The Eurocrats are anxious not to waste the current debt crisis. In today’s Financial Times, Manfred Schepers of the European Bank for Reconstruction and Development proposes not one, but two new EU institutions, to be staffed by transfers from the senior civil services of member states, and promotions within the Brussels/Frankfurt bureaucracies. There will be a new European Monetary Fund, taking on the roles of the International Monetary Fund managing troubled sovereigns, but working on a permanent rather than temporary basis within the Eurozone. Then there will be a new European Debt Agency, managing debt issuance and deficit control for all member states. At a minimum, Schepers’ proposal will aid the Brussels and/or Frankfurt commercial real estate markets, since these bodies will need a lot of office space.
Schepers is keen to retain the ECB’s restricted mandate as a central bank without the ability to engage in quantitative easing, restricting its work to commercial bank liquidity provision and inflation control. He holds this view despite the growing evidence that this central bank design does not work, and the alternative, more flexible mandate of e.g., the Bank of England and US Federal Reserve, does work.
Much more sensible are the views (via a skype video) of Jeff Sachs suggesting that the IMF, together with a reformed ECB acting as a lender of last resort, be brought in to restore stability and confidence to the Eurozone, in the interests both of Europe and the world economy. We also get a glimpse of Professor Sachs’ chi-chi Manhattan kitchen in the background of the video.
Category: EMU
Colm McCarthy and many other commentators want the ECB to print euros to whatever extent is necessary in order to keep essentially-solvent Euro states from being unable to finance their deficits. Colm argues that this ECB-provided unlimited funding back-up can prevent an inefficient coordination-game outcome in which investors flee Euro bond markets … because other investors are doing likewise. Once the unshakeable resolve and money-printing firepower of the ECB is demonstrated clearly, the Euro crisis will diminish, in Colm’s view. Many other commentators, e.g, Gavyn Davies, Mervyn King, numerous Germans, argue that this money-printing solution will just generate an indirect subsidy of wasteful Euro governments by prudent ones, with Euro-wide inflation or eventual ECB capital losses serving as the income-transfer mechanism.
There is some talk in today’s papers of a Eurobond system linked to closer EU control over national finances. The EU’s record for governance of this type of national fiscal oversight is not good, and the core nations are rightly sceptical.
Why not a combination policy? The IMF agrees to run sovereign bailout programmes for any Euro countries as needed, with funding provided via IMF-issued, ECB-purchased bonds. The ECB gets a decent, non-exorbitant yield on all new Euros issued, and the IMF has access to an unlimited supply of Euro funding as needed. The guarantee from the IMF-ECB that Italy, Spain and France could be brought within this bailout process as needed, with no funding limits, would probably eliminate the need to bail them out at all (via the same “good equilibrium” mechanism that Colm suggests). To make it credible this programme would need to be ready to activate as needed without exception. Recalcitrant Euro governments who failed IMF programme criteria would be booted from their bailout programmes in the normal way.
Thomas Klau has written an LBS-level piece in today’s Irish Times. The substance of his argument is that Ireland and other nations must accept a further transfer of sovereignty to Europe to save the Eurozone. From the piece:
Ireland’s citizens have made a name for themselves in Europe for their particular reluctance to hand more powers to Brussels. But the disintegration of the euro zone is inevitable unless more powers are given to its joint political authorities – and Ireland should have a strong interest in such powers being exercised through means other than a Franco-German directoire.
It is now apparent that the notorious
Irish insistence on each member state retaining its own right to a European commissioner has backfired very badly: the ensuing expansion of the number of commissioners has been a main factor behind the political decline of the institution, now marginalised by a European Council largely run by Germany and France.
Here is a lesson to be learned: Irish obstreperousness gave Ireland a splendid feeling of leverage for a few months – and has lethally weakened its best ally in Brussels.
There are quite a few problems with Mr Klau’s argument, but I’ll leave our commenters to point them out.
The Irish Times ran a series on water services in Ireland.
The first article is perhaps the most interesting. It leaks the yet-to-be-published report on the water sector by PWC. PWC will apparently be fairly critical of the current system, which nicely fits with the plans by the Minister for a radical overhaul. There will be more investment in water infrastructure. There will be a water regulator. Word on the street has that the Commission for Energy Regulation will have its mandate extended to water (but not to transport). There will be national water utility. Bord Gais, Bord na Mona and the National Roads Authority are bidding to run Irish Water. Only Bord Gais has experience in mass retail.
The piece discusses the transfer of Shannon water to Dublin, but the Minister disappears from the story at that point. I would think that we first want to promote water conservation and fix the leaks.
The piece is silent on the future role of the county councils in water. If Irish Water runs the show, what will happen to the water infrastructure owned by the county councils? What will happen to the civil servants who run this?
Another article wonders what will happen to the private water schemes. Will they be nationalized? Will households with a private well and a septic tank have to pay the water charges? That would be grossly unfair.
The inspection fees for septic tanks are unfair too. Us city folk poo for free — or rather, waste water services are covered from general tax revenues. That is, septic tank owners pay for urban waste water, but city dwellers do not pay for rural waste water.
The second main piece is on drinking water quality, the problems with which are typically overlooked even though they are serious.
The third main article is on water meters. It is summarized in an editorial, and repeats a number of points I made in August. My main concern is the plan for the centralized roll out of water meters. I think that it makes more sense to have people install their own meters and let these meters use the same communication network as the smart electricity and gas meters. See the discussion here.
Conor Pope cites 1000 euro per household per year. I said that. If we maintain the current spending on water (incl. investment), if we keep the business rates for water as they are, and if we exempt those on private schemes from the water charges, then full cost recovery (as required by EU legislation) implies an annual charge of 500 euro per household per year.
If Italy is to be the Euro’s last stand, then a huge amount appears to be riding on hopes that “structural reforms” can get Italian growth going. This paper from Daniel Gros provides reasons to be sceptical.
I think Daniel’s focus on the link between governance failures and growth is a bit speculative. Still, his conclusion that “it will be difficult to organise a sustained effort to combat corruption, foster adherence to the rule of law and improve the efficiency of the administration in general” might be too negative.
If the worsening of governance and control of corruption is associated with the rule of Berlusconi, then Daniel’s arguments would imply that his departure may have greater economic benefits than currently anticipated. Alternatively, a return to short-lived and unstable coalitions may just make things worse.
Anyway, it’s worth reminding our readers that economists don’t have a good track record at explaining differences across countries in long-run growth rates. Those claiming to have the recipe to produce a spurt in Italian growth while simultaneously imposing fiscal austerity are largely relying on guesswork.