Did Wolfgang Schäuble really say this?

I’ve seen various explanations for the 2008 crisis: global imbalances, dodgy financial innovations, lack of proper financial supervision, the interaction of all of the above. And a few others besides.

But this is a new one to me, I must confess.

Karl Whelan on the summit

This excellent post by Karl deserves a thread of its own.

Democracy, the euro, and the nation state

This report from the Guardian is consistent with Thomas Klau’s argument that current eurozone governance arrangements are pushing “democratic debate and voters’ choices to the margins”. It also suggests that in the long run the present way of doing things will prove politically unsustainable, in a union of democratic states. Whether Klau’s preferred solution is likely to come about is another question entirely.

Not a new bailout?

Reuters report Minister Noonan as saying:

“There is a commitment that if countries continue to fulfill the conditions of their program the European authorities will continue to supply them with money even when the program is concluded,” Noonan told Irish state broadcaster RTE.

“The commitment is now written in that if we are not back in the markets the European authorities will give us money until we get back in the markets.”

In the event that the State cannot fund itself on the open markets, this statement would seem to imply the Minister readily expects more cash than previously agreed with the EU, IMF, UK, and Sweden. But apparently that’s not a new bailout.

Presumably this statement was intended to reduce uncertainty about Ireland’s post-2013 funding position. But these statements inject more uncertainty.

The Minister expects there will be more cash if we are good boys and girls. Ok, I can accept that. But there are important follow on questions: That’s more cash, for the same terms? On different terms? Cash from whom, using what mechanism (EFSF/EFSM/IMF/Something else)?. When, if not in 2013, will Ireland return to the markets? Is there a Greece-style road map somewhere for Ireland?

Can we see it?

These are just some of the questions raised, on the night at Macgill Summer School we hear the Taoiseach proclaiming Ireland’s intention to repay all of its creditors. which, if we’re Greece 2.0, wouldn’t be correct at all.

Plan B begins to emerge

Colm McCarthy writing on these, em, pages, a few days ago explained that Europe’s Plan A–no banks will go under, no states will default on their debts, fiscal consolidation plus recapitalisation will see us through–is being quietly dropped in favour of Plan B. Today at the EU Debt Summit we got a glimpse of what Plan B will look like. (updated to official version).

Briefly, Greece is being allowed to selectively default, but this won’t harm Greek banks (nor their French owners) because the greek bonds will be guaranteed by an enhanced European Financial Stability Facility (EFSF) that can intervene in secondary markets amongst other new powers. Other debt-laden member states, including Ireland, will have access to cheaper funds from the uber-EFSF at longer maturities.

The markets liked it too, with bank shares enjoying a nice bounce. There’s some evidence the bounce we saw on the markets was just short equity positions being cleared out, so I wouldn’t take that too seriously as an indicator of how well this new plan will go down. I don’t think many people were surprised at Greece’s default. As macroeconomic events go, the default was pretty well expected, hence the lack of jitters when it was announced.

It is to be welcomed that the Greek default is somewhat orderly and buttressed by other member states’ guarantees to reduce (or avoid completely) balance sheet contagion. What’s not so welcome are some of the phrases used in the draft document. They are vague enough to allow lots of leeway should policy makers require it, but precise enough to guarantee action of some shape or form. All this does is move debate away from ‘what will they do’ to ‘how are they going to do it’, which is unhelpful given the seriousness of the situation. This is, after all, the tenth time EU leaders have met to sort the problems in Europe out ‘once and for all’.

Paragraph 7 of the draft contains the following rather ominous sentence:

To improve the effectiveness of the EFSF and address contagion, we agree to increase the flexibility of the EFSF, allowing it to:

– intervene on the basis of a precautionary programme, with adequate conditionality

That is really worrying language. Does it mean, for example, that the EFSF can require states to implement austerity measures without negotiation with the sovereign? The language is vague enough to be quite scary.

The composition of the new beefed up EFSF isn’t reported. The only place Italy is mentioned in the draft is to get a pat on the back for its recent fiscal consolidation. Is Italy, in its current fragile state, expected to keep its share of the EFSF up? Look at the table on page 1 of this document from the EFSF showing the contributions of member states. Italy is expected to pony up up to 78 billion euros if required. More information on just where this money is coming from would be most welcome.

Another slight worry is that Ireland has agreed to talk about the common consolidated corporate tax base (ccctb), meaning that perhaps there has been a movement in the government’s position on this issue, though agreeing to talk does not mean that Ireland’s corporation tax rate (a different beast) is under threat just yet.

All in all, a lot to discuss in today’s announcements, but I don’t personally feel the EU has solved its problems to the satisfaction of all, though commenters may of course disagree.