Bad arguments

We’ve gotten used to disingenuous arguments by István Székely regarding the EC/ECB stance on burning bondholders, but (given that the original interest rates they insisted on were a disgrace) this one really takes the biscuit:

Separately, the top European Commission official on the Irish bailout said critics of the decision not to impose losses on senior bank bondholders should recognise the benefit from the interest cut on Ireland’s rescue loans.

István Székely said the cut would yield €12 billion while moves to “burn” Anglo Irish Bank bondholders might have realised €3 billion.

Also, €3 billion?

Karl is right: it is too late to do anything meaningful about this, and the game has moved on. But that doesn’t mean that we should let these guys rewrite history.

A New Referendum?

My presumption has been that any set of “fiscal union” measures of the type mentioned here will require a referendum. Far more trivial international agreeements have required them, so surely this would too. Eoin reckons it can be avoided via some Lisbon-related maneuver.

I’m not a constitutional expert but some of our readers must be. What do people think? Can we get some concrete cites to the relevant articles or protocols.

Time for a Deal on ELA

Whatever happens, there’s going to be a lot of Euro summitry in the coming months. It seems clear that Germany is pushing for a swift Treaty change to introduce all sorts of legal limits on debt and deficits as the solution to the debt crisis. (You could argue it’s a bit like a flood defense plan that relies on banning rain.) In return for this, the ECB will agree to provide funds to bail out Italy and others, perhaps via turning EFSF into a bank.

Personally, I still think the economics and politics of the “Debt Treaty” approach are terrible. But it’s probably going to happen.

Given that, what should Ireland’s government do? Most likely, with the EU threatening to pull fiscal and bank funding if they don’t co-operate, our leaders will just agree to sign the dotted line at the relevant EU Council meeting and then see if they can get away with not having a referendum. (Unlikely — an Irish referendum will be one of many banana skins the process could encounter).

So here’s one thing that I think they can do. If the ECB is going to move into uncharted territory, then it’s time to ask for a small favour that will barely register as relevant when compared with a huge sovereign bond purchase scheme: Delaying repayment of the IBRC’s ELA debts. While unimportant in the European scheme of things, it would give Enda Kenny a big political win if he could announce the cancellation of the €3.1 billion March 31 promissory note payment.

If you want to read more about this, here‘s a column I’ve written for Business and Finance.

The Irish Debate on the Single Currency

I was asked by an Irish Times journalist recently if anyone had written up a review of the Irish debate on joining the single currency.  This paper of mine from 1997 came close, though it doesn’t for the most part name or ascribe  positions to the participants.  Rereading it now though, it strikes me that a lot of it remains relevant.

The Bayoumi and Eichengreen material makes clear that central control of national fiscal deficits across the eurozone – the suggestion du jour – will not remove the vulnerability of Ireland and the Mediterranean economies to asymmetric (country-specific) shocks.  This is what I was referring to in my post of a few months ago entitled:  Jean-Claude Trichet, 2004: ‘no design flaw in the euro project’.

Colm McCarthy and I agreed recently that the Irish debates (in which both of us were anti) did not identify the precise fault lines that would ultimately emerge.  Centralised eurozone banking regulation and resolution regimes – the absence of which we all now recognise as design flaws – will not address the problem of asymmetries however.

The article makes the point that “those worried about the rigidity of the single currency system argue instead for policy co-ordination alongside floating rates.  In that way the destabilising element associated with ‘maverick’ macro policies would be removed but the exchange rate would still be free to adjust to counter country-specific shocks.”

Alternatively, within the single currency, “fiscal federalism” could go some way towards correcting the problem.  The Federal Budget absorbs about one-third of  the average region-specific shock in the US; the figure for Canada is around one-fifth.  We have nothing similar in Europe.  But think of the pork-barrel politics this would (will?) entail.

And have a wry smile at footnote 11, which I had forgotten about, concerning an aspect of the debate between Patrick Honohan on the one hand and Peter Neary and Rodney Thom on the other.  (The ‘foreign currency’ refers to the euro).  How times can change!

Draghi Statement on “Fiscal Compact”

Mario Draghi’s statement before the European Parliament is available here.   

Some key paragraphs from statement:

Yet we are at a difficult stage at present. We have set up these new mechanisms, but their positive effects on the credibility of government fiscal policies are not yet visible. And the government changes that have taken place in some of the more exposed countries have not yet had much of an effect on the continuing fragility of financial markets.

Fundamental questions are being raised and they call for an answer. At the heart of these questions are not only the credibility of governments’ policies and the actual delivery of the promised reforms, but also the overall design of our common fiscal governance.

I am confident the new surveillance framework will restore confidence over time. I am also quite sure that countries overall are on the right track. But a credible signal is needed to give ultimate assurance over the short term.

What I believe our economic and monetary union needs is a new fiscal compact – a fundamental restatement of the fiscal rules together with the mutual fiscal commitments that euro area governments have made.

Just as we effectively have a compact that describes the essence of monetary policy – an independent central bank with a single objective of maintaining price stability – so a fiscal compact would enshrine the essence of fiscal rules and the government commitments taken so far, and ensure that the latter become fully credible, individually and collectively.

We might be asked whether a new fiscal compact would be enough to stabilise markets and how a credible longer-term vision can be helpful in the short term. Our answer is that it is definitely the most important element to start restoring credibility.

Other elements might follow, but the sequencing matters. And it is first and foremost important to get a commonly shared fiscal compact right. Confidence works backwards: if there is an anchor in the long term, it is easier to maintain trust in the short term. After all, investors are themselves often taking decisions with a long time horizon, especially with regard to government bonds.

A new fiscal compact would be the most important signal from euro area governments for embarking on a path of comprehensive deepening of economic integration. It would also present a clear trajectory for the future evolution of the euro area, thus framing expectations.

On the precise legal process that brings about a move towards a genuine economic union, we should keep our options open. Far-reaching Treaty changes should not be discarded, but faster processes are also conceivable.

Whatever the approach, companies, markets and the citizens of Europe expect policy-makers to act decisively to resolve the crisis. It is time to adapt the euro area design with a set of institutions, rules and processes that is commensurate with the requirements of monetary union.