Breugel: assessments of Troika programmes to date

The excuse, offered in this report, for sticking it to the Irish taxpayer is found on page 70.

“one has to acknowledge that at that time, the EU did not have clear resolution framework, rendering it difficult for the EU institutions to actually act on bank resolution.”

This is complete nonsense. There was a crystal clear resolution framework in place — hand the Irish taxpayer the bill.

@ Peter Stapleton

The “conclusions” have already been recognised and have already brought real benefits to Ireland but for reasons that have nothing to with the academic debate either in Ireland or elsewhere in Europe.

http://www.irishtimes.com/business/economy/ireland/esri-says-promissory-note-deal-to-save-1bn-1.1394996

The EU is ultimately a cooperative politial undertaking and the politicians involved ultimately face the choice of accepting this or seeing it collapse (or deciding to leave, which an increasing number of UK Conservatives seem willing to do).

@ BWS

If the ESRI is right, one billion on the PN’s; to which has to be added the not inconsiderable sums from the concessional borrowing on the country’s behalf in the markets through the EFSF/ESM; plus the possibility of something on legacy debt.

Not bad when compared to what Bruegel estimates to be the prejudice suffered by the country (which is far below the sums tossed about in both the academic and popular debate).

Stephen Kinsella has illustrated the ad hoc manner which the EU/Troka has tackled the crisis from country to country. Is this any way to administer a major world economic power. Rehn et al have proved to be incompetent and are now shifting position in the light of prevailing sentiment. God save us from them.

Btw, Hollande said today that we would have political union within two years.
What planet is he living on?

@ DOCM: I am unsure what you actually alluding to. So I’ll leave it there.

For me, its the human cost that is so great. You can print all the money you want. But you cannot put disrupted human lives back together so easily. Depends on ones personal biases I suppose.

[ps: I left a brief comment for you on the other thread.]

@ BWS

See my reply on the other thread.

@DOCM: “Overgrazing …” That’s a terrific analogy for over-extended credit. Love it!

Now about this fodder, er credit, shortage … …8-)

This is the bit where it can be argued, the Republic of Ireland unilaterally and without outside pressure, broke the part of mould of capitalism that enclosed banking, effectively rendering it unusable for the rest of the world.

“Turning first to the issue of senior bond holder involvement, a number of points need to be made. The 2008 state guarantee was given by the government unilaterally and without outside interference. Yet this guarantee meant that for two years (September 2008- September 2010) a large portion of unsecured senior bonds was in effect untouchable.”

[Still, an open inquiry would be in slightly bad taste – might give those who contributed ‘bragging rights’ down the golf club…or something. Very bad form.]

A couple of years later on:

“In the autumn of 2010, a significant debate about the imposition of losses on senior unsecured and unguaranteed bond holders began. According to the Central Bank of Ireland, the total amount of unsecured and unguaranteed senior debt amounted to €16.4 billion in February
2011.”

“Several interviewees confirmed the ECB’s firm opposition to the imposition of losses on both going and gone concerns. The ECB was worried that any such move would substantially increase funding costs for the Irish banking system but, even more importantly, for the euro area banking system.”

Nothing new there at all.

Bank Guarantee was a foolish mistake.
The system error that lead to it was:
The people elected TDs only vaguely qualified in anything.
A barrister whose expertise was with language and the dichotomies of law was put in charge of finance
He had to deal with bankers whose expertise lie in figures and the ambiguities of finance
They lied to him and he could not see that. He judged incorrectly.

Brian Lenihan would not have been in charge of finance for a medium sized company. There is something wrong when he ends up in charge of finance for a country.

That is the system error that needs to be addressed.

@ All

FYI

Plucked at random from the Web.

http://www.politics.ie/forum/economy/36533-myopic-lenihan-cheapest-bailout-world-so-far.html

We should sue someone!

@ Eureka

If the experience of Iceland is any guide, you are probably right!

@Eureka The one thing you do expect from a lawyer is not sign an open ended contract. Brian Lenihan’s mistake was to guarantee everything. Some guarantee was needed, but some caveats on that guarantee were needed and a lawyer should have known that, notwithstanding any lack of background in finance.

Since I remember, how furious folks in Germany were at that time,

I looked up, what was said precisely at this time

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ayQUgBTLYJEc&refer=germany

is a good summary.

This is just like the NATO treaty, you very careful avoid any automatism, which would enable somebody to draw the whole system into the abyss.

verbatim:

http://www.t-online.de/wirtschaft/id_16426364/merkel-spareinlagen-sind-sicher.html

There is no chance in the world, that anybody could ever sue for 1 cent over this text.

If this Genius Lenihan just would have talked with his Eurozone colleagues, and not have acted nationally alone. But in Ireland nobody stopped him.

And it was the same thing last summer, when especially France tried to turn the ESM into a vehicle of unlimited liability. It was Germany and our Surpreme Court alone, who stopped that.

And I was not the only one here around wondering, whether we are the only ones left to really read and think through such texts; there are other AAA countries with a lot at stake as well.

Do they just have infinite trust in us, or does everybody treat these kind of treaties as some fair weather statements, which will be broken in times of trouble?

Along the lines of : Ultra posse nemo obligatur

@ francis

The reason Lenihan did not talk to his colleagues is almost certainly due to the fact that collectively they did not want to know. And they are collectively still at the same game with the odd agreement to do something just as the euro train is about to leave the tracks.

As to sticking to international agreements, Germany is the last country that can give lessons in this area. There are 27 constitutional courts in the EU and if the German one has the right to interpret the EU treaties, then so do all the others. Pacta sunt servanda! Germany signed up to these treaties and to the articles therein giving the sole right of interpretation to the European Court of Justice.

But all of this is by the way. The treaties simply forbid any country taking on the liability for another country’s debts. They do not block common action to run a common currency successfully.

Two links that you may find of interest.

http://www.economist.com/blogs/freeexchange/2013/05/european-central-bank-2

http://www.faz.net/aktuell/wirtschaft/raus-aus-dem-euro-afd-will-nicht-zurueck-zur-d-mark-12187441.html

Germany is stuck with the euro and the pesky Club Med whether it likes it or not. The question is whether the general political situation in Europe will permit a continued “time out” until the federal elections which will, in my opinion, demonstrate for the third time that one Angela Merkel is incapable of translating a very high level of personal popularity into a clear majority electoral mandate. When was the last time the CDU won a land election?

@DOCM

Herr Professor Sinn? You gotta be kidden us! Sinn_u_citus after a bad dose of lorenzobinismaghiitis? Who u spinnin for?

@ francis

The most pertinent extract is probably this (pages 22 and 23). (The paper is from April 2013!)

“Fundamentally, large imbalances in the various accounts (or any sub-account) of the balance of payments reflect the interconnection, and thereby also the dependence, of a country vis-à-vis the outside world.
Therefore, they are vulnerable to spill-over effects from adverse developments in other countries, such as in the case of the sovereign debt crisis in the euro area with its potential for reversals in payment flows.
At the same time, while current account balances have been markedly reduced since the onset of the crisis, for several countries under strain they remain in deficit (or in the case of Ireland, the surplus is not sufficient
to cover for net financial outflows) and similarly, they remain in large surplus in other euro area countries. Thus, the correction of past imbalances in the current and financial accounts does not appear as strong as may be expected outside a monetary union where the countries’ exchange rate and external accounts could adjust rapidly. Eurosystem liquidity support as reflected in the associated Target balances – and this is one of the hypotheses of this paper – has helped to smooth the balance
of payments adjustments in EMU. Target balances are not a separate mechanism. The Eurosystem liquidity support was given to the normal counterparties in central bank operations, namely banks, to support
their liquidity position. In no way was there any aim to provide funds to finance current account imbalances – these are all indirect effects of a monetary policy aimed at maintaining price stability in the euro area.
The ‘shock absorption’ by the central bank is inherent in the construction of a monetary union where, firstly, the payment system ensures the smooth flow of capital in a currency whose value is the same everywhere in
the monetary union; and secondly, the central bank takes decisions, within its policy mandate, that contribute to the preservation of the monetary union. To ensure the outreach of monetary policy throughout the area when cross-border financial markets become fragmented, the monetary authority can itself replace private intermediation to some extent and augment liquidity provision.

Without the Eurosystem accommodating the liquidity needs of solvent banks in countries under strain – and in absence of the possibility for exchange rate realignments within a monetary union – disorderly adjustments may have arisen, with adverse implications for the economies, as well as for price stability in the euro area as a whole.

This is also the case for countries with current account surpluses. Their residents could have incurred disruptive losses on the claims they had previously contracted on debtors in countries now under strain (or may
not have been able to smoothly repatriate the funds initially invested there). Surely, they could not have been able to sustain those current account surpluses. The possibility of Target balances emerging thus allowed creditors in surplus countries to continue recovering their claims on foreign debtors, and firms to continue exporting goods and services. Reciprocally, residents in countries under strain could continue to service
the domestic and external debts previously contracted, while solvent customers could continue to import goods and services, including those that are vital for production chains.

At the same time, while the resulting stabilisation via Target balances offset the sudden lack of private financial flows, the Eurosystem intermediation did not foster a rebalancing in the balance of payments alone. This stabilising action gave time for policymakers to address the underlying causes of the imbalances – the question is whether this time is being used effectively.”

It helps explain why even the AfD sees that Germany simply cannot leave the euro.

That Merkel shines only by way of comparison with the other leaders in Europe is a point that I have often made myself.

As to the role of the BfG, I have absolutely no problem with it protecting the Basic Law. That is its job. If it thinks that any treaty commitment that Germany has entered into is incompatible with it, that is a problem for Germany, not the other countries of the EU, to resolve. Merkel put the onus on these countries instead by insisting on (i) an amendment to Article 136 of the TFEU to cover for any possible legal challenge and (ii) the “bail-out” arrangements being dealt with by way of international treaty – the ESM – rather under the EU treaties. The end result is a legal imbroglio for Germany. The statesmanlike thing to do from the start would have been to act under the existing treaties. They covered, and continue to cover, the situation that has arisen. There has simply been a failure to utilise the provisions that they contain for giving supervisory powers to the ECB, a situation being belatedly and reluctantly corrected, and for the other steps required on which Schaeuble continues to stall.

There are currently no statesmen in Europe.

@ DOCM

just a very short, first reply.

Sinn was sloppy signing the preface of the paper in 2012 : – )
I am gonna read it. There was also a Karl Whelan piece in forbes with regard to Target 2.

My understanding was, that the ESM and many other things, like the Schengen treaty, are based on bilateral treaties, are that way, because the UK used their veto.

While it is astounding how far patchwork can work for long times, I ll hope the English finally make up their mind in the next few years.

What I think the AfD folks represent, is primarily the increasing doubt, here around, whether the different cultures are close enough and strong enough, to actually obtain synergy in diversity, some strength in larger numbers, and do not lead to endless infights.

A relevant article: “Greek vs Irish unions, 20-0”
http://www.ekathimerini.com/4dcgi/_w_articles_wsite3_1_16/05/2013_499299

More, most likely, after lunch and reading your links : – )

@ DOCM

LOL, this is now going a lot bullet point like over many points, but I think it is better that way, because that is exactly the problem, that everything is connected with everything, and can not in most cases be solved separately.

1. Cour Thimann 2013 Target 2 paper

As far as I have read it so far, my sense is, that the way this worked out was not really fully contemplated before starting the Euro, making me afraid, that people also might not have thought through the ESM and many other multi-page stuff.

My sense is, that in the long run we have to find ways to reduce the Target 2 balances, with new regulations / mechanisms requiring treaty changes, but how those should look like, depends a lot on other decisions we have to make first, or events we could be facing. So I stop the discussion here, at least for the moment.

2. Czech

When I look at my good Czech neighbors, they are coming up pretty nicely, without much EU help so far, with their own currency, with what I would call a loose peg at 25 (+/-1, 3 sigma) krona to the Euro. The Danish krona at 7.45 +/- 0.1, the Swedish coming down from 10.5 to 8.5 in the last 4 years.

When I cross the border with my bike, there are no flags, no guards, just some small signs. Each others police, medical first responder, sewers (!) can cross the border. This is better than Canada / US, where they do now hold up formerly agreed fire brigades. The polish police has become pretty good at catching folks stealing cars in Germany at the Ukranian border.
Czech car and other manufacturing is now pretty tightly integrated in this central European supply chain / production network, much tighter than Ireland.
What we see often as British obstruction, can also have advantages, we can make separate collaborations with Czech, NL, Poland, which we might not be willing to do with Bulgaria, Romania.

Bottomline of this excursion: for the very most good neighbor stuff we do not really need a currency union.

3. UK

(your bbc link) In December 2011 the UK was alone, not even the Swedish understood them, but saw that as a pretty plain demand for special privileges.
With a 500 year old proud currency history, I would also clinge to that, I understand this very well.

(your telegraph link) Quite frankly, if I look at economic data, I would be more afraid for the UK, with 8% budget deficit (vs 1% equilibrium), at 8% unemployment (vs some 6% long term expectation), after some “blood bath budget” in name only, therefore all the difficult decisions (8%- 1%) – (8%-6%) /2 = 6% consumption cut necessary) still in front of them.

France with a budget deficit of 4% and 11% unemployment (vs 7% long term expectations ) looks to me like 4% -1% – (11% – 7%) / 2 = 1% real consumption cut necessary, easily to be done, just get the retirement age in line, and take the labor laws (and 35 hours/w :- ) just half way towards more international standards.

Their high government fraction is not so different from Sweden, Denmark, this is not deadly. But of course I do prefer lower.

France ETF EWQ vs Germany EWG is ok, compare to british EWU as well, FDI situation looks good,
Compare FDI in and Outflows http://www.oecd.org/daf/inv/FDI%20in%20figures.pdf
Now does this look like investors are really scared of France?

Quite frankly, if somebody can explain to me, why I should see the UK in a more positive light, relative to France, I am all ear!

We have all our own ways to address various problems, and we also do certain things our way (Sparkassen, apprenticeships, …. )

4. Merkel

I don’t think she run circles around them. She did nothing new. If somebody blocks with some unfair, as in not really infringing on national holy cows, but more trying for horsetrading, there are ways to get around, ESM just like Schengen : – )
And then the handywork doesn’t look statesmenship, but it works : – )
I think the handywork was a lot more by the europhile old lizard Schäuble with his social democrat Asmusssen, and Jens : – )

@ francis

Quite coincidentally, this hot off the presses from the FT. “Plus ca change!”, as the French say. Fun and games in the good old European fashion.

http://www.ft.com/intl/cms/s/0/48509516-c161-11e2-9767-00144feab7de.html#axzz2Tm3Lq1q0

@’ francis

I have debated the first point repeatedly with MH. The idea that Germany has to “destroy its export business” is so embedded in the defence mounted by defenders of the status quo that it seems impossible to shift. This not what critics of German policy are seeking. What they want is a re-balancing of the economy to spread growth across all sectors.

On the irreversibility of German euro membership, even the most – indeed the first formal – eurosceptic party in the country recognises this.

@ DOCM

1. the local facts.

The vignette, or electronic maut is actually not unpopular. People in Bavaria are fed up with paying vignettes and special routes like the Brenner, and the same people driving without fees through Bavaria. Switzerland is popular, we are just too large, but Seehofer went on a learning trip for direct democracy, the “Helvetisierung Deutschlands” : – )
http://www.sueddeutsche.de/bayern/csu-chef-seehofer-mehr-direkte-demokratie-wagen-1.1283245

What got on my nerves, was formulating Ultimatums, but this is on the other hand a time honed CSU strategy preventing the political splintering on the right side.

The metal workers agreed on a wage increase of 3% per year for 2 years last week. It was noted from both sides, that the negotiation was the fastest in 50 years. It didn’t take them even to midnight on the first day. What that also shows:

You are right, we have here a lot of consensus over the whole society, from AfD to the communists, over a lot of things. “Soziale Marktwirtschaft”, Universal health care, tariff autonomy as the general concept, but even the FDP agrees now, reluctantly, on that there might have to be some minimum wages in certain areas

The HICP inflation target for the EuroArea is <= 2.0%, and with public pensions and wages frozen in places like yours, it will even out.
3 years ago I took a closer look, why these substantial CA surpluses started, and stagnant wages in the early 2000s in Germany are only a smaller part of it. And reducing marginal tax rates and bringing corporate taxes more in line with the European environment, the larger part. I had actually tried to put this into some graph, but without a lot of details and sub calculations, forget it.

2. Keynes / Multiplier

This argument, if only the German wages would rise more or the German government would run high deficits, the structural problems in the GIPSI countries would be somehow solved this I come across about twice a week in various versions.
Most the times it comes from American academic economists, thinking everything in their own American sandbox.

America is a large, unified, relatively closed economy, as is Japan. In contrast to what most people believe. Closed as in trade / GDP about 10%, and that mostly in goods which are not really elastic.
That means, if you give 1 Dollar more to an US unemployed, the most of this, 80 – 95%, will be spent the same year in the US.

But if you pay 1 dollar higher pension in Germany, only a small trickle of this would end anywhere in GIPSI countries.

What I wrote here, is extremely short, but this whole argument is very important, and I would be willing to spend some time to discuss it through, open minded, with you, because this is one of the things endlessly coming back, and trying to better understand each other and trying to get this into a more robust and hopefully agreed form, is worth the effort.

I know that we are alone here, I watch the corporate tax thread too.

Otherwise the proposal for some long , drawn out discussion of what I see essentially (90%) the same discussion as 70 years ago, between the Röpke and other Ordnungpolitik folks with the Keynes. I am just finishing the book, and mostly it reflects what I came to independently, recently.

And I realize, that there is this fundamental disconnect, which basically rules all other discussions.

Like labor market, …..

You are since a long time the first I could imagine to discuss this with, but it surely would take some time for each of us, and it maybe better to not do this in this blog. Exchange of more complex data sets, diagrams, time needed ….

Interested? Suggestions how / where to do it ?

The AfD folks I see more as tellling folks: if you want to play all or nothing, lets do that, at first theoretically; what would end for Greece or Cyprus or some others as a true long lasting catastrophe, like > 50 % permanent GDP loss, would be not nice for us, but by far not deadly, like < 5% permanent GDP loss.

Pure gut feeling numbers, but trying to put things into perspective.

Basically they are calling the bluff.

@ francis

I doubt that we can take this dialogue that much further as what we might discuss has probably little relevance to what will happen.

By way of example, two elements of the SPD programme, the introduction of a national statutory minimum wage and the scrapping of the “stay-at-home” childrens’ allowance (betreuungsgeld), would be a starting point. But will either happen?

In my opinion, France will continue being France and Germany Germany, with some degree of movement towards a more integrated single market. If the euro is to continue, these leaves only one other solution; acceptance in some form of debt-raising mutual liability (which has happened already some extent).