Categories Uncategorized A roadmap for reform of the euro zone Post author By Philip Lane Post date August 4, 2015 14 Comments on A roadmap for reform of the euro zone I provide a brief discussion of the recent Five Presidents’ Report in this IT article – here. Related ← J.A. Hobson on the Eurozone crisis (sort of) → A 14 year old who should be very proud of herself 14 replies on “A roadmap for reform of the euro zone” The idea of an ‘Independent European Fiscal Board’ is a worrying one, if it gains the power to veto national budgets – that would effectively be removing the last shred of fiscal sovereignty, without necessarily replacing it with a central authority with the same level of democratic accountability. Plans like these, containing many different elements, tend to be implemented piecemeal – depending on what is politically palatable to the more powerful nations, like Germany – often leading to sensible-sounding plans, being implemented in a dysfunctional and dangerous way. I’m not convinced that piecemeal steps towards fiscal union like that, are workable – I think they risk becoming a significant threat to democracy – Europe is going to have to take much bigger unified steps towards fiscal union, if this is going to be done in a way that isn’t seriously dangerous. Strange that a monetary union is set up in what is far from an optimal currency area, with institutional changes then deemed necessary in an ad hoc manner over time. The idea that the overall stance of fiscal policy is important is clearly sensible but how might an ‘independent Fiscal Board’ work. For example, Germany chooses to run a chronic BOP surplus (i.e. consume less than it produces ) for reasons best known to itself so it is difficult to envisage that changing at the behest of s an external body, however constituted. A charter for technocratic and self- centred dominance of the eurozone by the vested interests of the big economic beasts….nothing in this stuff for citizens…. It is doubtful in the extreme whether any progress on a broad front will be made on what is proposed. A far more likely scenario is that the experience of actual crisis management will dictate the sequence of events, notably in dealing with Greece. The desire of European politicians to be seen by their electorates as breaking the “diabolical loop” between sovereigns (i.e. taxpayers) and their banks and the creation of investor confidence in the banking sector (essential to the establishment of an integrated capital market) are clearly incompatible. The best hope must be that the ship of the European economy will right itself without too much of their guidance. cf. http://www.bruegel.org/nc/blog/detail/article/1656-euro-area-governance-an-assessment-of-the-five-presidents-report/ Ceding further power, either monetary or fiscal, to European institutions in the aftermath of the Greek debacle is a non-runner. That European power was used to shut down the Greek economy, by forcing its banks to close; so we must of necessity assume that the concession of fiscal power could, in extremis, involve a government being told not to pay its ongoing expenditure and instead to hand over the money to financiers, either private or ‘official’; all on pain of having its economy destroyed by closing its banking system. To whose benefit now is banking union? It will clearly benefit investors, whose can invest money temporarily in a bank, and as soon as the going looks like getting sticky, those investors are gone. When the money has disappeared to greener pastures, the local banking system is expected to be ‘recapitalised’ using government funds, or by deleveraging its local balance sheet, destroying the local economy in the process. Of what use is such ephemeral investment to the local economy? The answer is none; such investment is in fact a major force for instability in the local economy. It is interesting also to note that the Troika formula for getting banks stable was to reduce the bank balance sheets to a factor limited by their ‘local deposit’ base; but ‘banking union’ seeks to reverse the process. Why? I would also query whether it is practicable or desirable to break the sovereign/ bank link, or ‘doom loop’ as it is referred to. Banks are the repository of a nations wealth. That wealth should be largely tied to the nation, through its banks and bonds, as its people are through the nations citizenship. The idea that investors should form a class of exclusive stateless people, to profit from their investment anywhere in the world, but have responsibility nowhere in the world, must begin to be challenged. Apart from all of that, I must say the idea of ESBies is an attractive idea, that is well worth pursuing. @ DOCM The report reads to me like an internal conversation between the wealthy. developed north European ‘core’. Core/periphery incompatibilities are found within countries as well as between countries, so we have probably had as much convergence as we are going to get at the broader European level. The lack of focus on the D word is telling. Everything normal. It is as if we haven’t had any Global Financial Crisis. The walls may have been strengthened, as they say, but the roof is still gone off as far as public and private debt is concerned. The main problem with establishing a sound banking sector is that the CEOs don’t want that. http://bankersnewclothes.com/ You also recently linked to Calomiris’ Fragile by Design, which nicely demonstrated the links with populist politics. What the CEOs want is the continuation of a system which can be gamed to their personal advantage, and that of their in-house and external cronies. Resulting losses to the institutions to be rectified indefinitely by the taxpayer. The notion of social responsibility simply doesn’t seem to apply to the plutocrats and the purveyors of financial ‘instruments’. . Like the arms trade, ‘I just sells ’em to anyone…I doesn’t ask what they does with them…that’s their business.’ Absent QE magic dust, which is being sprayed out by Central Banks everywhere, we would have financial Armageddon by now. Instead of challenging the conduct of the CEOs, and the show banking sector, the Central Banks have accommodated it. Naturally they will be back for more juicy financial assets, while wages and the real economy slide. Sorry. shadow banking sector When the proprietor here first drew our attention to this report: http://www.irisheconomy.ie/index.php/2015/06/22/the-five-presidents-report/ Colm McCarthy expressed his surprise that the Five Presidents thought that scaling up something like our National Comptetitiveness Council (NCC) to the EU level could work wonders. Despite doing a lot of useful analytic work, the NCC always ends with the ‘briathar saor’ – somebody somewhere should do something. It’s not its fault. It’s a council; it provides advice – which governments cheerfully ignore. What I found interesting is that the Government got very worried about this EU-level CC and the possibility that it might be used to compel it to tackle some of the powerful special interest groups which rip off ordinary citizens. It had two goes at trying to shoot it down. But it has no need to worry. Even if there an EU level CC, it’ll just be a talking shop. All it needs is for the existing competition bodies and economic regulators (at both the national and EU levels) to do their jobs properly. But there’s little chance of that happening, until ordinary citizens elect public representatives to advance their collective interests. The upsurge in support for Jeremy Corbyn in the UK Labour party’s leadership contest is quite interesting in this context. Despite, or perhaps because of, his wacky, antedeluvian statist approach to financing investment (People’s QE), his naive approach to very necessary reform of the tax system and his desire for socialism in one country he appears to have a better than sporting chance of becoming the next Labour leader in Britain. All centre-left parties in the EU have been neutered by the centre-right’s hegemony which is reflected in this 5 Presidents’ Report. It’ll prove difficult to overthrow this hegemony; but it will have to be done. But I fear that Corbynomics or Syrizanomics is not the way forward. @ PQ The two books you mention have become my references (after wading through a lot of other, largely misleading IMHO, general economic commentary). The recent broadside by a former French PM under Sarkozy, Francois Fillon, by way of open letter to Hollande suggests that the French body politic of the centre knows what needs to be done, it just does not know how to get elected to do it (to paraphrase Juncker). http://www.lejdd.fr/Politique/Francois-Fillon-a-Hollande-Monsieur-le-President-la-colere-gronde-deverrouillez-la-France-742050 “The Greek tragedy shows that the threat of bankruptcy is not abstract. A solution might have been possible earlier if you had not played a double game: rigorous in the company of Angela Merkel , complacent behind the scenes with Alexis Tsipras . Your activism to save Athens temporarily eclipse our own economic, social and financial failures. Poor growth, massive unemployment, persistent deficits, reforms minima, maxima-tax. We are one of the weak links in the European Union when we should be one of its leaders.” It remains to be seen what Hollande will do in the light of his direct participation in hammering out a deal with Tsipras on the lines demanded by Germany. @ PQ/PH The WSJ had a very good timeline on the “threat of bankruptcy” in the case of Greece. http://www.wsj.com/articles/eurozone-finance-chief-recounts-brinkmanship-that-led-to-greek-deal-1437090435 The fact that France’s credit is till good is a reflection, it seems to me, of (i) the essential resilience of the French economy and (ii) the fact that its people have evidently more confidence in the country’s banks than in its government, which, luckily, seems also to be the case in Italy. The fact that this situation is reversed in Germany suggests that the search for areas of agreement on the Five President’s Report will be in the banking sector; with the ECB. in both its monetary and – new – supervisory role. at the centre of developments. The UK will be in its usual position i.e. of taking zero political risks while keeping much more than a watching brief, as evidenced by its failure to participate in the Greek rescue. On the subject of banking “bail-ins”! http://www.ekathimerini.com/200290/article/ekathimerini/news/tsipras-sees-talks-in-final-stretch-juncker-hopeful-of-deal-in-august “The details of the planned recapitalization of Greek banks has not been finalized either. The institutions favor completing the process by the end of the year and seem to want to avoid a bail-in of depositors, as does the government.” Now, there is a surprise! This may be the most important political issue facing Ireland now with massive ramifications for the next 20 years, just like our decision to join the single currency has had massive ramifications. Apart from not having the time to educate myself on the proposals, I worry that I am not competent to analyse the impact of the proposals or to predict the long run consequences of same. It seems to me that, much like any specialised branch of study, analysis of these matters may require a grounding in economics and finance which I do not have. Based on recent experience in relation to the Euro project, I do not have even have confidence in our politicians or civil servants to understand or analyse these issues. This fear of the unknown, and lack of trust of the incumbents tasked with these matters, makes me wary of the whole project. Is this fear justified or unjustified? I am not sure. It is certainly real and is affecting political support for the Euro project even if it is not justified. If it is not justified, can this fear in the minds of many people be removed or overcome? I doubt it. Hugo Dixon of Reuters on the topic. http://blogs.reuters.com/hugo-dixon/2015/08/03/euro-zone-doesnt-need-political-union/ Yves Mersch of the ECB. https://www.ecb.europa.eu/press/key/date/2015/html/sp150714.en.html Comments are closed.