The New York Times carries an article today about whether Europe is doing enough in terms of its institutional response to the financial crisis, whether in relation to management of sovereign risk in individual countries or in relation to the economic slump: you can read the article here.
“We have reached our limits,” said Axel Weber, president of Germany’s Bundesbank, in Frankfurt on Tuesday. “The expectation that we could neutralise this synchronised recession through short-term fiscal policy measures is false. We should not even try. There will be costs.”
From this. Apparently they think that the SGP is the key to preserving monetary union, rather than, say, preventing mass unemployment.
For those of us in secure employment, this is shaping up to becoming a fascinating natural experiment in applied political economy.
Update: Christina Romer has a very nice introduction to the lessons of the Great Depression for today’s policy makers here.
The ECB released what looks to me like an important document on Friday. In response to a February 26 Communication from the European Commission, it sets out the ECB’s recommended guidelines on “asset support schemes”, i.e. over-priced purchases of impaired assets by the state or under-priced state insurance of these assets. I have described my objections to these proposals a number of times and won’t go into them again here. A quick look at the ECB document didn’t reveal anything that made me more convinced of the merits of these proposals (though I may report back after I’ve had a bit more time to read the document in detail).
In the Irish context, my concern is that the EU and ECB documents seem likely to convince the government that these schemes should be pursued. However, there are other ways to go about dealing with our banking problems and a broader debate needs to be had than simply focusing on the details of how asset support schemes should be implemented.
From the FT:
Eurozone authorities would help a member-state in serious economic difficulties before it needed to turn to the International Monetary Fund because of a risk of debt default, a senior EU policymaker said on Tuesday. “If crisis emerges in one eurozone country, there is a solution before visiting the IMF,” Joaquín Almunia, the EU’s monetary affairs commissioner, said. “It’s not clever to tell you in public the solution. But the solution exists.”
Also:
Mr Almunia’s comments made clear not only that EU policymakers would not remain impassive in the face of a crisis in a eurozone country, but would act pre-emptively before a bail-out became necessary. “By definition this kind of thing should not be explained in public. But we are equipped intellectually, politically, economically,” he said.
I’m not sure that it’s really so clever to keep this solution a secret. As the FT piece notes, there are serious legal restrictions in place that can hinder this kind of thing, such as restrictions on ECB lending to governments (The ECB website states “The Eurosystem is prohibited from granting loans to Community bodies or national public sector entities.”) and the so-called no-bailout clause in the Maastricht Treary prohibiting collective liability for debts (considered “an important pillar on which the European Union was founded” by reliably hard-line ECB Executive Board member Juergen Stark.)
Would it not be better for the Eurozone countries to have an explicit debate about this and, if necessary, outline a strategy and explain why it is legal? Wouldn’t financial markets be less jittery if they could be genuinely assured that a coherent Eurozone strategy was in place?
Written by Patrick Honohan and Philip Lane, there is a new essay posted on the VOX website that seeks to explain the current state of the Irish economy and recommends a shift in fiscal strategy: you can read it here.
Update: A shorter version of the article appears in the March 1 edition of the Sunday Business Post.
Update: The article is also cross-posted at Roubini Global Monitor.