A reader alerted me to this, which apparently is not a joke. For a horrible moment, I thought there was going to be ninety five theses but mercifully, the “people who count themselves friends of the Ifo Institute” limited themselves to sixteen.
Anyway, happy Christmas to one and all, even the friends of the Ifo Institute.
The latest attempt by the ECB to get a grip on the Eurozone crisis might work. It has the potential both to push sovereign market yields toward sustainable rates, and to block self-fulfilling institutional bank runs in which corporate deposits move to stronger Eurozone countries, draining weaker member banking systems of liquidity and credit.
Colm McCarthy was keen on a “reverse tap” in which the ECB enforces a maximum yield (minimum market price) on Italian/Spanish/etc sovereign bonds using its money-creation potential to back up this policy. The problem with his plan, in my view, was the lack of a surveillance mechanism to ensure the funded countries were continuing their needed restructuring. Germany would not accept that solution. My own preference was for the IMF to serve as conduit for sovereign funding via official IMF programs backed by ECB-funded bonds. Colm criticized this as an unnecessary intermediation by the IMF in a problem that needed to be solved by Europe.
The new ECB unlimited-three-year bank funding strategy uses the banks themselves as the monitor for sovereign discipline. It also provides direct bank liquidity so that the slow-motion institutional bank run phenomenon is less likely to lead to the negative feedback loop (corporate depositors distrust the PIIGS banks, PIIGS banks lose liquidity and restrict credit flow to their national economies, PIIGS national economies slow down due to shortage of credit, PIIGS banks suffer due to national economic slowdowns). Actually the “G” does not belong in this acronym anymore since it is a separate case. Perhaps PISI? Commercial banks in the PISI who lose corporate deposits to Germany or elsewhere can replace them with even cheaper funding from the ECB.
Might the new ECB strategy work?
A draft of the proposed Treaty has been released. I think we should be very very slow to look to put this to a referendum, if such is required (and it probably is). Many things may happen in the meantime that could derail this particular process.
In the meantime, our leaders should stop making up exciting scenarios involving Ireland leaving the euro if a treaty is rejected. That Stephen Collins vehemently disagrees with this only strengthens my conviction on this point.
The latest collection of briefing papers for the European Parliament’s Monetary Dialogue with the ECB are available here (click on 19.12.2011). Five papers (including one by me) discusses issues related to ratings agencies, prompted by the recent package of regulations proposed by the European Commission. Three other papers discuss the ongoing Euro crisis.
This could have been a useful contribution to the discussions about Target 2 if it was tweaked a bit.
For instance, the following slight re-wordings may have helped to inform rather than mislead:
Involuntary money acquisition is what happens when your spouse wins the lottery and gives you loads of money. At some point it dawns on you that you’re rich.
Or this
The bottom line: Germany’s Bundesbank—BuBa for short—has quietly, automatically received €495 billion to the European Central Bank via Target2.
Ok, no big deal. Financial journalists in getting things wrong shocker!
However, the piece does address a new aspect of the question that was not discussed in earlier discussions about the Target 2 balances. What happens if the Euro area breaks up?
Mr. Coy from Bloomberg is pretty sure it will be bad for Germany:
If the euro zone breaks into sorry little pieces, Germany could possibly lose its entire €495 billion claim. That’s more than $650 billion. It is 60 percent bigger than Germany’s annual federal budget.
But let’s take a closer look. Who is this “Germany”? Will the German residents who got their accounts credited as a result of the Target2-facilitated transfers out of Ireland now lose their money? No. There will be no losses to private citizens. Despite all this misleading stuff about “enforced lending”, German citizens will be very grateful that they managed to repatriate their money to German via Target2.
So who loses? Well, the Bundesbank has a Target2 credit from the ECB, an organisation that used to be considered sound and a good credit because they have the power to print money.
If the ECB ceases to exist and the Bundesbank wanted its balance sheet to still balance, it could simply replace the “Target2 credit” by writing itself a big check and sticking it in the vaults. Call it “Sondervermögen Ersetzen Vermögensverwaltung Früher als Target2 Kreditkarten Bekannte“ (“Special Fund Replacing Asset Formerly Known As Target2 Credit” – blame Google Translate!) Just like that, the Bundesbank’s balance sheet is balanced again.
Now watch how many commenters will try to convince you that placing a piece of paper in an empty vault will unleash hyperinflation.