Category: EMU

Merkel Proposing Orderly Default Framework

Mrs Merkel has been speaking in the German parliament about her latest financial proposals. In addition to defending the CDS and short-selling proposals, the Germans are apparently preparing proposals for an “orderly insolvency of euro-region states”.  In a separate story this morning, I see that former Fed Governor Rick Mishkin has been reported as follows: 

“What they should have done was to let Greece go and say we are going to ringfence the rest of the system,” Mishkin said. “Ringfence the banks, protect the other countries that have problems such as Portugal, Italy and Spain, which have not been fiscally irresponsible the way the Greeks have been.”

It’s interesting to see how far the consensus has moved. We’ve gone from the idea that no Eurozone country can be let default and the IMF can’t possibly be allowed to help to getting ready for orderly defaults.

IMF Report on Greece

Jim Hamilton at Econbrowser points towards this IMF Staff Report on Greece released a couple of days ago. The report is pretty honest about the scale of the challenge facing Greece under the plan if it is to avoid default.

Reinforcing Economic Policy Coordination

The European Commission’s proposals are laid out here.

Summary:

Reinforcing compliance with the Stability and Growth Pact and deeper fiscal policy coordination

Reinforcing the preventive dimension of budgetary surveillance, in particular in good times, must be an integral part of closer coordination of fiscal policy. Also, compliance with the rules needs to be improved and more focus needs to be given to public debt to ensure the long-term sustainability of public finances. Member States should make sure having in place effective national fiscal frameworks. Recurrent breaches of the Pact should be subjected to a more expeditious treatment.

Broaden economic surveillance to prevent and correct macroeconomic and competitiveness imbalances

To prevent the occurrence of severe imbalances it is therefore important to expand economic surveillance beyond the budgetary dimension to address other macroeconomic imbalances, including competitiveness developments and underlying structural challenges. It is proposed to upgrade the peer review of macroeconomic imbalances now carried out by the Eurogroup into a structured surveillance framework for euro-area Member States by making use of Article 136 TFEU.

A European Semester to synchronise the assessment of fiscal and structural policies of EU Member States

Specifying the proposals in Europe2020 to better align economic surveillance, every year a “European Semester” would encapsulate the surveillance cycle of budgetary and structural policies so that Member States would benefit from early coordination at European level as they prepare their national budgets and national reform programmes.

Early guidance at the beginning of each year from the European Council on economic policies would facilitate the preparation of Stability and Convergence Programmes and National Reform Programmes. For the euro area a horizontal assessment of the fiscal stance should be carried out on the basis of the national Stability Programmes and the Commission forecasts.

Beyond emergency support, moving towards a permanent crisis prevention mechanism

Financial distress in one Member State can jeopardise the macro-financial stability of the euro area as a whole. Beyond urgent action that was taken earlier in May, a clear and credible set of procedures for the provision of financial support to euro area Member States in financial distress is necessary to preserve the financial stability of the euro area in the medium and long term.

When crisis prevention fails, financial assistance should be provided by the euro area in the form of lending, while the associated policy programme and conditionality should be set within Article 136 TFEU. To raise the necessary funds, the Commission would issue debt instruments when the need occurs, as is the case for balance of payment support to non-euro-area Member States.

The way forward

The Commission stands ready to follow-up swiftly with legislative proposals, including amending the regulations underpinning the Stability and Growth Pact, to enhance the prevention and correction of macroeconomic imbalances within the euro area, and to establish a more permanent framework for crisis management.

Irish treat pain of crisis like a hangover

So writes Gillian Tett in the FT and in sharp contrast to Greece, as you can read here.

Martin Wolf provides his take on the future of the euro area here.

John Taylor criticises the European strategy here.

Debt Profiles of At Risk Eurozone Countries

Here‘s an interesting set of charts from Spiegel Online describing the debt problems of the countries who make up a certain animal-related acronymn. The graphs on the maturity profiles of the debts for each country provide a useful perspective on the stabilisation deal.