Some European Refoms

This post was written by Philip Lane

The WSJ reported yesterday on two interesting developments:

  • the adoption of a new approach to measure the output gap, which attributes more of the current downturn to cyclical factors - here
  • the advocacy of pan-European banks as a way to mitigate regional crises - here

(see also its “Insider’s Travel Guide to Dublin here.)

19 Responses to “Some European Refoms”

  1. colm mccarthy Says:

    Welcome back to our old friend OGWoG, the Output Gap Working Group! In the New Europe, the undefinable will be mis-measured using flexible but harmonised methodologies.

  2. DOCM Says:

    Albert Einstein reputedly had a sign on his wall that read : “Not everything that counts can be counted, and not everything that can be counted counts.”

    In the first category, we may include the calculation of the structural deficit, in the second, the dispute about the cost of the Seanad.

  3. DOCM Says:

    The link to the Bruegel paper.

    http://www.bruegel.org/publications/publication-detail/publication/792-the-neglected-side-of-banking-union-reshaping-europes-financial-system/

    From the Bruegel paper

    “This raises a central question on which Europe needs to make up its mind, and rather soon as far as non-viable banks are concerned. Governments will have to decide if consolidation of European banks will be allowed to happen across borders, thereby creating truly pan-European banks, which would improve financial stability. This would also reduce the close relationship between governments and banks, which pervades both sides of bank balance sheets, and which is perhaps Europe’s greatest financial problem.

    On the asset side, this close relationship translates into a bias towards bank lending to governments (partly encouraged by government regulation that assigns zero risk weights to government debt), or towards providing funds for politically-motivated projects with low, or even negative, financial returns. On the liability side, banks receive implicit and explicit guarantees from governments that amount to subsidies in the form of reduced funding costs. This relationship between national governments and national champion banks is incompatible with a true European banking union20. One way to weaken this link would be to impose limits on the exposure of banks to any sovereign, in particular their own.”

    Europe’s banking Humpty Dumpty having fallen off the wall, the conundrum is the necessity to stick him back together again and the difficulty of doing so (which boils down to creating a genuine single market for banking and financial services rather than continuing the pretence of doing so)

    The winding down of the bond issuing binge by governments seems certain to make banks look elsewhere for revenue. Countries in the periphery may have zombie banks, but they still need a profitable banking system.

    http://www.ft.com/intl/cms/s/0/99886c68-21fd-11e3-9b55-00144feab7de.html#axzz2fST2NrOP

  4. Joseph Ryan Says:

    “Governments will have to decide if consolidation of European banks will be allowed to happen across borders, thereby creating truly pan-European banks, which would improve financial stability. ”

    So the next time a bank goes bust, instead of the ECB deciding who gets paid (i.e thier banking buddies), we can have the pleasure of the decision to allocate the losses being made in a boardroom in Bremen, or Berlin.
    Who does the Breugel Institute think that a ‘truly pan-european’ bank will make decisions in favour of? The small depositor!!!!!.

    This is a deposit grapping exercise by the core countries, nothing more.

  5. DOCM Says:

    @ Joseph Ryan

    Would you prefer to have the Irish taxpayer, already burdened by largely zombie banks, and an enormously costly bailout, carry the can instead?

  6. Joseph ryan Says:

    @DOCM

    You may not realise this, but in the absence of an EZ mutualised banking resolution scheme, bank deposits of any nation need to be assigned to the State and protected as assidiously as the tax receipts of each State.
    Cyprus has shown, and the ECB imposition of bank losses has shown even before that, that bank losses, by mandate, will be borne either by the State or the depositors in the banks.

    Such being the case, it is sheer nonsense for any State with potential difficulties, to allow deposit flight, either in the guise of withdrawls, or under the umbrella of so called pan european bank consolidation.
    The ‘can’ in Cyprus was left to the remaining depositors, the suckers, and the people of Cyprus, while the deposits already flown ’strengthened’ the balance sheets of banks elsewhere.
    Only foolish governments, or governments whose decision makers have skin in the deposit shifting game, would tolerate such a fraudulent system.

    I would like to elaborate further but am unable to do so for the moment.

  7. DOCM Says:

    @ Joseph Ryan

    With all due respect, it seems to me that you may be mixing up bank deposits with bank safe deposit boxes.

    http://en.wikipedia.org/wiki/Safe_deposit_box

    In the first instance, the bank pays you interest for the use of the money i.e. it is at risk, in the second, you pay the bank.

    The general point is that the losses incurred by foreign banks in the Irish economic collapse are not a charge to the Irish taxpayer, although they may be to the taxpayers of their own countries.

    This is a cause for reflection.

  8. Mickey Hickey Says:

    The good news is that the anti EZ AFD, Alternative for Germany party at 4.9% will not sit in the Bundestag. The pro business Free Democrats did not make the 5% cut and are also excluded from the Bundestag. The Centre Right, Centre and left of Centre now in control means we will not be nailed to the cross any time soon. It does mean a continuation of the too little too late policies of the past five years.

  9. DOCM Says:

    @ Mickey Hickey

    I agree! However, the importance of the Bruegel paper IMHO lies in the fact that it outlines what must be done if the euro is to work correctly as a single currency. The outcome of the election in Germany is a help but the political driving force will be the realisation that there exists no real alternative.

  10. David O'Donnell Says:

    German Election Live Blog: Up-To-the-Minute Coverage

    http://www.spiegel.de/international/germany/live-blog-the-german-federal-elections-in-real-time-on-spiegel-international-a-923371.html

  11. veronica Says:

    @DoD
    Great link! Thanks.

  12. Krugman’s blog, 9/22/13 | Marion in Savannah Says:

    [...] yesterday.  The first was “The Pain In Spain Is Not Hard To Explain (Wonkish):” Via Philip Lane, the WSJ reports that the European Commission is reconsidering its methods for estimating potential [...]

  13. Dan Mclaughlin Says:

    The output gap issue could become much more significant in time for Irish fiscal policy given the new fiscal rules agreed by the euro zone and there is currently a divergence of views on what the gap is currently. The OECD put it at around -8% for 2012 and 2013, which is wildly different from the IMF at -1.8% for last year. The Dept. of Finance believe it was -1.3% in 2012, which is similar to the European Commission’s -1.5%.

  14. Dorothy Jones Says:

    What the ECB and Bundesbank say about central regulation of Banks within the EU:
    Just back in the door from the presentation at Bundesbank Filiale in Hamburg on the central Bank regulation : Bankenaufsicht:
    http://www.bundesbank.de/Redaktion/DE/Termine/2013/2013_09_23_forum_bundesbank_hamburg.html
    delivered by Thomas Volk of said Bankenaufsicht
    The talk concerned the progression of central regulation of Banks within the EU. Banks in the future should be ‘abgewickelt’ : wound down, without being a burden on taxpayers. The talk commenced highlighting the need for central Bank regulation within the EU citing the previous breakdown of communications to German Banks within the IFSC.
    At the Q&A I asked whether those Banks which were currently being wound down at a cost to the taxpayers i.e. Anglo Irish would be treated in the same manner or would there be a parallel system whereby the taxpayer burden would be lessened. No, was the answer.
    Anyone w deposits at Anglo in excess of €100k [as if] will have to pay. So Bail-In a la Cyprus IS the template.
    ‘Das Geld muss irgendwo her’ said the speaker, to a backdrop of ‘Richtig So : comments’ from the audience.
    So in case there remains any question in peoples minds : there is no foreseeable writedown or diminishment of burden to the taxpayer in Ireland in relation to winding down of Banks.

  15. seafóid Says:

    @ Dorothy

    ‘Das Geld muss irgendwo her’ - the money must be somewhere - is straight out of the 1970s.

    http://www.ft.com/intl/cms/s/0/14ab5734-5080-11e2-805c-00144feab49a.html

    “Asset prices have been artificially inflated by Central Banks” says Andrew Balls, head of European portfolio management at Pimco

    How much money is in a deflated asset price ?

  16. Shay Begorrah Says:

    @Dorothy Jones

    So in case there remains any question in peoples minds : there is no foreseeable writedown or diminishment of burden to the taxpayer in Ireland in relation to winding down of Banks.

    Rather unfortunate that the creditor protection had to be maintained until Germany was comfortable. Is there some wonderful word in German for thuggish self interest hypocritically disguised as virtue?

    A reminder, if one be needed, that EMU for Ireland means doing whatever is in the interest of larger countries at a given time and that a more Danish distance from the EU is imperative.

  17. Tullmcadoo Says:

    Dorothy,
    The BUBA would day that would they not. Faced with that risk, everybody should avoid the Irish banks and the Spanish etc and put their money into $ or £. Of course, the Target 2 balances would then rocket and stress would increase. This ultimately leads to the Draghi put,

    I am afraid somebody is going to present a bill to the core soon outlining the relative costs of bail out or get out. The periphery are going to be presented with demands to live on their reduced income as well.
    Interesting times lie ahead. I would short angela’s approval ratio here and go ling the AfD (nsdap v 2.0)

  18. Dorothy Jones Says:

    @Seafoid @Shay B @Tull
    To be honest, the formation of the Bankenaufsicht reminds me of when NAMA was formed. Despite all the arguments against NAMA back in the day including the open letter signed by 46? economists, the machine was just bigger and unstoppable.
    At Monday’s talk, it was all about process e.g. legal definition of correspondence in other languages and all about that. Completely missing he point I think, in the Same way that NAMA also does. Armies of number crunchers and lawyers and building substance rotting away because between the lot of them, they wouldn’t recognise a wrongly overlapped DPC on a building site if it jumped up and bit them on the nose. It’s like that new London Skyscraper, nicknamed ‘Fryscraper’ because the reflectivity of its glass melts cars and bicycles with people frying eggs in pans on the pavement……
    http://www.bloomberg.com/news/2013-09-05/london-s-walkie-talkie-fryscraper-draws-crowds-in-heat.html
    Oh and as for Angie : my guess is she’ll form a coalition with the Greens. Why? Because:
    -At her speech on Sunday she wore a Schwarz-Gruen Necklace #Schlandkette
    -She doesn’t pick her jewelry by chance
    -Both she and her Gallionfiguer Ursula von der Leyen wore black with blue jackets
    -Katrin Göring-Eckardt of the Greens, Trittin’s second in command, made her defeat speech as if it were a victory, dressed in black with a blue jacket, exactly like Angie and Ursula.
    The subliminal messaging among women :) It’s just a guess but I threw a fiver on a Schwarz-Green coalition anyhows.

  19. Tull Mcadoo Says:

    Always thought the CDU greens combo was worth a punt. Less jobs to give away, more jobs for AM loyalists. Politics is sometimes simple.

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