Gavyn Davies: How can the ECB fight fragmentation of the eurozone?

Interesting proposals here.

79 replies on “Gavyn Davies: How can the ECB fight fragmentation of the eurozone?”

Ultimately both ‘solutions’ involve trying to get banks to lend more and this is understandable since money comes from bank loans.

There’s an obvious flaw with money originating from bank loans in a world already awash with debt.

More worryingly, since money is created with an even higher debt (P + I) it’s systemically impossible for all loans to be repaid.

This system of money creation/deletion cannot go on forever in a finite world so when might we see the end of it? Could it be when mortgages have approached their natural limit of taking two careers to repay and half of business loans are already in arrears?

We are now leaving the eye of the storm (because that’s where we’ve been).

Batten down the hatches kiddo’s. It’s going to be a rough ride over the next couple of years. I know because my Swiss colleagues at work have told me so and they always seem to be right.. and they’ve even offered me a job in Geneva to ‘extract’ me from all this.

Dee dahddy dahhdy dahddy dum…
Should I stay or should I go now?
Dee dahddy dahhdy dahddy dum
If I stay there will be trouble….
Dee dahddy dahhdy dahddy dum
And if I go it will be double….
Dee dahddy dahhdy dahddy dumb

For all you rock’n’rollers out there.

Get out now while you can. The ECB ‘fighting fragmentation’ won’t help you.

You heard it here first.

@ Paul Ferguson

The issue in this instance, if I have grasped it correctly, is one of the solvent governments of the EU providing a backstop to banks in countries in difficulties to enable them to lend when doubts about the solvency of their own supervisory authority i.e. their national government prevents them from doing so. Attempting to provide such a backstop via said governments would simply leave the latter off the hook e.g. Italy (which, paradoxically, actually seems to be doing better without a government than when it had one).

The EIB proposal would help if the politics allowed. I am not certain about the SME lending. It is hard to convince a bank to lend to a business that is marginal, and becoming more marginal by the day as a result of the economic meltdown across the continent.

@PR guy
Congrats on job offer. My advice is take it.
But the Swiss may not be right. This cannot go on forever. Politics will not allow it in the individual countries. After a breakup, a rebalancing would start quickly. Devaluation would quickly erode the nest eggs of the hoarders and make work profitable again for the age group that are able to work. Hopefully!

@ PR Guy

congratulations. I always enjoy reading your posts.

Take the job but don’t forget to keep us posted, we are not all so lucky that we can escape the badly holed below the water line Irish economy.

I wonder if Gavin Davies realises 50% of Irish SME loans are impaired and the banks don’t have much idea how likely they are to have to write them off?

“How can the ECB fight fragmentation of the eurozone?”

The usual response is to use the strategy and tactics that you used to ‘fight’ a prior, historic fight. But then you find out, rather quickly, that the ‘enemy’ is deploying superior armaments. Bit embarrassing.

Western, Educated, Industrialized, Democratic (societies) metamorphosed from Production/Consumption [PC] into Finance, Insurance, Real Estate [FIRE] economies about 4 decades ago. Money game-changer on steroids!

Worse, politicians (who are incorrigible spendthrifts – of taxpayers money) relaxed or abolished the very controls that might have prevented the financial calamity we are now in. In the context of the ‘fight’, a strategic retreat is in order. Get back to your Homeland.

@ PF: Did you see my reply to your Q? The author of that comment may have been BWII.

@ PR Guy: Well done and good luck! But! Swiss society is littered with political, legal and social potholes. The Swiss know where they are us non-Swiss do not. Do not double-check things – triple-check them! Tedious. But that’s the Swiss for you: charming and ruthless. Political Realism is the national religion.

If the ECB want to fight fragmentation in EZ maybe they need new KPIs or a tweak to their mandate. It is not rocket science.

ECB data for Feb shows that for business loans up to €1m, German small companies paid on average 2.92% interest for these loans. The Irish loan rate was 4.25%; Italian companies paid 4.35%; Spain 5.17%. Greek loans were at 6.66%; Portuguese companies paid 6.6% Cypriot companies paid 7.03%.

Some loans have margins of over 6% above the ECB lending rate.

So banks that charge these high rates also are likely banjaxed and doing little SME lending.

There has also been a fall in lower value corporate bond issuance in peripheral countries.

The Wall Street Journal today reports on an interview with the Bundesbank chief:

On the issue of helping small businesses in Southern Europe gain lower-cost access to credit, which many economists see as critical to hopes for a recovery, Mr. Weidmann said institutions such as the European Investment Bank have better tools to address the problem.

His comments suggest that if the ECB waters down its collateral rules or, in a more extreme case, purchases private-sector assets from banks to spur new lending, it would likely have to do so over the objections of one of its most powerful members.


You’ve grasped it correctly but that makes us both right! As I said, ultimately the idea is to get businesses to organise more bank loans. This brings more debt to the economy than it does money so it doesn’t make the debt crisis any better.

@ Brian Woods Snr

Yes, I was confused for a while there but I get it now.

Banks are not actually members, citizens, subjects, of the EU. They are merely devices operated by incompetent, greedy men, mainly, out to push debt onto anyone who is willing to take it. Therefore, as Paul Ferguson says, why take more debt?

We have been here before. HISTORY!

Edmund Burke, Not Satayana.

Thomas Jefferson and Ben Franklin all knew about the banking weapon and why there were unemployed scouring the streets of London, while every American had work and wealth!

When are you going to learn?

@ Fungus the photo

I think the two proposals show how unimaginative are our financial experts are.

Both had an obvious flaw and one demonstrated a complete lack of understanding of the money system.

The first solution, which demonstrated the lack of understanding, involved providing more central-bank-money (liquidity) to the banks in a similar move the the UK’s ‘funding for lending scheme’.

This might work if the monetary system operated as the textbooks describe it but in actual fact the system works in reverse. The banks create bank-account-money and the central banks then create enough liquidity to keep the system going. But flooding the banks with an abundance of liquidity does not necessarily increase the money supply when no-one is willing or able to get a loan.

Mario Draghi confirmed this recently:
“It is a fallacy to make a mechanical connection between the creation of central bank liquidity and a rise in the money supply. The liquidity we provide to banks is used in the markets where banks lend to each other. It does not automatically increase credit or money in the economy – and so does not automatically lead to price pressure in the economy.”

The second proposal involved having the European Investment Bank lend directly to SMEs. While this creates more money in the economy it creates even more debt since interest is owed on whatever the EIB creates. Creating more money through loans has an obvious flaw in a world already awash with debt.

@ all

Am I missing something?

Even Michael D. is calling for more imaginative thinking and updating the models of banking that we have.

”The logistical strand of economics which today holds sway and stands as a hegemonic model of economic theory, not only in Europe, is the flaw of our times. This strand of neoclassical economics is of course useful for limited and defined tasks. It is insufficient however as an approach for our problems and our future. We need new substantive pluralist political economic models and an emancipatory discourse to deliver them, and I suggest that this is possible.”

”Because the dominating model and its method defines not only discourse but policy options there is an urgent need for new models of connection between economy, society and policy. These are essential for genuine, pluralist choices in policy, not to speak of democratic accountability and relevance, if we are to address the current challenges.”

The full speech is available at:

Hi Paul,

Some questions for you!

(a) What happens when debt is written off?

EG, in Ireland various loans were made to property developers, etc., who spent the money and were unable to pay them them off.

For simplicity’s sake:

Person A borrows 100m from bank.

Gives it to person B in return for land.

Person A goes bust and agrees with Bank that 50m will be repaid and 50m will be written off.

Does that mean there is now 50m out there with no corresponding debt?

(b) The ECB tell us that inflation is close to but not quite 2% and has been for years (I approximate).

You seem to be arguing that reducing the money supply, say in a bail-out, must do further damage to the economy.

Is the corollary also true?

When the banks were enthusiastically expanding their balance sheets, was what was happening that instead of it hitting headline inflation it hit asset inflation?

What use is a 2% inflation target in such a system?

Incidentally I’m pro the EIB stepping more (it has a bit already), and generally reflating those parts of the economy that could do with it. I also note the Commission is trying to get on with the Structural funds for Cyprus.

@ PF: No. Nothing at all! But if Irish SMEs are that short of ‘cash’ – why not create their own for payments within a specifically designated sector, and for specified commodities and services. There would be seigniorage fees and admin costs, but no interest payments or transaction costs to zombie banks. Not without warts, but it might wake up a few folk. Suck it and see.

@ Draghi: “The liquidity we provide to banks is used in the markets where banks lend to each other.”

Er, you mean they gamble with derivatives! What they ‘win’ they keep and ‘losses’ are picked up by taxpayers. Bl**dy marvelous!

“It does not automatically increase credit or money in the economy – and so does not automatically lead to price pressure in the economy.”

Credit or money??? Credit IS money! And, yes you are correct, it does not lead to ‘price pressure’ in the economy – just to the re-inflation of dodgy financial assets.


Martin Wolf

“Experience certainly indicates that monetary policy is not all that effective, on its own, during a balance-sheet recession. It must be complemented by fast reconstruction of the financial system, accelerated private sector deleveraging and a willingness to employ the fiscal balance sheet to support demand, wherever feasible”

Troika : Fail again. Fail worse

A poem by Yip Harburg, who wrote “Ding Dong the Witch is Dead”, from “At This Point in Rhyme” (1976)

On democracy under capitalism:

“Sing a song of politics
With bottles full of Rye
Fourteen hundred delegates
That anyone can buy
When the voting opens
The price begins to rise
And this, my little citizens,
Is called Free Enterprise.”

@ Gavin Kostick,

(A) You’re right that if a bank writes off debt there is debt-free money somewhere in the economy and in terms of keeping the money supply adequate for trading a mass default on loans isn’t a bad thing.

However the banks’ balance sheets can look very unhealthy and that’s when the banks try to reduce their liabilities, and hence money from the economy.

Under the Irish bank bail-out we reduced money from people’s accounts through taxes, transferred this to the government’s account at the central bank and then transferred it to the banks’ reserve accounts at the central banks. The effect was that banks reduced their liabilities (people’s bank balances) and increased their assets (their reserve accounts). While this restored the health of their balance sheets money was deleted in the process.

Under the Cypriot bail-in the banks’ liabilities were reduced directly and hence money was directly deleted from people’s accounts.

(b) The money supply has doubled around Europe every ten years for 4 decades prior to 2009. This hasn’t lead to huge inflation in the consumer price index but instead it’s lead to huge inflation in asset prices.

This has a similar effect to a direct increase in products since people’s disposable income goes down as a higher proportion of their wages service debt repayments. Even those not in debt see a (disproportionate) rise in rents also.

Our proposal would tackle such inflation and we’re strongly advising that we’d include house prices in any measure of inflation to spot and react to bubbles much more quickly.

On the EIB lending directly to SMEs what do you think of the conundrum of resolving a problem caused by that fact that money is created in tandem with an even higher debt by getting someone else to issue an money in line with an even higher debt? Is it not a very temporary solution?

@ Brian Woods Snr.

Nice idea and complimentary currencies are popping up. However Feasta and the Liquidity Network did some research into it and concluded that they are of very limited benefit in a world where ESB/gad bills, taxes, rents etc. have to be paid in the national currency.

@ PF

One is getting used to the mantra, you aren’t the Dork of Cork perchance.

Fractional Reserve banking and the concept of interest on money is universal across modern capitalist and communist regimes alike and even Islamists pay interest albeit they probably call it something else.

I’ve been here before but I’ll try again. It is perfectly feasible to conceive of a steady state economy where Income and Expenditure and their composition are steady every year. Also the Money Supply is constant, also interest is paid and received and is constant year in year out.

I think you have a fixation on the mechanics of money creation/cancellation. The concept that some people have economic needs today which they can’t afford but will be able to afford out of future income and the concept that they are prepared to pay more in the future than the economic benefit they enjoy today, or more importantly, that society providing this facility will demand that they compensate for this advance of their income is the most natural thing in the world.

Maybe I am missing the nuance of your argument but just because money earns interest does not make the concept either unsound or doomed to grow out of control.

@ All

As the world’s central bankers have, apparently, admitted, at least according to the FT, that they do not know what is going on in the real economy, we might as well all have a go at some explanation!

For the eventual basis of some form of synthesis, my money is on the widely recognised concept of positive and negative feedback loops, or vituous and vicious cycles in the case of economics to reflect a negative – in a human sense – connotation with regard to the latter.

Arguments for all positions, from the far left to the far right in ideological terms, can be found in the concept. Indeed, it has entered the everyday discourse of European politics.

What is really interesting is the fact that such loops can be triggered to changing to a different, and benign – in the case of economics – state, by an event or events. In the case of the euro crisis, for example, were Germany to announce the acceptance of the idea of eurobonds in the morning, the impact would surely be so dramatic as to constitute such an event.

Money and banking are, it seems to me, simply elements in a much wider political, economic and social tapestry. Their role hinges on the degree of confidence, or the lack of it, with regard to future events. The failure to control them is, moreover, a major contributory element to loops going out of control.


Your usual interesting links. (How do you do links BTW?)

I like the one about deliberately building in frictions to efficient but complex systems to prevent them going out of control. This is a very good argument for the financial transactions tax. The lack of friction combined with the growth in computing power and the quants to go with it drove the financial markets into orbit with the inevitable crash back to earth.

@ BWII: “Maybe I am missing the nuance of your argument but just because money earns interest does not make the concept either unsound or doomed to grow out of control.”

It is doomed to grow out of control – that is just a plain mathematical fact. Its to do with the nature of exponential functions – as applied to virtual entities. Interest (on emitted credit) is a virtual entity.

I have been ‘studying’ money for the last 7 years and the more I learn about money, the more bizarre and dangerous it appears. It is neither a single nor a simultaneous dual entity (like visible light) but a myriad of miasma-like entities. You think you understand it, only to see it elide you. Paul Ferguson’s ‘fixation’ is normal for someone interested in the concept of money.

@DOCM: I note your comment. I’ll ponder on it, compose something, and post later.

@ BW II: I missed your 5.34 pm. comment, otherwise I would have appended this comment for you.

“The lack of friction combined with the growth in computing power and the quants to go with it drove the financial markets into orbit with the inevitable crash back to earth.”

Its known in the trade as a Normal Accident! Common enough happenings. Very bad outcomes. cf: Charles Perrow – ‘Normal Accidents: living with high-risk technologies’.

@ Brian Woods II

The original method, I understand, used by engineers, was by putting “sand in the machine” to slow it down before more sophisticated control mechanisms were invented.

The analogy will not, however, work for the FTT, the reason being that there is an element – extraterritoriality – which will break the loop if it is constructed to contain it. We can rely on Uncle Sam for that. After all, the US collects tax only from its own citizens, wherever they may be hiding, which is the example that Europe should be following. To be fair to the Germans, they are serious about doing so (collecting it from their own citizens, that is).

As to links, I simply copy (cut and paste) the address line (URL) in Google.

If I find it is too long, I go to the (free) site – – and follow the instructions to shorten it; and then cut and paste it.

@ DOCM: Thanks for those. The Shell money is a gas! I recall my father saying he used both cigarettes and tea as ‘money’ during WWII.

Money – in whatever form you choose it, may be simply a means of payment for a good or service. But money has a darker side. Electronic money is another matter entirely. I’m about half way through my response to your 5.17 pm comment.

Thanks again.

@ Namesake Senior

Call me naïve, but if the whole world with its huge variety of economic and cultural models uses the fractional reserve (with interest) monetary system, then I really have to regard those who argue that it is all a nonsense as on the lunatic fringe. Purely circumstantial of course, however I thought my steady state thought experiment showed that there need be nothing at all inherently unstable in such a system.

I have seen PF’s explanation of monetary mechanics esp. in the eurosystem and it is very informative, but I think he lets himself down when he extrapolates from this to argue that it is all an unsound unsustainable nonsense.

@ Brian Woods II

Apologies for reiterating the same points but I feel they are important.

Just to clarify we don’t have fractional reserve banking as the textbooks describe it, as in, we don’t have banks taking in deposits, keeping some in reserve and lending out the rest. I would like economists to talk in terms of the system that we do have. Also I’m not anti-banks and not anti-interest. I think if creditor lends exiting money it’s perfectly fine to charge interest.

I also think the present system is unsustainable since we cannot expect the money supply to increase at the rate it has in an era when mortgages have approached their natural limit.

I understand that the current system could in theory work ok if the rate at which interest was paid to banks matched the rate at which banks respent said interest back into circulation. While this works in theory of course it doesn’t work in practice and the system is unfit for purpose.

We’ve had banks creating/destroying money for over 500 years and we’ve regulated the system for over 300 years. To date we’ve tried many things to keep this system stable and 300 years later we have the biggest financial crisis of them all.

We’ve tried linking money to commodities and removing such links. We’ve tried the same thing for international trade only. We’ve tried adjusting, abolishing and reinstating minimum reserve requirements. We actually had maximum reserve requirements at one stage during the Northern Rock run.

We’ve tried private central banks creating the cash portion of the money supply and acting as the lender of last resort. We’ve tried nationalising central banks to better focus on the public interest.

We’ve tried liquidity coverage ratios and capital adequacy ratios. We’ve placed strict limits on how much banks could create and then removed all limits. We’ve tried prohibiting banks from creating money for projects that don’t involve an increase in GDP. We’ve tried public & private insurance on bank deposits. We’ve tried banking unions.

We’ve tried putting central banks, financial regulators and financial services authorities in charge of monitoring stability. We’ve tried providing banks with an abundance of central bank liquidity. We’ve tried capitol controls.

We’ve tried encouraging businesses to take on more debt, then governments, then households until all three have approached their limits and 300 years later we haven’t been able to keep this system stable.

Also, for the reasons outlined on our website under ‘What’s different about this recession?’ we feel there’s no better time to redesign the foundations of the economy.

@ Namesake II: – I like that!

Brian, you are not being naive. But some folk do get exercised about stuff. Bees in bonnets and all! We each of us have quite different experiences and interests – hence our mindset and world view. It’s the way it is. Not a big deal.

@ DOCM: Re your 5.17 pm posting.

The concepts of feedback controls (for physical systems) is quite complex – even for experienced process engineers. Originally these control systems were human controlled (analogue in nature), but modern ones are digital and computer controlled. This does not make them any less unreliable – unfortunately. The key associated constructs are hazard and risk. If you do not understand these two … !

Many folk – especially financial quants boast that they are well acquainted with the concept of risk, then proceed to create disastrous outcomes! Money and mercury are alike (both are hazardous substances). Tightly contained neither pose a significant risk. But once ‘spilled out’, risk may increase by many orders of magnitude.

Negative feedbacks are not a major problem – its the positive ones that cause the disasters. What you need to know and understand is the nature of your system – something few folk can accomplish. The predicament lies in the nature of many modern systems – they are fiendishly complex. Modern financial systems fit this description with a vengeance. They are designed by humans who know well how the individual components of their system will behave, but once the whole array is assembled and becomes operational the system may (and has done) behave in an non-predictable manner. This is where controls come into play.

There are sensor components built in and these are meant to signal the operator that the system is within its operational tolerances or it is not. The operator then acts to correct any anomalies. Or the corrections may be automatic (see Fail Safes below). Given the deeply interconnected, highly complex and tightly-coupled nature of modern financial systems and the speeds at which they operate (nano seconds) computer controls are essential. But these latter are also human constructs. There may be Fail Safe devices built in and these do trigger but the final outcome may not be what the designer intended as the system is probably already in chaotic mode.

A system, apparently acting correctly, experiences a positive feedback stimulus and begins to run out of control – it becomes chaotic. Worse, actions by the operators to bring the system back within its operating limits invariably potentiate the chaotic behaviour of the system. Boom! – not as in BANG, but as in bust! That’s the good news! The bad news. The operators can, and will, ‘game’, the system to their own financial advantage. This is what we are now experiencing in global financial markets and national banking systems.

Which brings me back toward your comment (I hope!). Economics deals with only the theoretical parameters (using mathematical models) of a massively complex physical system. This system sits (uncomfortably) on some immutable laws of nature and some iron laws of maths and the limits of scarce resources. Economists (mostly) ignore these. They make truly heroic assumptions – and then are perplexed when they observe the economy going awry! And like our operators above, apply totally inappropriate ‘corrective’ measures – and again are perplexed!

Money – or what most folk believe to be money, is indeed an essential component of modern economic systems. But the majority of money in existence is not physical (notes and coin) but virtual stuff. And attempting to ‘control’ a virtual entity is a very difficult proposition indeed. Its not impossible, but you must accept the limits that your control systems will attain. Financial control systems are deeply political. And the operators of our financial systems ‘control’ the politicians. You can join the dots yourself!

As I have mentioned several times on this site the existing economic paradigm is Permagrowth – an annual compounding increase in aggregate economic activity and output. Only one commentator [PF] asked me about it. Despite my invites to the resident econs to engage with me about the unsustainable nature of Permagrowth, none has obliged. Eventually, (possibly now) this paradigm inflects from ‘growth’ to a stationary maximum. Then it will decay. It cannot be otherwise with any physical system which operates in a closed container with finite resources. Sure, you can ‘goose’ the system – but only temporarily. Which is what is happening now.

In essence modern developed economies metamorphosed from Production/Consumption economies (pre-1970) into Financialized economies (post 1980). In these latter economies, fiat-credit and other virtual forms of money are created almost without limit and exponentially increasing debt is the only product. Our politicians, bankers and economists regularly assert that this debt is a temporary problem – ‘growth’ will alleviate it. What these mendacious individuals really mean – is that the growth of debt will alleviate the debt. And many foolish folk believe them – despite the evidence of their own eyes!

Hubris, and fixation on salient issues are to be expected. Which is what we observe. Attempting to rationalize and explain the actual global economic mess is too tedious.

Hope these comments are of some assistance. Its not the full picture by the way. But what the hell! Its late and I’m off to sample some distillate!

@ PF

I’m a bit tired and emotional at present, but I will mull your comments and possibly respond tomorrow.

‘ BW Snr

‘I have been ’studying’ money for the last 7 years and the more I learn about money, the more bizarre and dangerous it appears.’

And I would be interested in a summary of your findings brother. My own daily work, which concerns social rather than economic stability, involves many thorny issues of trust, power, and control. We live, as the sociologists say, in a negotiated order.

‘From the first group of scholars, for example, Polanyi clearly rejects the traditional treatment of cowrie shells as ‘primitive money’……….The cowrie was, in fact, an example of the ‘the launching of a currency as an instrument of taxation’. Polanyi furthermore argues that the emergence of non-metallic currencies should be correctly regarded ‘as a feature in the spread both of centralised government and of food markets in the in the early African empires…’

‘Chartalism and the tax-driven approach’ Pavlina Tcherneva, in A Handbook of Alternative Monetary Economics, eds Arestis and Sawyer.

This is the company I would like to keep, if only there were 36 hours in the day.

@ Brian Woods Snr

As I have mentioned several times on this site the existing economic paradigm is Permagrowth – an annual compounding increase in aggregate economic activity and output. Only one commentator [PF] asked me about it. Despite my invites to the resident econs to engage with me about the unsustainable nature of Permagrowth, none has obliged.

Apart from our own Philip Lane (who gets a shout-out from Reinhart & Rogoff for work on external debt that he co-produced), Irish economists tend to stick to local issues.

There are big changes underway and the usual response is a minister or lobbyist will say that there’s huge potential for Irish exports in Africa; wouldn’t it be an idea to give travelling salesmen tax incentives to drum up business in the BRICs?

Far away hills are indeed green and wonder why we don’t really know why the export performance is poor in Europe — but surely you can’t be serious, the figures look good?

“I am serious… and don’t call me Shirley,” as the doctor on Airplane (1980) said.

@ PQ: Got that. It’s early – caffeine levels need to be re-adjusted! Will get back to you. But it may be this evening. Mrs B W ‘needs’ to paint our kitchen!


Den scoth.

You say that “Financial control systems are deeply political” but I would also say that our political systems are controlled by money. The system we have is also a reflection of the way most of us think. Most people don’t like change and follow whoever issues the rules.

Experience is the only thing that a sizeable majority of people who work in management will believe. If it hasn’t happened in their lifetimes it can’t happen.

“To think about consequences over time reguires…. that we know how things are linked as systems and understand that small actions can have large consequences , many of which are unpredictable” David Orr

Not enough people get that.

“The self confidence of learned people is the comic tragedy of civilisation” Alfred North Whitehead.

@ PF

Hmmm! If I can sum up your argument, you are claiming that our monetary system ain’t perfect and never has been. Can’t argue with that. But I think it has been a significant factor in the unimaginable (ex ante) advance in our economic condition over the last few centuries.

Its weaknesses are inherent in human nature and in particular in group behaviour and feedback loops (see DOCM), and I fear will always be with us. We seek for an optimal trade off between efficient monetary transmission and the dangers of these loops. Remove all the loops and you will diminish the efficiency.

We will always learn from the most recent loop driven calamity and tweak or even revolutionise our approach going forward.

I do not buy into your argument that what we have at this point in time is inherently unsound and I think you read to much into the current mechanics of money creation/cancellation in arriving at that conclusion.

Interesting stuff above.

@ Paul Ferguson

“On the EIB lending directly to SMEs what do you think of the conundrum of resolving a problem caused by that fact that money is created in tandem with an even higher debt by getting someone else to issue an money in line with an even higher debt? Is it not a very temporary solution?”

I get the basic principle. But if the money supply generally keeps growing, I can’t see it as a pressing problem.

On the EIB, it would be a small proportion of the total, and if spent on useful things (ask Stiglitz to do a quick check-list), I would think it wouldn’t be a problem at all.


Who is Reggie Middleton?

A thorn in Noonan’s side.

He is probably right about another bank rescue being required. He is also right when he says it will not be automatic and knee jerk next time. As to Irish depositors being Cyprus’d he is probably wrong.

Hope springs eternal in the human breast, even mine.

@ All

The theory and the actuality currently under discussion may have something added by this report of a recent extensive survey of the famous German ‘Mittelstand’.

It illustrates numerous points notably (i) that it the expectation with regard to future events that drives sentiment (ii) that some one quarter of those surveyed think that wages should rise in Germany in order to provide a stimulus.

However, the decisive element is the manner in which it illustrates how the largest economy of the EU interacts with others. The economic models currently in use, as BWS has pointed out, are of little enlightenment and may, in fact, be seriously misleading.

The problem with the EIB avenue of attempting to aid SMEs in peripheral countries is that it is a mechansim outside the relevant loop. It will have little or no impact.

“Senior hurling” is a euphemism on this site for serious business.
And this is why (best watched on mute)

You need to be aware of what is happening. You need to be able to execute. You need a bit of what the Italians call “furbo”.
And everything must be timed to perfection .

Italian industrial orders down 7.9% in February.

Another step on the way to fragmentation.


“The problem with the EIB avenue of attempting to aid SMEs in peripheral countries is that it is a mechansim outside the relevant loop.”

Any SME ers reading can have a look here:

And from the Irish end, for example, here:

Article by Donal O’Donovan here:

@PR Guy

It is not exactly all rosy in the garden of the UK either .

o ButcherCameron
18 April 2013 8:45pm

“2.5 million unemployed
2.0 million run out of JSA entitlement
1.0 million on Work Programme and Community Action Programme (count as in work)
0.5 million long term benefit sanctions
TOTAL 6 million unemployed
It doesn’t even include zero hours and those in part time who want full time, yet the media keeps reporting how good unemployment figures are. What a joke.
Funny how unemployment always goes through the roof when the Tories come to power. Is it due to their economic incompetence or are they just ‘soft on scroungers’ and keep increasing benefits?
What do you think?”

How can the ECB fight fragmentation ?

Gavin Kostick posted this on the thread about the roundtable with Sinn

“He (Alan Taylor) (and Portes) was very critical of the Eurogroup decision making process and pushed that they have to shift from ideological denial to an evidence based approach. This may only be achieved by people changing.”

@ GK

I am not questioning the efforts by the EIB, simply their adequacy. They will not IMHO make very much difference as they fail to address the underlying reason why there is such a disparity in the cost of credit for SMEs between the core and the periphery. It is the simple one of loss of competitiveness, resulting in doubts about their sovereigns, leading in turn to doubts about their banks, which in turn impacts on the level of business confidence (especially when seen against their existing level of indebtedness) and so on. A classic negative feedback loop.

The EIB route is the only one that Germany is currently willing to embark upon politically, irrespective of the combination of parties that wins the election.

It is better that nothing. But it will not break the loop.

What might do so is the natural resilience of capitalist economies in general especially those like the French and the Italian which are broadly based (more so than Germany as the comparative impacts post-Lehmans demonstrated). That seems to be what Merkel and her advisers are banking upon, if I may use the expression.

IMF project UK debt to peak at 101% . They can’t blame the Euro. Even blaming Labour at this stage is threadbare. I wonder when Osborne will be defenestrated.

There is more to it than that. The core are as ideological as the victorians. Peripherals are divided into respectable, unrespectable, moral and immoral. Workhouses were punitive to pprevent only the destitute from tseeking relief. SMEs get that treatment now. Eventually late victorians understood the importance of sewage systems. But the core isn’t there yet.

@ GK

There is another angle to the EIB route that I forgot to mention. It is an EU27 body i.e. it involves the UK.

As you will know, I am not an admirer of Merkel. She is a political opportunist and tactician with no real understanding of why the EU came into existence not to mind having any idea about to assist it out of its current difficulties. But she has an excellent grasp of old-style European balance of power politics. This involves keeping the UK on board. The problem is the bill for both parties. The UK will have to stump up a hefty sum for anything additional the EIB does and this against a background where both London and Berlin are blocking attempts to fill the shortfall in the EU’s current budgetary artihmetic (variously estimated between 11 and 15 billion euro by the Commission). Going back to the Bundestag with this news is the one thing that she seems to wish to avoid.

@ GK

Which reminds me of another central point. Historians will IMHO establish that the fork in the crossroads where Merkel made THE fatal tactical error was when she chose to try and mask what hard economic and political reality was forcing Germany to accept by way of assistance to other countries. The stratagem was to imply that it had to be done outside the existing treaties; hence the amendments to Article 136 TFEU to give the necessary cover, the ESFS, the ESM as a separate treaty etc. etc.

One could not imagine a statesman of Kohl’s stature following such a route. And it has left Germany’s last situation worse than her first with the parliament rather than the executive in charge of the external relations of the country in this area.

Not to mention the helpful involvement of the constitutional court.

P.S. The Pringle judgement is of interest in this general context.


One could not imagine a statesman of Kohl’s stature following such a route.

It’s not uncommon for contemporary politicians to be seen as compared with perceived giants of the past.

The styles of Merkel and Kohl are polar opposites.

Even so, Kohl did not level with the German people when he was embarking on momentous journeys.

I think it is a bit facile to believe that it would have hugely mattered if Merkel was more candid — what is likely is that she would not have got support for huge transfers.

In Wolfgang Schäuble, she has a powerful finance minster who has no reason to have personal loyalty (even after seizing the party leadership, she refused to nominate him for the German presidency in 2004). They appear to agree on the major issues.

The Eurozone could do with strong leadership in its four biggest members.

But for Dominique Strauss Kahn’s sexual escapades, François Hollande’s political career would have continued to have been a litany of disappointment. He did not get a ministerial job under François Mitterrand, in 1981-95 (there were 2 two-year periods where the right had the majority), nor when the Socialists ran the legislature in 1997-2002. As for Spain, an FT article said last January: “Spaniards often describe their prime minister as a typical Galician – reserved, reluctant to give a clear answer, ever keen to keep his options open. Popular lore has it that when you meet a Galician on a staircase, you never know whether he is going up or down.” Italy’s political crisis continues.

Otmar Issing, the first ECB chief economist, said in 2010 that in early 1990, he was a member of the council of economic advisers (the so-called ‘wise men’) and the group issued an open letter opposing a West-East German currency union (with parity between both currencies). Issing said all the economic risks they warned about came to pass.

Chancellor Kohl was furious and cut ties between the chancellery and the group.

Merkel is indecisive while Kohl has reportedly said he acted like a ‘dictator’ in pushing forward the euro project. He certainly seems to be a stubborn person and while it’s not unusual for family to be sacrificed for political ambition, it seems strange to me that a father would maintain an estrangement with his two sons for decades. In 2001, they lost their mother to suicide (she had a rare allergy to sunlight).

In the sweep of history, German reunification will be inextricably linked with the genesis of the euro.

“Reunification is not only one of the underlying causes of the euro crisis, it is also one of the reasons behind our inability to solve it,” Wolfgang Münchau wrote last year. “This is exactly the tragedy of Helmut Kohl: with his great political coup of German unity, he sowed the seeds for the destruction of his greatest political dream of European unity.”

The hasty reunification cost almost two trillion euros in transfer payments, and it was the greatest example of economic mismanagement in the history of the world. It was a record, which is only now about to be smashed by the euro-disaster. One can hardly be surprised that the (formerly West) Germans, who had to put up with the transfer payments to East Germany (and must still put up with them) want no further transfer union in Europe…Due to the costs of reunification, Germany entered the euro at an inflated exchange rate. The result was that for a whole decade German economic policies concentrated on boosting Germany’s own competitiveness against third parties instead of strengthening the economic performance of the eurozone as a whole. And that was one of the major causes of the crisis that would come later.

German and European unification can therefore largely not be reconciled, because they have both turned out badly economically. I believe that future historians will take a critical view of German unification and Kohl’s merits, which is the view today.

What was the alternative to reunification? I dunno but it is hard to see Kohl as the father of this crisis when so many others messed up. The euro crisis drives and is driven by a wider crisis of capitalism. The system itself is prone to crisis and is inherently unstable. See world war one and world war 2. German attitudes to money are a problem but they are hardly the only ones. We know things have to change but we have no idea what to do.

@ MH

A review of events with which I am largely familiar. However, it is addressing points that I have not made. I referred to the choice of routes, not the qualities of the leaders making them other than – implicitly – the decisive manner in which Kohl could act. As to the view taken by Munchau, the cost of reunification was certainly, and remains, a major element in forming current attitudes in Germany. And the one to one parity exchange gave reason for woe not just to Germany but to the European economy in general. There is no difference of opinion between us on these points.

Coincidentally, I came across this item in Euractiv giving the views of Hubert Vedrine, Jospin’s foreign minister during the era of “cohabitation”.

I liked this quotation in particular.

“When the Americans created the United States, they brought together Americans. The same when Bismarck brought together the Germans. As General de Gaulle said, you don’t make an omelette with hard-boiled eggs.”

In my view, Vedrine is absolutely right and represents a broad “Gaullist” consensus in the matter which the current Socialist leadership is incapable of articulating effectively.

I also think that Euractiv sums up the situation admirably with regard to the topic addressed in this thread; how to stop the euro area from fragmenting.

“We need more Europe, we need not only a monetary union, but we also need a so-called fiscal union, in other words more joint budget policy,” Merkel was quoted as saying June last year.

France so far has been reluctant to take a leap towards federalism but may advocate ceding some fiscal control to Germany in exchange for Eurobonds and debt-pooling under a “grand bargain”. For Germany that would be the end point of a fiscal union.”

It must be hoped that, in the meantime, agreement can be found on the interim banking union which both Rehn and Moscovici have recently stated publicly is needed now; without the need for treaty change.


A couple of years back I estimated that Ireland would need approx., 5-7bn a year extra to escape properly, plus restructuring prom., notes. All rough and ready of course.

I noted that the 5-7bn would be better if it was aid/investment, didn’t need to come from one source and so on.

It was Mr Bond who pointed me in the direction of the EIB, which I hadn’t heard of before.

The EIB is second best as it is more loans. I am certainly wary of headline announcements and I share Joseph Ryan’s concern that overall the SMEs in Ireland are in no shape to take up the offer.

However, there is always churn in the economy and new businesses start and grow even in tough times.

So I welcome EIB involvement as a modest development in the right direction. The fact that there is a channel that Irish SMEs can access is good. But I certainly don’t think it is the solution.

@ seafoid

There was no alternative to reunification. However, taking on this project and the euro was quite a lot.

Kohl was thinking of the political benefit for the CDU by allowing East Germans to exchange their currency for DMs at parity but even firms in the East that could have survived during a period of adjustment, didn’t have a chance.

As for Mitterrand using the euro as a bargaining chip, a man who could be in both the Résistance and Marshall Pétain’s Vichy government at different times, knew how to play his cards.

However, Kohl, Gorbachev and George H. Bush were the main players.

Kohl could have delayed the euro project but just 14 months after the rebirth of a united Germany, the Maastricht Treaty was signed.


A few months ago, Deutsche Welle broadcast a report on the difficulty that a German firm, located 10 minutes drive from the border, has in selling in France. The French may have similar moans about doing business with Germans!

In hindsight it probably was but at the time it seemed feasible. Sceptics tend to be sidelined and often it works out. If you look at the december 2008 posts on this site it is not so easy to find anyone predicting a pan european crisis lasting as long as 5 years. Growth was expected to pick up in 2009. The euro could have sailed on…


“What do you think?”

The Tories know well in advance of coming to power each time (it’s their ‘turn’) exactly what their policies will do vis. unemployment.

I’ve seen papers prepared for Thatcher in the late 70’s that were quite specific/quantified about the steep rise in unemployment that would take place from 1979 on if her policies were implemented (and subsequently happened). I’ve no doubt Cameron’s lot conducted similar studies.

Why do they still go ahead and do it anyway? I guess they take the view that most of those who are going to suffer aren’t their voters anyway (or that it’s not affecting their nearest and dearest anyway)? I don’t know. Chances are now that some of the people being affected actually would normally be Tory voters.

There are a lot of people out there who are unemployed (US, UK, Ireland, rest of Europe) but don’t show up in the official figures. Lots and lots of spin applied to those that’s for sure. There’s a relevant cartoon about the current situation here (page down and look for it in the central column then click on it to enlarge):

When did the monthly unemployment figures in the EU last show anything but an increase? It can’t go on like this much longer.

@ GK

We appear to be in agreement.

@ MH

As someone who has been banging the drum on the indissoluble link between the success of the euro and the creation of a genuine single market, by harmonsiation where necessary and mutual recognition where this suffices, the DW coverage is no surprise. The Germans are just as good at administrative anti-competititive practices as the French, if not better.

@PR guy
The tories are lashed to the austerity bandwagon and the academic winds appear to be turning. I would be surprised if the Tories won a majority over the next few elections. Osborne really got it wrong. Folk memories of Kitcheneresque ineptitude can last as long as half a kondratieff cycle.

You are clearly hankering back to the glory days of 1970s UK when the Labour dinosaurs walked the earth. Do you still have the Morris Marina- great car. The Tories are manfully trying to clear up Gordo’s & his pal Sir Fred’s mess. You need to move beyond this anti Tory/Brit meme. The reality on the continuum of Euro politics, they are at the relative competant end of the spectrum.

Why do right wing governments implement policies that make unemployment worse. Ronnie and Maggie are prime examples

The source of campaign donations usually determine party policy. The middle upper and upper class buy cheap labour policies which come in myriad forms. Minimum wage, union weakening, removal of production subsidies, privatisation, reduction in unemployment coverage. foreign temporary worker visas, cuts to public service employment and many more.

Books could be written on why Lawyers, Chiropodists, Pharmacists, Orthodontists, Opthalmologists and many other middle class professions can have protected oligopolies.

In the long term it is self defeating as it destroys the customer base. But then again profit this quarter is paramount. America is a very good example of a nation that went from exceptionalism to third world status in thirty years. A lot of other countries Germany included are headed in the same direction. Wealth accumulating at the top while manufacturing wages stay stagnant or go lower.

Henry Ford had it right which means we need more offspring of Irish fathers and French Canadian mothers. Deeply imbued with the fear of God and compelled to do the decent thing.

@ Brian Woods Snr

‘The majority of money in existence is not physical (notes and coins) but virtual stuff.’
Does this mean that the trillions reported as hidden in tax havens is also ‘virtual stuff’?

‘The control systems are deeply political….and the operators of the control systems control the pols…….’

So, no desire or willingness to go after that stuff in the tax havens?

@ PR guy – a reminder…

Your ‘austerity sharp end stuff’ holds no interest for most of the contributors to this blog nor does reference to the ridiculously high levels of worldwide wealth which is accumulating to the 1% on a continuous basis – neo liberal ‘economic doctrines’ reign supreme here!

We are running a 7% plus fiscal stimulus and piling up debt and an alarming rate. That policy seems to be working does it not.
I have said before, I would take the performance of the UK over the rotten heart of Europe anyday. At least the labour market is in better shape than all bar Germany. Employment is rising rather than cratering as elsewhere.
The UK is not the worst offender in terms of policy mistakes.
I know happy flappy lefties like yourself probably prefer The socialist paradise that was pre Thatcher UK or modern day France.

@ Tull

Ireland isn’t really going anywhere but I don’t think the wonks who devised the straitjacket want anything more than their money back. The UK is supposed to be different.

Talk to any wine broker in London. Here is the Osborne effect

Demand is banjaxed. It’s not about being lefty or righty.

It’s about for how many years Europe removes itself from circulation. If Osborne was right the UK would be growing now. It isn’t. The costs of stagnation are massive. Not just in terms of plonk either.


“PR guy – a reminder”

That’s a bummer. I thought someone out there might care about the plight of their fellow humans 🙁

@ PR guy

…’out there’ are people who care but they do not usually contribute to this blog

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