One opinion in this matter is as good as another. The outcome will be one for negotiation. The final arbiter in the matter is the European Court of Justice i.e. as to whether whatever solution is adopted – no treaty change, limited treaty change or major treaty change – is legally correct. (It seems that Berlin will set out next week what it thinks may be necessary by way of change).

By the way, what has European Union law got to do with the requirements of the Greek constitution? There are 27 countries in the EU (soon to be 28 with the accession of Croatia on 1 July this year) and they all have constitutions.

Debt sustainability is what, exactly? My debt level remains at the same level – indefinitely? I roll-over the debt when it matures, but I do pay the interest due? Is this what is meant by debt sustainability? If so, its dopey in the extreme (in the context of modern, industrialized economies).

@BCT: “In Ireland’s case, the key threat I see is that a heavy debt burden will act as a drag on growth for many years, and I think this is part of Mody’s concern too. I don’t believe the evidence reviewed in the literature survey does anything effective to contradict this.”

1. Folk will not take a blind bit of heed on any empirical evidence that contradicts (refutes) their beliefs.

2. Real, actual and exponentially increasing debt burdens are a charge on a probabilistic, future income which may be arithmetic in nature.

3. Question: Where, how (the means) does income arise? (In the context of a modern industrialized economy).

It is this last question that I would like to see some meaningful answers to – especially from the economic professoriate. Pregnant silence all around. I am sure that they do understand the critical difference between arithmetic and exponential functions.

A physical economy iterates (over the long run) arithmetically: debt iterates geometrically. It is mathematically IMPOSSIBLE to assert any economic equilibrium which contains these two functions active simultaneously. They will diverge – and dramatically so. This is what is now occurring. The only solution – and its a really nasty one, is that significant amounts of debt are both written down and written off. That’s it!

For the mathematically un-challenged:

Fire up a spreadsheet. Set up two ‘growth’ functions: one arithmetic, the second geometric – say for 3% p/a.

Start the arithmetic at iteration #1, but hold the geometric until there have been 16 arithmetic iterations. Now fire up the geometric function. Notice anything ‘interesting’? Maths 1:Economics 0.

@DOCM steady on……h/t to Fiat.It was posted on other tread,apols have not read the above Lewis/McHale what with Tiger and The Masters one my fav. sporting events.

“Speaking after a meeting of European Union finance ministers on Saturday, Germany Finance Minister Wolfgang Schaeuble said the EU’s Lisbon treaty had to be changed to allow common rules on shutting troubled banks – a central element of the union.
“Banking union only makes sense … if we also have rules for restructuring and resolving banks. But if we want European institutions for that, we will need a treaty change,” he said.”

Schauble has already set out his position and has stated that it will require Treaty changes. I think his opinion will carry more weight.
Barnier takes the opposite view. I would be inclined to accept Shauble’s interpretation.
As for the Greek constitution…I was merely observing that the powers that be will interpret laws, constitutions and treaties in a manner that suits them. I doubt if the Greek Constitutional court would be as forceful as their German counterparts in protecting their constitution.

@ Flj and John Gallaher

Schaeuble’s interpretation of what? Nothing has yet been agreed. What is agreed will be the outcome of political, not legal, negotiation with the three possible outcomes I have listed above.

I happen to think that Schaeuble is right but not because of any particular German opinion but the logic of the situation. The present treaties require countries only to coordinate their economic and social policies. For those sharing a single currency, much deeper integration is almost self-evidently required. How the UK would fit into such a scenario is beyond me cf.

Perhaps I’m wrong but I believe Schauble said that bank resolution will require more EU institutions and hence treaty changes.

@John Gallagher
Thanks for link. Looks an interesting read. This bit says it all…

“Although Blyth does not dwell on the point, Franklin D. Roosevelt’s most serious error through 12 years in the White House was the lurch to austerity in 1937 that threw the American economy back into severe recession. In many cases, the idea of expansionary fiscal contraction is not just oxymoronic but plain moronic as well.”


There are two items above that you have quoted or linked to that I would draw attention to. My reason for doing so is that in both cases, imho, the respective gentlemen either do not know what they are talking about or, as is more likely the case, are being deliberately disingenuous to say the least.

The first is the Michel Barnier quote:
“Deposits under 100.000 Euros will always be protected”.
On what basis does he make such an assertion? What side of a balance sheet does he not understand?
Take a very simple example of an insolvent Irish bank, whose only creditors are depositors under €100,000, ( those over €100,000 will be long gone having seen the movie, Cyprus) and the ECB.
How does he propose to pay the depositors under €100,000?
Is the ECB going to take a hit?
If that is his suggestion, he should spell it out and see the reaction. Otherwise he should stop deceiving people.

The second issue is the Van Rumpuy press release.

In a press release labelled fighting ‘tax evasion’, it seems to me he is setting the stage in a council meeting to attack ‘business models’ that may not suit certain countries.

He starts out with
“Tax evasion is unfair to citizens who work hard and pay their share of taxes for society to work.” Hard for anybody to disagree with that.
Then he moves on to the issue of ‘tax complacency’, whatever that is.
“The current economic crisis only helps to stress the urgent need for fair and effective tax systems. We simply cannot afford nor tolerate tax complacency”.
That, at first reading could be a very broad agenda!
Then he moves on to ‘tax havens’. The only working definition of tax havens in the EZ, as far as I can detect, is the propaganda spewed out about hot Russian money in Cyprus. Nevertheless, the EC council under Van Rumpuy is ready to legitimize the theft in Cyprus and move to the next target.
“That’s why the European Council discussed the question of fraud and fight against tax havens in our March meeting. And that’s why I have decided to put it on the agenda of our next meeting of the European Council on the 22nd of May. We must seize the increased political momentum to address this crucial problem. ”

All in all, it seem to me that the stage is being set not only for the EU to combat tax evasion, but for a broader agenda of shutting down countries with the wrong ‘business model’.

“We must seize the increased political momentum to address this crucial problem.” What political momentum. The Cyprus raid as carried out by the EZ/Eurogroup/Schaeuble?
Van Rumpuy is clearly there to do his master’s bidding and using the cover of fighting tax evasion’ to do it.

You pay in rescue funds and then get help from the ESM. Is the Spanish guy doing a bit of wishful thinking on the 90/10 split?
One must remember that Wolfgang is a cunning lawyer as well as he is an astute politician.
No joint bank guarantee?
Could be can kicking or is it evolving German policy?
It seems the goalposts keep moving..defensive strategy called for!

@ fiat

Resistance is futile : – )

head administrative nurse (how did michael hennigan call it: medical consultants) Ratched says:

Take your medicine, and get with the programme

@Mickey Hickey

“push to increase productivity & keep wages static”

I have just had a ‘moment of clarity’

@John Mch

Its late and I’m tired, so bear with me, here are some initial thoughts.

“Based on an assessment of debt sustainability by a collective of independent fiscal councils – effectively an assessment of whether a good equilibrium exists – the ECB would commit to the necessary bond market interventions to keep interest rates low. ”

The investors’ perspective on this would appear to be that there is a decent chance said fiscal councils (aka supposedly independent,government appointed and financed, financial analysts) will never declare any situation as having no ‘good equilibrium’ available. Witness the utter crap from almost all government associated quarters about Greece for example. The pressure on the analysts within those fiscal councils would be immense. The incentive for politicians to appoint non-boat-rockers to said fiscal councils would probably be irresistible.

So this would, given that no financial analyst, or collection thereof, has the wisdom to actually know (as opposed to speculate about) the correct fiscal outlook for any country on the brink, amount to an effective softening of the Euro and its monetary policy. Investment analysts job done.

Somebody might tell the German electorate.

The other theoretically possible interpretation among investors, is that these fiscal councils will really be genuinely free thinking, independent and staffed by people who don’t mind annoying lots of very powerful people. If the collective fiscal councils decide that a ‘good equilibrium’ has ceased to exist for a state, they will then presumably vote to switch off the bid for that country’s bonds.

Investors then have a binary landscape to strategize on. Either the fiscal councils will surprise everybody by analysing debt sustainability for a country in a way that hasn’t occurred to all the other independent financial analysts, and out of the blue, declare a country non-creditworthy, or there will be a cascade of selling as speculation mounts that a majority vote might declare said country non-creditworthy. If the ECB holds its bid, as it presumably should, in any size you like, it suddenly becomes the owner at a very full price, of an awful lot of probably uncreditworthy bonds. So if the members of the fiscal councils hadn’t folded under the pressure from the political machine of the EZ in the first instance, and had got this far, they would have another opportunity in response to irrate phone calls and pointed interviews on cnbc. So even if they hold out, see comment above about Germans electorate.

Could always parachute KW in armed with a powerpoint presentation on central bank insolvency though.

I don’t think this is clever enough to change ECB policy without the Germans spotting it – and I don’t think they are looking for a face-saving way out on the question. It amounts to an attempt to soften ECB LOLR policy. If I’m right, it would seem more useful to just get on with having the argument with them.

Even being academic about this and leaving out the Germans, Finns, Austrians and the rest, does this ammount to more than a softening of ECB policy?

In particular the utter crap emanating from Greece. They are not meeting any targets and yet the charade goes on.

@ grumpy

Some good points there. You said you were tired…not tired and emotional!!

Politics is at the core of this issue and it’s not realistic that the system would work with a collective of appointed experts advising 23 members of the ECB’s governing council.

So giving powers to foreign part-time advisers that could result in triggering a country’s default, would reduce the potential for alienation and deflation compared with the current system? It could make it a lot worse.

Even if there was a consensus in a country on remedial action, an opposition at election time would always present their version of a better way of doing it.

Besides, the ECB itself would not make agreements with member countries on fiscal issues.

As for “the election of Hollande did not emboldened countries like France and Italy to provide any kind of counterweight to German views,” it could have been a good thing but the ‘growth pact’ was an empty political slogan.

Not only wasn’t there a grand plan there was nothing that could charitably have been termed a plan that could have rallied support from other countries. So after the second round of the National Assembly elections last June, there was a repackaging of EIB projects and that was that.

On growth, what is depressing is that there are no credible plans for the EMU being proposed, apart from lazy mantras that can be easily swatted away.

Hollande had a choice to make and unpopularity was unavoidable either way. However, by doing little or nothing coupled with the bad luck of appointing a wealthy tax cheat to his government, he conveys the impression of being a dead duck less than one year in office.

@ All

In yesterday’s FT, Simon Kuper speculated that Margaret Thatcher’s early opposition to German reunification, gave President François Mitterrand an opening to demand Chancellor Helmut Kohl’s agreement to the launch the euro. A year before, Jacques Delors of France, the European Commission president, had set up a committee of central bankers plus himself as chairman, to explore the issue of a common currency.

Later President Chirac wanted the new currency called the écu (not to be confused with ECU — the European currency unit) named after a gold coin minted in 1266 during the reign of Louis IX. However, to the Germans, it sounded like the word cow.

This paper details fraught Franco-German relations prior to the euro’s launch.

So, the French saw the euro containing German economic power but didn’t bargain that both consecutive annual budget deficits since 1974 and annual trade deficits since 2002 would weaken itself.

Jean-Michel Six, a Frenchman who is chief European economist at Standard & Poor’s, the US rating agency, points out that French exports rose just 2.6% between 2007 and the end of last year – compared with 14% for Germany and 17.5% for Spain.

“Unless French export product growth picks up significantly, the French economy is likely to remain in no-growth mode in 2013 and for the best part of 2014. In view of recent trends, such an increase in exports seems unlikely, in our opinion,” wrote Six.

@ Joseph Ryan

You are right on insured deposits.

At the current rate of 0.2% for the Irish Central Bank fund, you could say that effectively, it’s a pay as you go system.

On the subject of the thread, for once in my case!

“Let me be quite clear what I am suggesting here. As soon as a country specific default premium began to emerge on a Eurozone member’s government debt, the ECB would ask the collective of Eurozone fiscal councils whether they thought current fiscal plans would result in a sustainable level of debt. If they did, the ECB would announce that OMT would apply to that country i.e. it would buy whatever quantity of that debt that could not be sold to the market. That decision could be reviewed annually until the default premium faded away. If the fiscal councils collective did not think current fiscal plans were realistic and sustainable, OMT would not be forthcoming. In these circumstances, there would be no bailing out by the Eurozone or IMF, and default would almost certainly follow.”

So we would have a collegiate of 17 unelected government quangos from 17 countries, voting on an undisclosed but most likely weighted voting system, deciding to allow or disallow what the ECB, and in particular Germany, say it the ECB is not entitled to do in the first place. The blocking majority system, so prevalent in the EZ, would effectively mean a German/French veto on anything not in their national interest.

Even if such a system were set up, the proposition seems to me to be even more removed from democratic accountability than the present elitist shambles.

I concur with grumpy/Joseph Ryan’s issues above.

I noted the following from “Chapter 3: The Dog That Didn’t Bark: Has Inflation Been Muzzled or Was It Just Sleeping?”

‘the Bundesbank was also pressured to place greater weight on reducing unemployment. Helmut Schmidt, the minister for economics and finance, famously declared in 1972 that “5 percent inflation is easier to bear than 5 percent unemployment.”’

posted here:

What a world! Just imagine: German Economics Minister declares 5% unemployment the worse evil than 5% inflation.

Now we have a Europe that considers over 12% unemployment a price worth paying for (supposedly) 2% inflation.

Of course, in some countries it is many times worse than that.

From the post this quote worried me greatly:

“One question is whether countries facing debt sustainability concerns would be politically capable of making the necessary difficult adjustments without in the absence of programmes with explicit conditionality.”

If blue-sky thinking is allowed, how about each country sets up an independent ‘Employment Council’, with a target rate of say, max., 4%, and if it is exceeded then economic policy is taken out of that country’s hands until such time as the ‘necessary difficult adjustment’ is made to bring unemployment is down to that figure.

And no zero-hours contracts, less-than-living-wage, underemployment, replacement-with-interns malarkey either.

ICIJ reports some 30-40 trillion dollars hidden in British Virgin Islands – add in what’s hidden in the Cayman islands, Switzerland, Luxembourg, Lichtenstein, IFSC etc., etc. – more than enough cash wealth in the world to go round, far too much in the hands of far too few and that trend is increasing with the middle and lower being almightily screwed on their lower and lower take of wealth created – see stats from good ole USA as well as all other ‘developed’ economies in Europe.
Something has to give in the near future and debating the niceties of various financial mechanisms to dress up ‘debt’ and to chant the necessity to maintain ‘moral hazard’ principles by the little people while disavowing the same standards for the wealth owning classes will be seen for what it is – academic nonsense.


you are quoting a helmut schmidt from pre historic times. He is actually still alive, has some kind of special permit to smoke in places nobody else can.

1972, Olympia in Munich, with some 2 or 3% unemployment in germany, 10 % , 11% pay raises in 1973 and 74. The golden times. Buying real estate with no money down, just with finishing college.

Well then we had more than 5% unemployment AND inflation, and even with ramping up national debt from kind of zero (various sources differ) to 40%, all kinds of “employment programs” things just got worse.

@ francis

I’m quoting from this paper:

If you have time it might be worth reading from ‘Germany: Institutional independence and anchoring’ down to see what you make of it.

I’m not comfortable with a lot in that paper and, as ever, in as far as I understand it all.

However, my basic point isn’t about Germany, but about priorities. Employment should be much more central.

I also agree with @vinny


“Now we have a Europe that considers over 12% unemployment a price worth paying for (supposedly) 2% inflation.”

“If blue-sky thinking is allowed, how about each country sets up an independent ‘Employment Council’, with a target rate of say, max., 4%, and if it is exceeded then economic policy is taken out of that country’s hands until such time as the ‘necessary difficult adjustment’ is made to bring unemployment is down to that figure.”

Well done, Gavin, on both observation and suggestion above.
Both get to the heart of the matter.

@ Gavin,

the figure 3.5 shows that there is ZERO relation between unemployment and inflation.

NAIRU , philips curve are silly things from the 1950ties.

some related link:

@ vinny

the way I understand your post is, to seize all those assets,

and then let anybody claiming ownership come foreward with detailed, documented explanations, where this money is coming from.

I can document every single cent I have right back to my financial ground zero.

We keep coming back to the issue of the private debts of property developers with banks and the poor investment decisions made by individual bondholders in banks being deemed to be a problem for society and society has to pick up the tab at the cost of tax increases and the creation of quangos (such as NAMA in Ireland’s case).

Wouldn’t it have been great if some man (undoubtedly a man) in a powerful position had said at that time, “There’s no such thing as society – only individuals”. Wouldn’t we have praised this man and deemed him very wise for saving us all? Unfortunately the moment has passed now.

Initial partial seizure through a punitive one-off tax followed by the imposition of something akin to the Tobin tax based on a self assessment system with the onus on proven accounts to prove national taxes have been fully paid.
To attempt to restrict and police further actions by the loophole merchants – very difficult indeed – perhaps a special tax on the ‘experts’ who design and countries who facilitate such hiding of liquid assets.
Not an expert in any of this stuff but something has got to give and very soon…

I was just away, doing some Adolf business (under me the brown masses : – ),

And then enlightenment struck me, and I laughed so hard, I nearly fell of the stool.

Vinny ….. Winnie … like Winnie Fraenkel in

HBO 1997

with James Coburn, the Irish guy, who played Steiner in “Cross of Iron”,
taking people there to “where the Iron Crosses [and the AAA ratings] grow” : – )

Rich people might wax about “you shall not crucify mankind upon a cross of gold”,

poor people, like us here (median household worth 21 000 Euro east germany) have to make do with Iron.

This is a “must see” movie here.

They are playing “the orphan card” there too, like this Cyprus-mail link above.

The Cyprus millionaire is complaining, that he might now have only half of that, because he concentrated all his families money allegedly in just one account (playing the orphan card pretty crudely) in a shady bank, he should know to be risky, with paying short term interest of 4% or more, controlled by a stupid communist government.

And the taxpayers from here should make him whole?

Everybody, I would show this story here, would be a sure vote for an anti-EU party. Maybe we should get some flag burning going. But I don’t, I am a civilized person. At least I claim that : – )

James Coburn was really good in this movie: e.g. “If we take the Irish off birth control, this will check up the electoral vote in no time.

@ vinny
I dont need the wealth tax to be “punitive”. Just enough to pay down their national debt to the target 60% GDP

@ bunbury

There is very much something as society. It is the glue which holds all together. That the poor and the sick are taken care of, and everybody knows that they have a guarantee to that. That the law protects all, and not just those, who can pay a rich lawyer.

Increased (or trend increases) in productivity (whatever that defines out as) axiomatically means less employment opportunities. THought thta was obvious. Unless! 😎

The residuals will ‘enjoy’ zero-hours contracts, less-than-living-wage, underemployment, replacement-with-interns, etc., malarkey.

You have to concentrate very hard on this debt predicament. Unless it goes away (fat chance with the current proposals) or we have a decade of 7% annual compounding economic ‘growth’ (without borrowing one extra sou) – which effectively should be sufficient to pay down the debts.

Which is more likely? Political agreement on defaults and write downs, or geometrical economic growth?

@ vinny

Tax havens facilitate rich individuals while the huge growth in corporate tax avoidance has coincided with a significant shift towards the owners of capital over labour, which is an issue I have written about in the recent past.

Tax havens also facilitate crime other than tax evasion and last December, HSBC one of the world’s biggest banks, admitted in court pleadings that it had allowed big Mexican and Colombian drug cartels to launder at least $881m.

Switzerland has been the classic case of a small country where tax evasion is not illegal, prospering on crimes committed beyond its borders – this in a country influenced by the austere religious doctrine of Frenchman John Calvin, who had taken refuge there. It is not unique in being an organised hypocrisy.

Germany shares borders with several small countries that have facilitated rich German tax evaders and earlier this week, Luxembourg relented on its opposition to sharing information on foreign depositors while Werner Faymann, chancellor of Austria, said Austria was willing to negotiate about removing its bank secrecy in the case of non-Austrian citizens.

However, Maria Fekter, his coalition partner and finance minister rejected any change – – according to the Wall Street Journal, foreign deposits at Austrian banks, which totaled around €53bn in January, make up just under 10% of total client deposits in the system. Of that amount, €17.5bn is from outside the EU. Currently, Austria withholds taxes on bank accounts and anonymously transfers the money to a depositor’s home country.

So Austria is not hugely dependent on foreign cash but Fekter’s illustrates a key problem for the European project. She wants to be in Europe but on an à la carte basis.

Ireland has aggressively gone after individual users of tax havens in recent decades and they are viewed as pariahs. It has at the same time facilitated a massive increase in corporate tax avoidance even though gaining little itself. Google paid Ireland €3m in tax on minimal trading ‘profits’ in 2011. Its revenues were €12.4bn in 2011 — 45% of global revenues. Its global net income as a ratio of sales was 31%.

Crying for other embattled economies while turning a blind eye to facilitating the erosion of their tax bases, is also a hypocrisy.


I was afraid, that I was sending people of to some searches, interrupting the discussion here. That was NOT the purpose, and it actually doesnt look like this. Good!

just some useful link, to look at shortly (0:42 min youtube : – ),82968/

Well, and with Luxemburg caving in to data exchange, Junckers pointed out, it is not us in Germany, they are bowing to the Americans !

At least sometimes we have some bigger badder guy, who is made responsible : – )


You make good points Wren-Lewis proposal, especially in relation to the uncertainty about what to expect from a collective of fiscal councils. However, it is worth underlining that a key rationale in Simon’s proposal is to get away from the politically toxic present situation of other European countries imposing conditions and surveillance on countries needing assistance. I do think it is useful to look beyond the currently politically feasible, even if it is only to get a better perspective on the limitations of current arrangements.

On the broader role of the ECB in strengthening the LOLR function, questions must be asked about the workings of OMT — notwithstanding its apparent success in driving down yields. The amount of information on the likely workings of OMT is very limited. A possibly too uncharitable description of what we know is that you qualify for OMT if you don’t actually need it. Supporting Ireland’s exit from the programme would seem to provide an ideal opportunity to demonstrate its usefulness. But then we have this question and response from Mario Draghi at the March 7 press conference:

Question: For example, on the question of whether a country can use it when it is returning to the bond markets or not – I would have to go back and check your exact words – but, at one point, it sounded like it was valid for countries that were returning to the markets. But you said just now that actually it is not something that should be used to enhance a return to the market.

Draghi: Exactly. Countries should be in the market under their own steam. To be in the market, I think I clarified what we mean: being able to issue along the yield curve, being able to issue to a fairly broad category of investors, and being able to issue certain quantities. The OMT has never been considered, or created, to support countries in their return to the market. OMT was meant as an effective back-stop that will remove, and has removed, the tail risks from the euro area.

Simon says: “OMT would apply to that country i.e. it would buy whatever quantity of that debt that could not be sold to the market.”

That is not my understanding of OMT. I thought it would focus on the secondary market and in the 1 to 3 year range. It was a confidence booster not an LOLR in the primary market. In any event, the suggestion of leaving such life or death decisions to Fiscal Councils seems very naïve.

Off topic, but Colm McCarthy in today’s Sindo recommends a Germany exit from the euro. To me this is completely unfeasible, irrespective of its desirability (and it ain’t desirable!).

All previous currency changes have been characterised by a “stabilising” mindset. People thought New Liras were going to be better, New Francs etc. The move to the Euro itself was felt to be a move to something better. Even D-mark holders hadn’t any alternative anyway, can’t hold on to your D-marks and not much point converting to dollars/sterling. An announcement that Germany was to leave the euro would precipitate the most almighty run into “German euros” and even dollars/sterling. In any event, that rush has already part happened through the Target 2 and Germany would be the big losers form a “devaluation” of the euro against its new currency – it would be owed euros from Target 2 but its banks would owe New D-marks to non-resident depositors.

@John Mch

I think I’ve asked this question before but didn’t notice any takers.

Assume a state, call it Periphugal for example, manages to stay in the market or re-enter it along the curve and not just issuing to its own banks. It agrees on the conditionality necessary for OMT.

After a while it turns out that the economic assumptions / theory / dogma behind those conditions prove to be inappropriate for the current economic backdrop or Periphugal’s economic fundamentals are sufficiently abject to mean they are unable to lead to debt sustainability. This becomes apparent to most observers.

At this point, in contrast to the WL suggestion, I don’t notice anything in OMT that allows the ECB to declare that there is a ‘bad equilibrium’, so presumably they have to keep suppressing the bond yield so long as Periphugal does what it is told.

What has OMT become at that point?

Have the Germans thought it through that far – or just until September?

@Michael Hennigan – Finfacts

Thank you – your post, based on your usual factual analysis, is very informative and relevant.
ACTION required urgently!

Lex from a while ago

“Much like the long elusive Higgs boson, most theories and beliefs held by managers and economists have not been observable in reality. These include everything from the foundations of business and finance, such as rational choice and efficient markets, to management guff about incentives and leadership. ”

I would start there. Maybe bring in a load of women to figure out what to do then. Cop on is in very short supply.

For precisely the reasons you state, Germany should leave the EZ. I am sure a suitable deal could be negotiated to allow the State stay in the Union.

@ JMcH: I posed some questions about the issue of countries ‘going into debt’. For what reason? And how would it be intended that the debt would be paid down.

Theoretical econ has some positions about this, but in real terms, it just does not make the cut. (cf: Seafóid). You CANNOT ramp-up a physical economy (except in the short-term) to provide exponential growth. This leaves a predicament with debt which is the un-acknowledged output of economic activity (and which increases geometrically). So, how does an arithmetically incrementing income pay back a geometrically incrementing debt? IT DOES NOT! So, what is the proposal then? Default? Write downs? What? The solutions being proposed are plain wrong.

Politicians will do anything to obtain and remain in power – including laying a debt burden on their taxpayers to pay for day-to-day expenditures. It makes the pols quite popular!. They ARE the problem. Do they recognize this? Have they even the foggiest idea about how a physical economy operates with finite resources and marginal limits on technology? Do you, as an advisor, attempt to explain it to them? I can understand if you didn’t. It might not be well received.

The delusional idea that being able to ‘access the markets’ (to buy more debt) is madness – in the context of a developed economy which is more reliant on non-productive activities and less and less reliant (its a trend!) on production of goods for export). That this ‘return-to-market’ should be trumpeted as some sort of a success is incomprehensible. How can it be that you can exit a debt by taking on more debt? And spare me the debt ‘sustainability’ bit. Its a complete crock.

What is needed is a meaningful intellectual exchange on the possible options we might have to extract ourselves from this financial mess without triggering significant social and political disruption. We cannot even discuss the principles of this unless the public are told the truth. The Irish public just do not trust (or even expect) their politicians to be truthful. And to date, the latter, and their advisors have been very short on truth, and long on paternalistic rhetoric.

@ Michael Hennigan et al

A distinction needs to be drawn between the various issues (i) corporation tax (including the issue if where profits are declared and transfer pricing) (ii) facilitating tax evasion by individuals and corporations (iii) making the “banksters” pay i.e. the FTT.

The first will take a considerable time to disentangle because of the interests of nations and their corporations have become almost inextricably mixed. A subtle switch between (ii) and (iii) seems to be taking place. As regards (iii), the unworkable nature of the Commission’s proposal is sinking home as is the fact that those countries that have signed up to it have collectively agreed to shoot themselves in the foot. (ii), on the other hand, has the following advantages; (a) the culprits are easily identifiable (b) the are not economic heavyweights (and the one that is, the UK, seems to have put its neck on the block) and (c) is immensely popular in the public’s imagination.

@ Brian Woods II

I agree on all points. As far as OMT is concerned, to the layman it boils down to Draghi saying to players in the market “you try and game the system and we will take your shirt”. It seems to me that the misunderstandings arise not from any lack of command of the technical aspects but of a near total lack of appreciation of the institutional workings of the EU. The Americans have no problem with the “rules of the game” in Washington. The same cannot be said of Europeans in relation to “Brussels”.

@ Tull

I am not sure of your point. Maybe what I said is a reason Germany should leave but I was intending to articulate the reason it can’t leave, which are not incompatible. The euro should be abandoned, it should never have been started in the first place, but it can’t be abandoned.

German expulsion from the EZ (union?) would allow a rebalancing of monetary conditions. The peripherals would benefit from a combo of looser monetary policy and a lower FX.
Of course peripheral defaults on obligations to the core might follow or at least the core gets repaid in new escudos/ punts etc. We could also unilaterally renegotiate the T&cs of the Anglo debt- make it a one thousand years zero.
Almost certainly, the core banks would be bust but that is an issue for the core countries.

@ Tull

Okay we are talking about different things CMcC was referring to German exit i.e. ne D-mark. You are referring to new punts etc. Either way, it is IMPOSSIBLE.

As mention has been made of the Sindo article by Colm McCarthy, a link to it seems appropriate.

As one might expect, it is a well-argued commentary with many aspects of which many would be in agreement.

However, the point must be made that, while Germany is responsible for a lot, it is not responsible for everything that happens. The same consideration must be also be given to Germany when dealing with so-called political constraints as that given to any other democracy participating in the EU.

On a point of detail, the following statement is hardly correct.

“The treaties explicitly and unambiguously confine competence in taxation matters to the sovereign states.”

Title VII, Chapter 2 of the Treaty on the functioning of the European Union, Articles 110 to 113, carries over, virtually unchanged, the provisions of the Treaty of Rome, with the title “Tax Provisions”. These could probably be summed up in terms of a legal requirement for harmonisation of indirect taxation (VAT, excise duties etc.) but no such requirement with regard to direct taxation e.g. corporation and income taxes, but subject to the general provisions of the treaties banning any form of discrimination. The fact that unanimity is required for all decisions with regard to taxation seems to cause considerable confusion as to whether the EU has any role and between the two forms of taxation.

That is a very strong term. I think in future years that will be termed a deposit selling mo.


what makes you think, that a citizen of a deviant country, purged from europe, would own anything in europe, but just a theoretical claim to his own government?

Leaving the EU with huge open claims, would mean beginning to start trade tariff negotiations from a Simbabwe point


there is a soffin II, ready to replace the complete ownership of german banking over a weekend, 24/7, if some funny stuff would happen.

It has long been speculated that the acceptable outcome for the hard money men is the exit of the “deviant” countries to use your term. Then the holes in the German financial system can be filled in with German taxpayers money. Germany gets what it wants which is the restoration of the DM along with the comfort blanket of lblaming the “deviants” (your term).

@ PR guy…
There is little real interest from most of the contributors on this blog in ‘those experiencing the sharp end of the financial crisis’ – discussing the theories/niceties and technical aspects of hybrid economic principles is more the interest….

pr guy

how do these heart attack rates in greece compare to countries like ireland, finland, eu average?

Colm Mc Carthy with his phantasy “Hergestellt in Deutschland” claim is living in some parallel universe.

how difficult is it for “civilized” people,

to accept that treaties and laws are kept, debt is paid until bankruptcy,

and criminals are gone after and put into jail, after a fair and speedy trial.

I just got an email, that “anonymous” has hacked into some so completely irrelevant news outlet, that I didnt even bother to keep track of my password there?

And that means something, I have 2 pages with passwords not analog, and the financial stuff not even written.

Is this world going mad ?

@ BW Snr

‘What is needed is a meaningful intellectual exchange on the possible options we might have to extract ourselves from this financial mess without triggering significant social and political disruption. We cannot even discuss the principles of this unless the public are told the truth.’

Time has prevented me from following up all the links in this thread, but there is plenty of political economic quality on view. You keep asking this really fundamental question though. What is it with all this debt, and where is the real economy, and the society, going ? Other contributors like Gavin and Vinny have pointed in that direction also.

I think your position is a bit like that of the Dork, whose recent comments, Mickey has kindly linked above. Dork is a cranky inscrutable git, but he has a unique feel for the dynamics of power, money and resources. Lucky for us.

I guess we have to wait for some more of the finance/sovereign games to be played out, and the resource issues to be exposed fully, before the real, as opposed to notional, options become apparent.

As I see it as long as Germany is a net beneficiary of pain inflicted on the periphery it is in Germany’s interest to continue inflicting pain.

One of the first things that the PIIGS should have done is to impose restrictions on movement of Capital. This would have put a damper on wild fluctuations of interest rates to the detriment of the PIIGS. There has been a flight of capital to Germany, USA, Australia, Canada, Switzerland which is ongoing.In turn there has been a flight of investment capital out of Germany to China, USA, Mexico, Brazil in the form of FDI by Germany’s major manufacturers.

So the PIIGs are funding FDI overseas, which would be fine if unemployment was below 7% in the EZ. German manufacturers are now getting well educated, bright workers for around Euro400 a week. So even the remittance flow to the PIIGS is low.

We are past the point of rigorous intellectual discussion about the EZ. The EZ in its present form is toast, the rigorous discussion has to be on what replaces it. One viable option would be Germany reverting to the DM and the EZ continuing, led by France and Italy. The Germans should not be denied the benefits of a strong currency The rest of us can take a 20% devaluation and 4-5% inflation. That’s the best answer to a maiden’s prayer.

Nothing would put the fear of failure into German manufacturers than an imminent currency appreciation of 10-15%. The German bankers would love it of course. The internal squabbles would be entertaining.


Germany leaving the euro is not as far fetched as you think.

Imagine a Merkel led party next August heading for election defeat, then think of one sure way of winning the election!
Give Germans back their beloved DMark. As guaranteed an election winner as Thatcher invading the Falklands.

PS. You need to think a little more about how the chips would fall in the event of a euro breakup.
“Germany would be the big losers form a “devaluation” of the euro against its new currency – it would be owed euros from Target 2 but its banks would owe New D-marks to non-resident depositors.”

In a breakup all bets are off. Countries would pay non residents in the currency that cost them the least, and the creditors would be very glad to get the money, in any currency.
You should not for one moment think that Germany will pay non residents in new Dmarks, or indeed that Ireland would pay German debts in Dmarks.

2 things fron Jmac’s piece

1. Countries with stronger fiscal positions – these are being undermined as the firewalls they erect to prevent the crisis from spreadind repeatedly fail. 2 years ago France and the Netherlands would have been in the strong camp

2 Keeping interest rates low. The Cyprus job on deposits is going to increase the cost of bank funding. More risk, more reward required. The same logic will apply if there are any fast ones pulled on bonds in any tbtf country. Do the geniuses making the decisions understand the consequences of their audacity?

It is unlikely that a German government would seek to abandon the EMU on its own. It’s also unlikely that there would be two ECBs.

France would have a serious choice as to what to do.

Italy’s exports fell 0.8% in 2008-2012 while Portugal’s exports expanded 10% (others cited in earlier post). Italy with a low household GDP debt ratio of 44% compared with Germany’s 63% and Netherlands/ Ireland at 128%, coupled with a high savings rate, would likely see resistance to allowing discredited politicians to restore the lira

The Italian lira went from 250 to the Deutschemark in the mid-1970s to 990 before joining the euro. When extensive transcripts of US president Richard Nixon’s taped conversations in the White House Oval office were released, during the Watergate congressional hearings, many passages, contained the term [Expletive Deleted] in respect of cruder language than the following.

One gem from 1971 when the US dollar’s link with gold was broken, riled the Italians: “Whatever about the pound,” Nixon said. “I don’t give a shIt about the lira.”

It’s frustrating to see that Schäuble has raised the issue of a treaty amendment in connection with a banking union. However, work is apparently progressing behind the scenes.

Germany, Finland, the Netherlands and Denmark say bail-in rules for creditors should be phased in by 2015 along with other parts of bank resolution law, rather than in 2018, as the European Commission has proposed. However, Gunnar Hoekmark, a Swedish MEP who is in charge of drafting legislation in the European Parliament is reported to disagree.

“The existence of buffers of bail-in-able assets is essential,” Draghi said earlier in the month. So banks won’t be allowed offer high deposit rates to avoid debt funding.

Edward Luce in today’s FT has a piece on ‘German envy’:

The average hourly cost of a US manufacturing worker is $32. In Germany it is $48. Yet US employers insist the shortage of skilled labour is a growing problem.

Almost half of Americans with a degree are in jobs that do not require one. Fifteen per cent of taxi drivers in the US have a degree, up from 1% in 1970. Likewise, 25% of sales clerks are graduates, against 5% in 1970. An astonishing 5% of janitors now have a bachelor’s degree…For a company such as Siemens (Europe’s biggest industrial group , which has 60,000 American employees and recently reintroduced train manufacturing to the US (in a plant near Sacramento), the answer is simple. The US needs to rejuvenate its community colleges, which offer two-year vocational degrees but are often starved of funds. And it needs to fall back in love with apprenticeships.

“Reckless entrance into college,” Lee Myung-bak, then president of South Korea, said last year, is “bringing huge losses to households and the country alike.”

As regards the demands for more public spending from universities, Germany has a stronger economy than France but half the percentage of young adults with a college degree.

Ireland’s apprenticeship system is a mess and neither is it a knowledge economy.

Finland heads the rankings of 144 countries in the World Economic Forum’s 2013 global technology report. Ireland slipped to rank 27.

@PQ: “I guess we have to wait for some more of the finance/sovereign games to be played out, and the resource issues to be exposed fully, before the real, as opposed to notional, options become apparent.”

Indeed. It might be useful if folk who are fixated on D-land take a peek at US-land. The $ is in a bit of bother. Hegemony and all that.

@ RB: I think it might be my nerdy science background. Its kinda difficult to discuss the nature of an element if the participants insist on talking about the electrons (and very interesting they are) and forget there is a nucleus!

States will always put themselves first in terms of survival. EU is not a state. Its a cluster. Atom v molecule. You cannot disintegrate the former (well you can, but its not such a good idea!). Not so the latter. Fun times ahead. Got to think positive.

Thanks both.

Wolfgang Munchau in the FT.

‘The riddle of Europe’s single currency with many values’

“In a monetary union, adjustment can only occur through real movements in wages and prices. Since Germany is not inflating, and is not likely to inflate in the future, I see no chance of that happening, even in the long run. My conclusion is that, in the long run, this adjustment will eventually happen through a nominal change in the exchange rates – which means that somebody has to quit the eurozone or resort to a parallel currency.

“To put it another way: if the same unit of account gives us a higher wealth figure for Spain than for Germany, and when you also know that this cannot be true, then there must be something wrong with the unit of account.”,Authorised=false.html?

@ Flj

Whether they do or not fly – the pigs that is – remains to be seen. Take-off will not be before next year one way or the other.

The point that I was making is that the quotations from an unnamed Finance official and Dijsselbloem cut to the chase while the rest of the Irish media coverage is off in left field somewhere (notably the leader in today’s IT with regard to the trade-off as far as Ireland is concerned).

None of the remarks made by either Dijsselbloem or Schaeuble are incompatible with some eventual arrangement for Ireland.

Assuming that Germany wishes to ensure that the UK stays in the EU on less than grudging terms, it is clear that Cameron must be given something whether by way of the usual route of more opt-outs or treaty change. The latter seems necessary as the opt-out route cannot involve the repatriation of competences. There is, therefore, an unusual coincidence of need as Germany has never been to the forefront in ceding domestic powers in the first place even if in this instance what is being sought is again – as in the case of the ESM – certainty against the outcome of any legal challenge before their constitutional court (on the evidence of its judgements, the most eurosceptic player on the German political scene).

In short, not just two birds with one stone, but three (four if one includes bouncing any major public changes of position until after the federal election)!

Ireland is not even at the races. If we feel another referendum coming on, no one is any longer paying much attention. The one in the UK promised by Cameron is another matter.

@ MH

Dr. Ed Walsh had a very interesting contribution in yesterday’s SBP outlining the failure of our state-run universities to supply the graduate skills that are needed and explained the increasing role that private institutions are playing in competition with them. He instances the Scandinavian experience in this regard and the fact that six out ten of the top universities in the world are private corporations.

@ JR
Exactly. Germany leaving the euro leads to the meltdown you describe. When we get to that stage indeed all bets are off, i.e. bye bye EU and 60 years of European economic integration. I don’t think Colm sees it that way, he seems to think German exit would be relatively painless. Strange that he has argued that monetary union without political union don’t work and yet he seems to think a monetary union of 16 would work – Germany is the only blockage.

As to Merkel announcing in advance that euro exit was in her manifesto!!! Normally these things happen with a dawn raid on a St Patrick’s weekend, to give that much notice would trigger convulsions on the markets. Maggie won the Malvinas war, within one week Merkel would have precipitated such devastation that she would be forced to climb down.


The issue of Germany exiting was first raised by Soros and one cannot imagine that he would be unaware of the consequences that you outline. The only conclusion that one can draw IMHO is that the ploy is intended to underline (i) the illogicality of the present German position (that the solution lies solely with others changing position with Germany making none) and (ii) that Germany is the key player and carries the major responsibility for whatever transpires.

Michel Rocard ex French PM in Paris Match: “Si l on continue a appliquer les idees liberales du monetarisme qui a cree la crise mondiale ,bref, si l on ne change pas de vision, un remaniement ne sert a rien.”
English “if we continue to apply the liberal monetarist ideas that caused the crisis, basically, if we don’t change our vision/memes, whatever we do won’t work”

Donc voila quoi.

@ GK

Interesting piece by Munchie. With the huge influence of house prices and cultural attitudes toward home ownership it is very difficult to know what these differences between Spain and Germany actually mean.

What they do not necessarily imply is that Spain and Germany should not be sharing a common currency (sorry for double neg). As Munchie observes, these differences existed in 1999 before the euro and would exist post euro. Also a euro in Dublin is defo not the same as a euro in Leitrim, and nor was a punt, but surely Dublin and Leitrim should share a common currency.

@ GK

There is an article in the Telegraph which unfortunately I cannot link to. It cites the views of two of Germany’s wise men who are reacting to these stats of wealth in southern countries. They are calling for a domestic wealth tax in future bail outs. They argue that the deposit raid in Cyprus is not the correct template. These seem to be important guys so I would not rule this out as the future template.

I have always argued that all this money that our banks can’t pay back has gone somewhere. It has gone to make a minority in this country super rich. There is great merit in going after this wealth directly to fund paying back those loans which were given to us in good faith on the basis that we knew what we were doing.

I am surprised that the likes of Fierce Doherty and Boy Barret have not taken up this theme. They obviously perceive more electoral potential in burning British/German bondholders rather than our own super rich.

To say that Germany does nothing when they exit the EZ voluntarily or unvoluntarily is not quite right. The EZ would be composed of France, most of the PIIGS and others. The Euro would remain with the EZ without Germany and a few like minded countries such as Austria and Finland.

The new EZ would be the dominant factor in the EU not Germany + 2. The separation would not be a cataclysmic event, far from it. The new EZ would be sounder than the USA or Japan. Certainly there would be a devaluation and interest rates would increase. That is precisely what is needed.

We are noted for our navel gazing, insular, risk averse, self serving behaviour at election time. Time to contemplate alternatives on a number of fronts.

Faced with a serious decision would Germany depart peacefully or remain in a huff. In either case its vice grip on the economic throats of the PIIGS would be broken. Germany is being made a scapegoat by the 16 EZ policy makers who appear to be in thrall to Merkel. Germany might be relieved to rid itself of sycophants.

@ Brian Woods 11

‘I have always argued that all this money that our banks can’t pay back has gone somewhere’- quoting you

How about Luxembourg,Lichtenstein,Switzerland,Austria,Jersey,British Virgin Islands,Cayman Islands,Bermuda,money laundries run by various establishment banks worldwide and facilitated by ‘respectable’ countries- just for a start.
And by the way it wil be Jane/Joe citizen who will do the payback – already happening – bank debt now sovereign debt…….

there ya have it…
“OMTs entail interventions in government bonds with a remaining maturity of up to three years. OMTs have a number of characteristics: they require the government concerned to accept a programme involving support by the European Stability Mechanism that entails strong and effective conditionality. Such conditionality is important in particular to preserve monetary policy independence. Interventions would be ex ante unlimited, which is essential to ensure their effectiveness. All interventions would be sterilised so as to ensure that there is no impact from these measures on the overall monetary policy stance. ”

@ Mickey Hickey

Your armchair scenario is based on prejudice not reason.

France would head a coup d’état to eject Germany and its allies from the EMU and rather than restore the franc under the control of the Banque de France, it agrees an alliance with weak economies: why?

Of course to become rich through devaluation. Why didn’t they think of that before joining the euro?

But they did and it didn’t work.

France and Germany are each other’s biggest trading partners.

Now the puzzle of this fantasy is that currently France cannot even enlist itself to stand up to Germany never mind rally other countries.


The link between universities and enterprise policy reveals a huge amount about how Ireland operates and anyone who expects the bust to have changed things need to look no further.

Ministers out of their depth; Oireachtas members lacking interest (I did contact some myself); tech journalists as with their property counteraprts in the past, mainly cheerleaders and an eco system of vested interests dependent on a flow of public funds with each university president eager to head what they aspire to: a ‘world-class’ university.

How is all this working out?

Beyond the spin and blather on inputs rather tahn outputs, not very well. However, none of these categories really want to know. Wonder why?

I have to agree that some of the Irish media reporting is woeful. Today’s IT report on the Greek Troika deal is one example.
It seems to be cut and paste….
“The critical long-term goal for Athens is to bring its debt as a proportion of GDP down to a manageable size. The ratio currently stands at more than 160 percent. The IMF has said it must be cut to 120 percent by 2020 to be “sustainable”.
In its review, the troika hit a positive note on the debt path and said that it was prepared to consider “further initiatives and assistance” to help bring the debt down more rapidly once Greece has achieved a primary surplus.
“The mission’s view is that debt sustainability remains on track,” it said.”

No query as to how to cope with “unsustainable” ratio (160% current) over the next seven years. And that’s after wiping out Cyprus and their own bondholders.

Is the IMF in danger of losing its credibility? Samaras said today that all the 15000 civil servants to be axed would be replaced. Did the IMF agree to this?

Btw, telegraph is reporting that the Finance Minister said they will seek “steep” debt cuts if they achieve a primary budget surplus. As the debt is mostly official debt now it would appear that he is whistling in the wind.

@Michael Hennigan quotes a former South Korean president on the evils of excessive education

South Korea might have a problem with excessive levels of third level qualification, but then again the levels for third level qualifications are about one fifth higher than Ireland’s (which are also high, thank reason).

A cynic might say that when the former president of South Korea spoke of “Reckless entrance into college,” of he had an agenda more in tune with that of South Korean industrial capitalism (avoiding labour shortages and demands for better working conditions) than the interests of individual South Koreans or society.

The idea of an over educated populace is very Trilateral Commission by the way.

Apols off topic but Shay…………..a bit high ya think….
“New figures out today from the EU’s statistical office – Eurostat – show that Ireland has the highest proportion of young people who have successfully completed third-level education in the EU. With over half of 30 to 34 year olds (51.1 per cent) having completed third level, Ireland sits well above the EU target that at least 40 per cent of the population in this age group should have higher education qualifications (tertiary or equivalent) by 2020.”

Shay, John

maybe you take a look at Box A1.1. Vocational education

to see where the AAA ratings grow.

If high levels of tertiary education would be the key to success, Germany would be heading for the dumpster, right after our

Czech friends, who are doing extraordinarily well, just 20 years out of communism, and with very little help from the EU

especially if you compare this to what Ireland and Greece got

@francis thanks,the latest stats make fascinating reading,probably flogging a dead horse here but Mario Draghi’s speech link above,from today on ‘the role of monetary policy in addressing the crisis in the euro area’ is a must read and ties in with the Wren-Lewis/McHale post.
@shay just having a bit of fun,education in ireland is a sacred cow,like ‘mom and hot apple pie’ in america-its simply NOT done to be against it everyone should have it,but are the resources allocated efficiently ?


maybe you take a look at Box A1.1. Vocational education to see where the AAA ratings grow.

Dear Reason but it is an impoverished worldview that sees credit rating as the ultimate mark of national success. Anyway….

Which apprenticeships exactly do you think Irish employers are crying out for?

Do you imagine that a larger supply of metal workers is going to create metal working jobs in Ireland? Or do you see Irish firms employing apprentices who then leave for work in Germany?

To plagiarise myself, the problem with arguing with supply siders is that there is no demand for a consistent answer.

@ Vinny

This is a very apt quote from the Telegraph article:
‘Prof Bofinger told Spiegel Magazine that it was a mistake to target deposit holders in banks, the formula used in the EU-IMF Troika bail-out for Cyprus … “The canny rich in southern Europe just shift their money to banks in Northern Europe to escape seizure,”’

So yes maybe the money is in all those places but by and large it belongs to “canny” Paddies. A narrow domestic deposit levy seems so unfair when faced with such blatant “cannyism”. The government should state unequivocally that whatever emergency measures may be needed in the future “cannyism” will not have worked, it would take the form of a levy on all wealth, or ideally on any bogus wealth generated between 2000 and 2007. Problem is they daren’t even mention the possibility of emergency measures.


eerm, the tulip mania was 1720, I believe.

The Speechs is long, so everybody will find something he likes,

and me likes:

“we cannot and do not want to subsidise banks that are failing. Our liquidity support is not and should not be equity support. Likewise, in pricing out break-up risk in sovereign debt securities, we cannot and do not want to subsidise governments.”

I read Wren lewis as just more of the same, LOLR to Governments, everybody says how much money he believes he needs, and then we print it. That is simply not going to fly.

Shay, since when am I a supply sider ?

This stupid idea, that everybody needs a university degree, and folks without it dont count, is just dead.

Something has to be done about unemployment, and that is certainly not just throwing other peoples money around.

@francis,errrrrrrror we were both wrong,idea was to explain his choice….
“In these years Amsterdam banking firms made large profits with money trades and loans to other European banks, who lent the money to their governments that needed the money for the war efforts. To cover the loans large quatities of goods were sent to Amsterdam. But in 1763, because of the end of the war, the abnormal high war prices plummeted, commodity and goods lost their value rapidly. More than 30 banking and trade firms went bankrupt, with an estimated debt of 20 million Dutch guilders.”

“Tulip mania reached its peak during the winter of 1636-37, when some bulbs were changing hands ten times in a day.”

its an excellent speech/paper and yes something for everyone.


the way I read it, Bofinger was just opposing to charge the small acocunt holders, the way the cyprus government was planning it, in conflict with their deposit insurance law.

Bofinger and others, like me, very much want to take the rich in the south to account. That is very the money is, and where it will be taken. They have the most to lose anyways, if their countries go bankrupt, whether they have their stuff in cash or otherwise.

@ francis

I think the following quote is very telling of how they see this whole shambles.

“The canny rich in southern Europe just shift their money to banks in Northern Europe to escape seizure”

They see it very much in nationalistic terms. The various banking crises are a problem to be faced by the national territories which allowed them to develop. They are the responsibility of the citizens of that country. Canny folk who try to escape their national “responsibility” should not be allowed to do so. I see a lot of merit in that narrative.

@Fiat apologies was attempting put the speech in context and “guessed”- was wrong again.Financial crisis Amsterdam knee jerk reaction Tuilips…oops.


What is being proposed is far from a coup d’etat it is what the mass media in Germany are moulding the public to demand. As for prejudices, I have none, in that sense I am more like the Swiss who either have so many prejudices that no single one is discernible or they are prejudice free. Seeing things as they are and not what i want them to be is how I look at it.

France does not have its back to the wall yet but when it does the French public will not go willingly in lockstep with the Germans down the road to ruin. There will be a swift uturn in German policy or they will be cut adrift. The countries in the most trouble are the ones that should be lobbying France to establish an alternative which would be one way of solving their own problems by strengthening France’s hand. I see the lengthening of the repayment terms as a larger straw and not a life raft. The life raft would be devaluation and inflation unless of course you see FG raising the tax take from 27% to 40% in which case we be acting like Germans, problem solved.

As all members of the EZ realised their individual currencies were row boats bobbing in the wake of tankers or in the case of Ireland a cork bobbing aimlessly in the wake of row boats. Germany with its need to export is not a viable economy with the DM. France would be jerked around even more with its Franc. The beauty of the EU and the EZ is that small countries have the benefit of fiscal and economic gravitas provided by the monetary union.

However the scheme went off kilter for myriad reasons and at least one country is now playing holier my god than thee and the other sixteen are going along with the destruction of a generation of people in almost half the countries comprising the EZ.

You know very well that devaluation and inflation are the tried and true tools used by weak governments to recover from over indebtedness public or private. I do not see strong governments in the EZ, not even Germany who is doing what is politically expedient at the moment.

How about a retrospective levy on the incomes of senior finance professionals who earned super normal incomes during the boom.

Hypothetical question! If an innkeeper sold their inn for say 600m to a builder and paid there due taxes, are u proposing another levy?


if you give up a green card, and not even a citizenship of the US, you are still liable for taxes for 5 more years. Thats why I didnt take one.

What do you think is more important for us here, to get our money back, or to make some rich criminal whole?

@ Tull

All those who were lucky enough to be professionals or even tradesmen during the bogus boom are good for a solidarity levy.

Yes I would support a levy on folk who made €400M on the sale of a postage stamp piece of land in Ballsbridge funded by Anglo funny money even if they have paid taxes already.

@ francis

I know it is the ubiquitous refuge of a politician but I don’t understand the question


I wanted the say 2 things:

a) the time, that folks could seriously threaten tax evasion, are over

b) poor German renters have zero tolerance to pay for rich tax evaders in the south, via any kind of transfer or abuse of the ECB. The ECB wealth report last week was very clear, plenty of wealth in the south.

We are pretty sure that the treaties and laws are clear, and that any criminal attempts can be dealt with.

We are running out of patience here a little bit.

Some folks here think, it might not be such a bad idea, if Grillo marches on Rome and Syriza on Athens.

Beppe: A member of the Italian Socialist Party asked Craxi: “If the Chinese are all socialists, who do they steal from”?

@John Gallaher
And I alluding to the fact that Draghi follows a different drum beat.
He is out of step with Bernake, king and the new guy in Japan…so he must have a different academic perspective.
What’s intriguing at the moment is the willingness of the ECB and IMF together with the eejits in the Commission to buy the “utter crap” coming out of Greece. I think that’s courtesy Grumpy.
Another point is Draghi’s insistence that he can do sfa about getting money to SMEs and that it’s up to Governments to provide.
Interesting that the SEC called out AIB on their alleged SME lending and they had to admit they were double counting, ie, restructuring existing facilities.
Given that we now know that 50% of SME lending is in default..that came as no surprise.
Wonder what Draghi will lecture on when his time is up…tulip bubbles?

Noted. Anybody with a few bob in their running away money should make sure it is as out of reach of the grasping hands of the Irish establishment.

@Fiat as usual I’m probably totally out of step here-but i happen to think Mario given the cards he was dealt is doing a great job-i know i know !
Re-read Simon’s paper and studied Mario’s speech,I could go on and on about it but this absolute drivel,by a writer i happen to like appears more interesting to follows here,the data for a start is wrong,its complete nonsense-kite flying and scaremongering an appealing piece of journalism.

@John Galagher
Ambrose is Ambrose. Still you need a right wing Tory euro sceptic view to balance things up.
I re-read Draghi’s speech and this lengthy bit, to my mind, contains the admission that he is out of step with the rest of the world. What he doesn’t admit is that the reasons are political…

“Central banks have adopted different approaches as regards their non-standard measures. For instance, the Fed, the Bank of England and the Bank of Japan all engage in Large-Scale Asset Purchases. The Fed also uses forward guidance.

When viewed, however, from the perspective of the framework I just described, most non-standard measures employed by the major central banks around the globe seem remarkably similar. They aim to implement the desired monetary policy stance, in conditions in which the stance may not be smoothly and homogeneously transmitted to the economy, or where a further easing of the stance through standard policy rate adjustments is hindered by the lower bound constraint. The unifying overall goal is to improve the effectiveness of monetary policy, in ways that can support the attainment of the monetary policy objectives.

Yet, the varying emphasis on instruments and the approaches used by central banks around the globe are tailor-made to the particular challenges of their economies. The particular challenge of the ECB is to operate in a multi-country environment: one monetary policy for 17 countries that constitute our currency union.

Unlike economies with a single fiscal authority or with a fully-fledged federal structure, the euro area comprises multiple sovereign states. The debt of each of these states has different liquidity and risk characteristics. In such a set-up there is no uncontroversial way to define the term structure of the risk-free rate. As a matter of fact, this means that there is no univocal measure of the term premium for the euro area as a whole.

At the same time, during the crisis, normal heterogeneity has turned into detrimental fragmentation: a landscape with natural diverse scenery has turned into a dangerous surface with jagged cliffs and stumbling blocks. Liquidity risk, which was a widespread concern for banks throughout the euro area at the start of the crisis, has become more concentrated as the crisis has progressed. Fault lines between banking sectors with structural funding surpluses and banking sectors still suffering from a precarious access to credit run across national borders.

The banking sector and the financial market of the euro area has become fragmented. This is harmful as the euro area is a bank-based economy. Around three quarters of firms’ financing comes from banks. So if banks in some countries will not lend at reasonable interest rates, the consequences for the euro area economy are severe.

Although we see a decrease in fragmentation on the funding side, our very accommodative monetary policy stance is only partly passed on to the financing conditions faced by firms and households in some euro area countries. Companies headquartered in stressed countries face worse borrowing conditions than equally risky competitors in non-stressed countries. And, within the same stressed economy, Small and Medium-sized Enterprises (SMEs) suffer relatively more than large companies that have easier access to capital markets and are less dependent on the banking system. This is especially disconcerting given that SMEs account for about three quarters of euro area employment.

Our non-standard monetary policy measures have, therefore, the task of removing these stumbling blocks to ensure that our single monetary policy in fact reaches all parts of the euro area. This is crucial for fulfilling our mandate.”


think a little bit about what you do.
Gold is dropping like a stone.

You have to make a tax declaration, and at least where I live, you have to declare certain income, and in that way, where you have holdings.

The holdings will be explicit in the future.
Tax evasion is a crime, and at some point people will ask, what holding belongs to whom

You may think that you now get your money out of reach, but will you ever get it back on the table? Cash, in larger quantities, could become rapidly useless, if the print form changes : – )

I see Cyprus as a depth charge planted, to see what is popping up.

@Fiat i enjoy ambrose’s writing this one has attracted much debate check out the comments…wonder who hes referring to here…..hard to argue with that.
“In other countries it was the banking sector’s leverage that increased fast. This in turn reflected a strong increase in lending to domestic firms and households. In these cases the lack of competitiveness was triggering a shift of the economies towards domestic consumption and activities shielded from international competition, such as the housing sector.

On top of that, banking supervision and regulation did not always mitigate the destabilising tendencies. There were cases when banks were not induced to develop sufficient capital and loss buffers in good times.”

actually the next logical step.

Sell some more Central bank gold.

Price is now at 1368, let it drop through the psychological 1000, this week.


at 300 comes Executive Order 6102


I can assure you my tax affairs are in order. What I am talking about is ordering my affairs in such a way to reduce my chances of falling victim another Boche inspired solidarity levy to bail out feckless German savers who claimed ignorance of the risks they were taking.

That would involve legitimately putting my savings outside the EZ while I am still allowed.


I did not question your honesty and loyalty to your country.
I just suggested, that you dont do something stupid.

I said it earlier, the US also doesn’t care where your savings are, in order to demand tax on them. And it is the US today, breaking up one tax haven after the other.

@ Brian Woods 11

I agree – perhaps no ‘mention’ just ‘do it’ – but there’s always ‘leakers’ – witness the massive cross-border raid a month ago – hundreds of cops and customs witnessing bonfires of info/laptops etc as the raid commenced…
Or maybe a ‘Tobin tax’ approach to every single financial transaction?
Galling to see trillions out of reach of which a small % could sort out so much – but that’s life for the average Joe/Jane – a few oul crumbs from the rich man’s table – just enough to keep us in our permanent state of apathy and enough to keep us under the financial cosh…


“The issue of Germany exiting was first raised by Soros”

No. It was raised by me. A long time ago, on this blog!

@ Mickey Hickey

Germany with its need to export is not a viable economy with the DM.

Hard to argue with this wisdom….!! Delusions are not easily undermined.

Devaluation is a temporary palliative at best…

A cynic might say that when the former president of South Korea spoke of “Reckless entrance into college,” of he had an agenda more in tune with that of South Korean industrial capitalism (avoiding labour shortages and demands for better working conditions) than the interests of individual South Koreans or society.

An uninformed cynic?

There is no conspiracy here as the president was speaking in 2012 against a backdrop of 40% graduate unemployment after 6 months. Among OECD developed countries, 65% of 25-34 year-olds have degrees — the highest level.

Finnish and South Korean children do well in PISA assessments but their education systems are polar opposites. Korean parents spend lots of money on cramming schools to ensure their kids get a college place (the number of universities has almost doubled in 15 years).

They want them to get jobs in big companies or in government institutions but these jobs have fallen as the graduate level has surged.

China has a similar problem and entrepreneurship is viewed as ‘jumping in the sea.’

It’s fine to blather about the Trilateral Commission but beginning work in a low-paying job and loaded with debt, is not very motivating or is it?

The Economist 2011: Glutted with graduates

@ PR Guy
Crackpot Ideas is a very competitive field as is witnessed by the immense talent on this very blog. I’m afraid the particular trophy you are claiming belongs to that colossus of the genre, David McWilliams.


It’s true that I do work in a very competitive field…….

I see the German ZEW index fell from 48.5 to 36.3 in March… and Irish exports fell by 10% in February…. and the IMF has cut forecasts again….. and… it’s all going to hell in a handcart. Though at least there’s a good market in handcarts in the periphery these days as people give up using their cars.

@ Tull

I know a man with a field in Liechtenstein. It could be arranged to put you in touch in return for 2 Hogan tickets for the duration of September in perpetuity. Premium level, bien sur.

@ Tull

I think John Gallaher’s “F*** you mone”y has a better ring to it than “running away money”.

And it is a real pity that the concept of “senior hurling” hasn’t yet made it into German.

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