Worth a look, Breugel’s assessment of the programmes in Greece and Ireland in particular, and the differential roles and internal tensions played by the individual members of the Troika, particularly the Commission. The large effects these programmes are having on unemployment is a key feature of the report.
I dare say that readers of this blog do not all subscribe to “Le Petit Écho des Entremonts“, so here is an article I wrote for a forthcoming issue dedicated to the economy.
A holy trinity — or perhaps a troika? — of beliefs has guided policy since 2010. These are that austerity is expansionary; that the sky will fall in if ever the debt to GDP ratio exceeds 90%; and that the way to do austerity is to cut expenditure rather than raise taxes.
All of which is very convenient if what you really want to do is shrink the state.
We know how well the first two nostrums have performed when confronted with empirical evidence, so you might think that people would be just a wee bit cautious about stating the third as gospel truth. But no, here is Mario Draghi:
First, fiscal consolidation should be based on reductions in current expenditure rather than increases in taxes. Unfortunately, many of the fiscal consolidation measures were implemented in an emergency situation, with most governments choosing the simplest route, which was to raise taxes. And here we are talking about raising taxes in an area of the world where taxes are already very high, so it is no wonder that this had a contractionary effect.
Paul Krugman helpfully reminds us where this belief came from, and what happened next. The ECB is constantly telling us that it has a narrowly restricted mandate, with its primary concern being inflation. In that case, then surely the least that we are entitled to expect is that it keeps its views about the composition of fiscal adjustments to itself?
The Eurozone banking system is not working properly due to fragmentation between core and peripheral banking systems. In a recent speech, the president of the ECB, Mario Draghi, has acknowledged this, but argues that fixing this problem is someone else’s responsibility. The ECB has the tools to address this crucial flaw in the Eurozone system, and over the medium term horizon there is no other Eurozone institution that can. The ECB should use the tools available to fix this market fragmentation, in particular, the ECB should engage in aggressive, long-term asset refinancing on sufficiently generous terms to encourage bank participation. (more…)
It has been evident for quite some time that citizens right across Europe are losing faith in the European Union, and the fact is making the headlines today. If the Euro experiment needs meaningful banking union, including some element of fiscal union, and probably other “deepening” reforms as well in order to survive, and if citizens are becoming increasingly hostile to “Europe”, meaning that such reforms are politically impossible, then the Euro may be doomed in the long run. In the meantime the never-ending Eurozone crisis, caused by a flawed currency, a dysfunctional central bank, and a perverse macroeconomic policy response, is dragging the entire European project down with it.
Update: bang on cue, Spain’s unemployment rate has reached 27 percent this morning. Solving the periphery’s economic problems rather than saving the Euro really has to become the continent’s top priority. Apart from anything else, you won’t be able to do the latter if you don’t do the former.
Rarely have statistics been misused so much for political purposes as when recently the ECB published the results of a survey of household wealth in the Eurozone countries.
Thus begins a new column by Paul De Grauwe and Yuemei Ji, which points out, inter alia, that the median household wealth statistics currently being used by some German economists and commentators to justify future wealth grabs in the Eurozone periphery are in fact telling us something important about German inequality.
But it gets worse. Tim Worstall (H/T Eurointelligence) quotes the ECB report as follows:
2.2.3 VOLUNTARY PRIVATE PENSIONS/WHOLE LIFE INSURANCE
This section shows how households save for retirement using voluntary private pension
plans and/or whole life insurance contracts. Public pensions and occupational pension plans
are not considered in this report, as the value of some public pensions and occupational pension plans can be difficult for households to evaluate. Cross-country comparisons are challenging in the sense that institutional arrangements across countries with respect to the different modes of retirement savings, such as voluntary private versus public or occupational, can be quite substantial. A deeper analysis of these differences falls outside the scope of this report.
As Worstall says, this means that many households’ major asset is being excluded, essentially on the grounds that including them would be really rather difficult.
Time for the report to be consigned to the dustbin, surely, and for those people currently abusing it to spend even five minutes or so reflecting on what the likely political impact would be if their proposals were implemented.
George Soros’ recent speech on the eurozone is available here.
Simon Wren-Lewis is puzzled here.
In a must-read article, Chris Pissarides states that “far from the currency bloc acting as a partnership of equals, it is a disjointed group of countries where the national interests of the big nations stand higher than the interests of the whole.”
This sums up perfectly where the European project is today. Indeed, there isn’t even solidarity among the smaller countries, as Malta and Luxembourg seek to distance themselves from Cyprus, reminding us of many similar protestations by individual PIIGS in the past, Ireland included. Not that it did any of them any good.
Was it not bizarre to see so many anti-German posters in Nicosia last week, when by all accounts it was the Cypriot President (among others) who wanted to see small depositors hit? Actually, no, it wasn’t. We have seen several statements by German politicians saying that the Cypriot business model is dead, and I’m sorry, but irrespective of the rights and wrongs of the issue this is simply unacceptable. The IMF has the right, and duty, to opine on such matters. So does the ECB, which is supposed to care about financial stability, whatever about how it behaves in practice. Perhaps one could find a rationale for the Commission, or maybe even the Eurogroup, to express an opinion on matters such as this. But an individual member state? Formally speaking, and in any club such formalities matter, it’s none of their business. Even if it is an election year.
The EU is supposed to work according to a set of well-understood principles. If we want to re-regulate the banking sector, and we should, then the recent decision to cap bankers’ bonuses is an example of how the system is supposed to work (again, irrespective of the merits of the issue). There are proposals, there is a vote, there is a decision. Fine. I’ll have more of that please.
But that is not what we are seeing here.
It might be less difficult to swallow if the German government were caped crusaders seeking to bring the entire European financial system to heel. But we all know who has been undermining the drive to have a meaningful European system of banking supervision, and it isn’t Cyprus. And is Mr Schaüble really going to try to prevent German banks from touting for business in that island, as the FT recently reported? I don’t think so. None of this means that Merkel and Schaüble are any worse than anyone else’s politicians, but if you are the arbiter of other countries’ fates, and you aren’t any better either, then there’s going to be a backlash. Which is terrible news for Germany in the long run.
My quote of the week is from another must-read article, this time by Wolfgang Münchau, who says that
I have believed for some time that it is impossible for Germany, Finland and the Netherlands to be in a monetary union with Cyprus, Greece and Portugal. Either the two sides agree to adjust more symmetrically, politically and economically, or this experiment should end.
The argument about economically asymmetric adjustment has at this stage been done to death, and almost everyone understands it, although the German government remains resolutely, proudly, and vocally, macroeconomically illiterate. Another reason why anti-German posters at mass demonstrations are something that we will have to get used to, which is tragic. But Wolfgang’s point about politically asymmetric adjustment is just as important, and gets to the heart of the matter.
When the EU club works according to its rules, people accept the outcomes, but in crises policies are made on the hoof, and it is the powerful who call the shots. This is inevitable, but it is also very dangerous, especially since the decisions that are made at times like this have a much bigger impact on peoples’ lives than anything that typically comes out of Brussels. We have been in crisis mode for much too long now, the crisis shows no signs of going away any time soon, and the political asymmetry is becoming intolerable.
A meaningful banking union, that had the power to stick its nose into the German banking system, and had a set of ex ante mutually agreed principles regarding how to resolve banks in all member states, would help reduce political asymmetries. More expansionary monetary and fiscal policies would help make economic adjustment more symmetric. I suspect we’re going to get neither, in which case we need to end the EMU experiment before it drags the broader European project down with it.
On balance I agree with Paul Krugman’s views on whether Cyprus should leave the euro or not. And most people seem to also agree with him that there will be a Cypriot public debt crisis in the not too distant future. Given what is about to happen to their GDP, how could it be otherwise?
As regards the political benefits to Cyprus of staying in the Eurozone, which Paul advances as a possible counter-argument: the Telegraph links to a piece from the Netherlands suggesting that the EU is contemplating earmarking those future Cypriot gas revenues the island has been looking forward to, to ensure that the Troika gets its money back.
Completely logical, and utterly destructive.
Colm McCarthy has a terrific piece in today’s Sunday Independent.
To his comments about money laundering hardly being something confined to Cyprus, I would add the following link.
It seems that we still don’t know how this crisis is going to end. But here is one big dilemma that I see. Implicit in Colm’s article is a recognition that a meaningful banking union is a pre-requisite for a sustainable EMU. That means common supervision, a centrally-funded deposit insurance system, and a common, tax-payer-friendly, and (where necessary) jointly funded resolution system. The core reference on banking union remains this piece by Pisani-Ferry, Sapir and Véron. This past week’s events have clearly reinforced the case for such a banking union, which necessarily involves some element of fiscal union. Without it, EMU is a dangerous place to be.
And here is the dilemma (aside from the fact that it is being made increasingly clear that the Germans are never going to be convinced that such a system would be one involving mutual insurance, rather than one-way transfers, and that the idea of a meaningful banking union may therefore be dead in the water in any event). Do the rest of us want to get even more deeply involved with a Eurozone whose decision makers are as incompetent as this lot? And do those of us who live in small countries really want to get more deeply involved in a club in which big, powerful countries and small, weak countries are not treated as equal members?
Update: according to the FT, German banks (among others) are going after the Russian business that has up to now been located in Cyprus.
This interview with Athanasios Orphanides will ring a few bells in Dublin. I remember in the autumn of 2010, when the ECB in a similar fashion threatened to pull the plug on the Irish banking system, thinking that this was not a credible threat, since such action would de facto mean expelling Ireland from the Eurozone. Would an unelected bunch of central bankers really be willing to do something so political?
I can understand why Irish policymakers were not willing to test this logic at the time, even though I was very angry with them for giving in to ECB pressure not to burn the Irish banking system’s creditors, and still think they shouldn’t have done so.
One thing seems certain however. The ECB cannot have it both ways. It cannot simultaneously threaten to expel a member state from the Eurozone, and also expect us to believe that it will do “whatever it takes” to save the euro.
What investors (and, to be honest, I) have forgotten is that Draghi qualified his pledge: the ECB would do whatever it takes “within its mandate”. It isn’t clear that investors will continue to believe that “it will be enough”.
This piece by Nicolas Véron is well worth a read, even though it was posted yesterday and the situation is fast-moving.
You leave the computer switched off during the holiday weekend, and look what the Eurozone does while you’re away! I guess we don’t know yet what the final outcome is going to be in Cyprus, and I fully share Sharon Bowles’ hopes that we haven’t seen the final word yet.
But if small depositors are going to take a hit, then, as a reminder of what we will have lost, here is a handy set of links to various EU documents and regulations regarding banking deposits. This citizen’s summary which reflects the media reports of the time helps explain why people have persisted in leaving their money in peripheral European banks for so long. It seems mad to tear this guarantee up on the grounds that Cyprus is sui generis, since as Tolstoy (almost) said…
Update: Tuesday morning, and we still don’t know what is going to happen; maybe the guarantee for savings of less than €100,000 will be honoured. But I fear that Karl and the many other commentators weighing in on the issue this morning are right, and that the long run reputation of the EU’s claim to guarantee such deposits will suffer a big hit as a result of this debacle, no matter what ultimately happens.
Timothy Garton Ash may be on to something. 2010 was clearly a turning point, when the Eurozone decided to engage in generalized pro-cyclical austerity — whether they did this because of the dodgy ideas that were floating around at the time, or simply because conservative politicians were more adept at using the crisis to further their long term goals (in their case, to shrink the state) than Europe’s useless left is something historians can debate in the future.
Garton Ash suggests that 2012 may also have been a turning point, or rather a turning point that never was: with Hollande and Monti newly installed, there was a clear demand for a more symmetric adjustment policy from pro-European Southern leaders, and an opportunity for Germany to respond favourably– after all, Monti was their man. That response never came. All we got was a June summit declaration on banking union on which there has subsequently been much backtracking. There was nothing on making short run macroeconomic adjustment less asymmetric. And now the German government is busily making matters even worse on the fiscal front.
I don’t see any way that the Eurozone can avoid a major political crisis. If the current policy mix continues unabated for the foreseeable future, then the real economy in the southern periphery will continue to worsen — unless of course something miraculously turns up, which is a possibility which we can however safely discount. Since this situation will ultimately prove politically unsustainable, the ’steady as she goes’ scenario implies an eventual political crisis that could be quite nasty, at some unknowable date in the future — a year, or two years, or even — God help us — five or ten years from now.
But can we envisage a shift in the short run macroeconomic policy mix — looser monetary policy, more debt restructuring, a countervailing core fiscal stimulus channelled either through Germany or some EU body like the EIB — and moves towards an appropriate Eurozone architecture — a real banking union, which will require at least some element of fiscal union, and ideally some other elements of fiscal union as well — which is brought about in the absence of crisis? We have all seen how OMT has bred complacency and allowed German politicians to wriggle off the hooks on which they had been impaled last June. 2012 was a pretty good year to force change from that point of view as well; another way in which the year was a turning point that never was.
The problem of course is that a political crisis serious enough to force major reform may also lead to the collapse of the Eurozone: otherwise it won’t succeed in forcing major reform. Germany’s leaders can prove me wrong, by heeding Garton Ash’s advice and seizing their second chance. But I am afraid that they will not do so.
It isn’t Paul Krugman’s fault that the European Commission has been busily defending a macroeconomic policy mix that is doing tremendous damage to the European periphery: the EC only has itself to blame on this one. And so the latest outraged tweets emerging from the Brussels bubble are a little hard to take.
One of the tragedies of the interwar period is that the good guys — liberal internationalists — tended to support a macroeconomic policy mix that was destructive, as a result of their support for the gold standard. In so doing they helped undermine the case for liberal internationalism. It would be helpful if the cocooned elites in Brussels remembered that they are, de facto, the public face of the European project, and that when they defend the indefensible they are in their turn undermining that project.
Paul de Grauwe and Yuemei Ji have an interesting commentary on the causes and effects of austerity here.
Terrific article by Mark Mazower here.
Mario Monti has done Europe’s voters a huge service. It would have been easy for him to remain aloof during this election; by standing for election he allowed Italians to directly express their opinion on the EU’s current macroeconomic policy mix. The results are pretty conclusive: current policies have no democratic legitimacy, at least in Italy.
We all remember Jean-Claude Juncker’s statement that “We all know what to do, but we don’t know how to get re-elected once we have done it”. He got it half right: they certainly don’t know how to get re-elected. But it is also clear that they really don’t know what to do about the economy either. And this represents a huge problem for the European project, since by pinning their colours so firmly to the mast of an incoherent and destructive macroeconomic policy mix, Europe’s leaders risk doing huge damage to that project. Indeed, the damage is already occurring.
It would be nice to think that these leaders would take seriously pleas by people like Karl for a saner approach to macroeconomic policy. The evidence since September, however, is that they will sit on their hands unless forced to do otherwise by the markets: the risk of financial crisis, not the reality of peripheral unemployment crises, is what grabs their attention. Another reason to welcome the Italian vote, perhaps.
Update: Paul Krugman has a very similar reaction here.
You might have thought that the disastrous but wholly unsurprising eurozone GDP numbers indicate that the bloc is in a bad way, and will continue to be so until the current macroeconomic policy mix is jettisoned.
Happily, Olli “Don’t mention the multiplier” Rehn has good news for us:
The current situation can be summarised like this: we have disappointing hard data from the end of last year, some more encouraging soft data in the recent past and growing investor confidence in the future.
Thank goodness for that.
By Philip Lane
Monday, February 11th, 2013With thanks to Eurointelligence, here are a couple of useful antidotes to the complacency that will kill the euro unless it is abandoned: here and here.
(If Ashok is right then, contra Manasse, the Eurozone crisis will become a bit more symmetric, but he is right to query whether this will be good news for the project.)
And here is an account of a Slovenian constitutional court decision. If the account of the legal reasoning is accurate then this is quite appalling.
The FT has a sobering report here.
Just like a year ago, we are hearing a lot of guff about how the euro crisis is over, and just like a year ago the people I talk to in Brussels are becoming increasingly alarmed by the complacency of the European establishment. It does seem as though the only thing that makes Europe’s useless political class worry is the risk of imminent cardiac arrest, as proxied by bond yields and the like; but the cancer of unemployment will do just as much damage if allowed to progress unchecked.
Here are the latest Eurozone unemployment statistics. Just because we are becoming used to this sort of news does not mean that they are even remotely acceptable. They are grim.
There are certain costs that are obviously not worth paying to keep the EMU experiment going. One is a dilution of the continent’s democratic traditions. Another is unemployment rates of the sort we are seeing in Spain and Greece. No doubt crocodile tears will be shed by supporters of status quo macroeconomic policies, but such responses are no longer acceptable. EMU supporters, and €-sceptics who are worried about the costs of an EMU break-up, now have to start being very concrete in terms of proposing Eurozone economic policies, including short run monetary and fiscal policies, that can start reversing these trends in 2013. (A group of us tried to do so here, for example.) And then we need to see such policies being implemented, quickly.
You have to live through times like this to really appreciate the wisdom of Keynes’ famous line about the long run.
The markets are going into a minor tizzy this morning thanks to the news that Mario Monti is stepping down earlier than expected. And I can certainly understand why people like Beppe Grillo and Silvio Berlusconi might seem like a cause for alarm.
But what if Wolfgang Münchau is right, and the real problem in Italy right now is the austerity policies that Monti is pursuing, and that are being praised to the skies by the entire European establishment as we speak? Bang on cue, we learned this morning that Italian industrial output fell by 1.1% in October, much faster than expected. If Wolfgang is right, then what Europhiles (and the markets) should be devoutly hoping for is centrist, Europhile politicians willing to reject the status quo policies that are doing such damage. Why should Eurosceptics have all the best tunes?
One of the things that makes it possible for Europe’s politicians to persist with this nonsense is their conviction, like Mr Micawber, that something will turn up. There is no sign in Ireland that anything at all is turning up. The most important indicator of all, employment, is still falling, and you can see signs of strain all around if you care to look. At the panto last night, I was struck by the lack of sparkly fairy wands, light sabres, and all the rest compared with previous years: it really was very noticeable. And these were the people who could still afford to take their kids to the panto. Also noticeable was the almost complete absence of recession jokes, which were such a feature in 2008 and 2009. It just isn’t funny any more.
Colm McCarthy was in good form yesterday regarding this over-optimism in the Irish context. Of course, it is always possible that predictions of rapid growth just around the corner aren’t fuelled by optimism at all. It is at least theoretically possible that these growth predictions are whatever is required to make Ireland — the Eurozone’s supposed success story — seem solvent.
Mind you, you’d have to be a complete cynic to believe that such a thing was possible.
Update: Good Heavens Above. The corner appears to be receding from view in the Netherlands.
Brian O’Kelly and I have a new policy paper on Eurozone bank resolution; it is in the Special Papers series produced by the Financial Markets Group at LSE.
It would be a good thing if the leaders meeting in Brussels today were to take reports like this one seriously.
In an earlier post I drew attention to the extent to which Ireland’s recent apparent competitive gains reflected the weakness of the euro relative to the dollar and sterling.
Another component of competitiveness is, of course, our rate of inflation relative to that of the Euro area as a whole.
It is therefore of interest to put on record the inflation rates in Ireland and in the Euro area since 1999.
This is facilitated by the European Central Bank’s website, from which monthly data on the rate of inflation as measured by the Harmonised Index of Consumer Prices (HICP) may be readily downloaded.
The following Chart tells the story.
It may be seen that for the first five years of the new monetary union Ireland’s inflation rate was - contrary to expectations - significantly higher than the Euro area average. This resulted in a significant loss of competitiveness relative to the rest of the Euro area.
For the years between 2004 and 2007 our inflation rate behaved as expected in a monetary union and differed little from that of the Euro area average.
During 2009 and 2010 we experienced more deflation than the rest of the Euro area. This helped restore some of the competitiveness we had lost in the early years of membership and the ‘internal devaluation’ was hailed at the time in the belief that it would play a big role in getting the economy moving again.
Since 2010, however, our inflation rate has been climbing back up towards the Euro area average.
It would seem that any further ‘restoration of competitiveness’ will require further weakness of the euro on the foreign exchange markets.