PFM Board
Medium Term Expenditure Framework => Decentralisation => Topic started by: FitzFord on April 30, 2012, 16:00:42 GMT
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As we all generally predicted, the EU crisis is far from over. I doubt that any of us expect a substantive change in direction soon. As a consequence, I would suggest that we begin to create an ongoing archive of commentary of views and selected news on this ongoing historic meltdown and (it is to be hoped!) recovery. It may make an interesting pfmboard publication for us to review and summarize the process and outcome. To start this new phase, here is my first contribution - from Larry Summers, in today's Washington Post. It is worthwhile reading for its own merits, as well: http://www.washingtonpost.com/opinions/europes-growth-challenge/2012/04/29/gIQAP0rPqT_story.html?wpisrc=emailtoafriend
What do you think?
Fitz.
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For the first time, an ECB Board member has acknowledged the possibility of Greece leaving the euro.
"Greece must be clear that it agreed to this rehabilitation program is no alternative, if it wants to remain a member of the Euro-zone," Asmussen stated clearly. [Google translation - my underlining]
http://www.handelsblatt.com/politik/konjunktur/geldpolitik/ezb-direktoriumsmitglied-asmussen-schliesst-kurswechsel-aus/v_detail_tab_print/6607004.html
Hold on to your hats!
On the plus side, the German Minister of Finance, has this week come down in favour of significant real wage increases for German workers. Increased spending power in the creditor nations of the eurozone has to be part of the re-balancing solution.
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I was in Ireland over the weekend and the Referendum on May 31st is to vote yes or no to adding a new subsection to Article 29.4 of the Constitution of Ireland.
The wording of the proposed new subsection is:
“The State may ratify the Treaty on Stability, Co-ordination and Governance in the Economic and Monetary Union done at Brussels on the 2nd day of March 2012. No provision of this Constitution invalidates laws enacted, acts done or measures adopted by the State that are necessitated by the obligations of the State under that Treaty or prevents laws enacted, acts done or measures adopted by bodies competent under that Treaty from having the force of law in the State.”
If a majority of the people vote yes, then this new subsection will be added to the Constitution and Ireland will ratify the Treaty. The Treaty will come into effect if it is ratified by at least 12 of the 17 countries which use the euro so unanimity is not required. If it comes into effect and Ireland has ratified it, the national legislation which the Treaty requires would have to be introduced within a year.
If a majority of the people vote no, this new subsection will not be added to the Constitution and the Government will not ratify the Treaty. The Treaty will come into effect if at least 12 euro area countries ratify it. Those countries which have ratified it will then be bound by its provisions.
The road side publicity was very pro Yes, but conversations over the Black Stuff did not suggest that!
Everything you want to know about the Stability Pact can be found in:
http://www.referendum2012.ie/REF00377_Booklet_Information_online_English.pdf
http://www.referendum2012.ie/summary-of-the-fiscal-stability-treaty/
http://www.referendum2012.ie/the-fiscal-stability-treaty-in-more-detail-2/
http://www.referendum2012.ie/what-you-are-being-asked-in-the-referendum/
http://www.referendum2012.ie/useful-facts/
http://www.consilium.europa.eu/media/1478399/07_-_tscg.en12.pdf
http://www.referendum2012.ie/glossary-of-terms-2/
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Here's an interesting briefing note by Paul de Grauwe showing the extent of the internal devaluations already achieved among the troubled eurozone members. The progress is actually much more impressive than I would have imagined for some. Ireland is three quarters of the way to regaining its 1999 competitiveness. Greece has also made surprising improvements. Italy has hardly begun.
The article goes on to suggest the whole process is made easier if the creditor nations undertake an internal revaluation. This helps puts the German Finance Minister's words about wage increases in perspective.
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A very interesting article: In Ireland's case, given that the UK is a major market (15.6% of exports in 2011) , the recent decline of the € against the £ might push it over the hill. There also may be a larger than average market in the USA (23.1%) relative to other Euro countries. Ireland's export sector has been doing well recently and this latest push might provide the stimulus to domestic demand from the earnings of the exporters to get the whole economy growing. Exports to EU other than UK 42.2% of total in 2011 with ROW 19.1%. It was noticeable that the price of certain "essentials" was much lower in € terms last week since the last time I was there. A Hollande led stimulus might also be beneficial.
http://uk.finance.yahoo.com/news/ireland-feels-pain-europe-turns-031217027.html
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The problem with the internal devaluation is that it is only weakly selective. While the external devaluation reduces the relative price of tradables versus non tradables, thereby increasing the competitiveness of the industries producing tradables, "internal devaluation" is difficult to target differently to the tradable and non tradable sector, so that their relative profitability is significantly changed. Thus, it tends to depress all wages and may not change at all relative prices between tradables and non tradables. Without sufficient selectiveness, terefore, the benefits may be low, while the recessionary costs may be huge.
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True - PSCANDIZZO, and further to that internal devaluation will have an effect on the labour market which may hurt tradables as highly skilled workers emigrate and immigrants return home, either through shortage of work and/or increased hostility towards immigrants (witness the PIIGS).
As for the EU Treaty / Austerity Measures it appears that there is a similar position in Greece as in Ireland. I've been in Crete for the past week, including election day, and there appears to be serious pressure for the country to accept the bailout medicine on the roadside and in the press, to the extent that it is presumed that not accepting the terms of the bailout equates with exiting the Euro. However, the people have spoken and pro-austerity parties have ended up in the minority - a seismic change in Greek politics (possibly an indication of what will happen to the treaty vote in Ireland?) . For sure, no party can form a government (the left would not entertain a coalition with the far right anti-austerity party), but the predictions are that the inevitable election later this year will strengthen the anti-austerity parties even more.
Together with France's rejection of austerity this week (or was it just rejection of Sarkozy?), it appears that we are seeing a shift in the European response to the crisis. Increases in German wages may be the first expansionary signs from the heart of Europe but surely there are more to come. It appears that Hollande has rejected calls for a meeting with the Greek left, but now that the anti-austerity cat is out of the bag it will be interesting to see how the EU institutions deal with it.
Already this week Olli Rehn, the commissioner tasked with dealing with the euro crisis, has stated "We are seizing the moment to advance our proposals in the new political climate", and was backed by the EC's President, Barroso, to increase the capital of the EIB by €10 billion next month, presumably to secure large infrastructure projects. Another €82 billion of unused structural funds could also be used in an expansionary way. Finally, Rehn indicated that fiscal conditions may be loosened (though not for Greece!!).
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Yes – PSCANDIZZO, but...............! In the context of the euro, the internal devaluation is the means to effect a currency devaluation so as to change the relative prices of domestic tradables vis-à-vis competitors provided that the export price in euro terms is reduced to reflect the internal devaluation. And what is a non tradable these days? Property and Land? This has plummeted in price which will impact on the price of tradables. Labour? As Harnett points out this is a tradable as skilled worked leave (but will return as they have done in the past), but also is transformed into tradables. However, if a country has no export base, then clearly the benefits of the internal devaluation is somewhat limited. The other important issue is the contribution of the internal devaluation to the reduction of the fiscal deficit which cannot be ignored. The issue of the recessionary cost is important, but perhaps as Harnett points out it is the time to embark on infrastructure projects that are affordable over the medium term in the context of the deficit targets. Voters will vote against austerity – who would not? But that does not mean that the adjustments to get back to an even keel are thrown out and return to the economies fuelled by policy distortions and lax banking regulation which generated unrealistic expectations. If voters see that there is light at the end of the tunnel, they might accept the package for what it. Of course, the euro could be scrapped and national currencies restored......................
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The FT reports today that the Bundesbank may be prepared to countenance a higher rate of inflation in Germany than the rest of Europe as part of the re-balancing process (apparently it's in the attached evidence, but I don't read German). This points to another softening of stance and is in line with the de Grauwe briefing note that I posted earlier.
It's interesting to note that the UK's trade weighted exchange rate has declined by over 20% since the 2007 peak, but the impact on exports and imports has not been tremendous.
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Sounds like a very long J curve!
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John Short has raised an interesting question: what are nontradables nowadays?
There is a tendency to think that globalization has reduced the number and the value of nontradables to non movable assets (such as land and property). Yet, current household surveys show that nontradables account for more than a half of consumers' budget in many advanced countries (including most EU ones). The bulk of non tradables are services of various kind. In several cases, furthermore, internationally traded goods (such as, for example, financial services) are only weak substitutes for domestically produced goods. Finally, leisure is also a major nontradable.
Many nontradables are affected by Baumol's desease, i.e. the their productivity stagnates while the productivity of the tradable sector increases. This tends to overload them with unproductive employment, as laborers are released from the more dynamic sectors in response to differential productivity increases. An overvalued exchange rate gives a premium to nontradables vis a vis the tradables, encourages consumption of leisure (thus reducing the incentive to work harder and longer hours), reduces the international competitiveness of the country and aggravates its Baumol's illness. For the countries of the EU that instead enjoy an undervalued exchange rate, of course, the tendency is the opposite and all virtous circles are reinforced at least up to the point where the whole system undergoes a global imbalance crisis.
Can internal devaluation work during a recessionary period? I doubt it. Its lack of selectiveness makes futile the attempt at changing significantly the (shadow) price of non tradables and is likely to aggravate the recession.
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Fitz,
Larry Summers took a long time to say something simple and complicated it - If it had been in Le Monde - print version we could have read the second level summary and got what he had to say - but the online version had a beautifully apposite advert about slimming...
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Hollande led... before we get too optimistic about what Francois Hollande may or may not lead, we have to await the other part of the national election process. Despite all of the best intentions of the founder(s) of the current (fifth) republic, the current "Settlement" here does allow for a Parliament actively to approve the Head of State's choice of his prime minister and council of ministers. Hollande would not be the first fifth republic president to have to 'co-habit' a policy space at home. (He is of course the first to consider the real possibility of having to treat with a Parliament led by someone of whom it would not be surprising to discover had washed his children's socks). So 'let-austerity-go-hang' may not be be a given on the home front that he can take in his bagage to Berlin when he takes up Angela's kind and prompt invitation to congratulate him, face to face, in her humble abode, on his new leadership role.
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Stone - you wonder about any changes that Hollande may deliver. Well I would like to be the first to note here the first change: from Merkozy to Merde. Worried?
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Harnett, perhaps my post was unclear (...!) - I was only commenting on the fact that there is a new person elected to a leadership role, but we have yet to identify if there will be a critical mass of followers. It was a comment on the Constitution rather than on the merits of any policy that the leader will seek followers for.
If your Merde allusion is the one that comes to mind, then one can acknowledge that the Imperial Guard and/or support did well in pushes at Jena-Auerstadt, Lutzen, Ligny and Vauchamps, but when it came to a shove and 'merde' at Waterloo the Imperial Guard was obliterated. And as an aside, whilst the Nord Rhein Westfalen elections may give Angela pause for thought at the final shove the Westphalian Landwehr Battalions fought with the Prussians perhaps as assessment of their long term interests...?
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Well maybe this post should be under macro-fiscal analysis but given the current debate regarding austerity versus stimulus in Europe I thought it should go here.
So - as we all know the USA (one country!) has been engaged in QE and a resultant fiscal stimulus for the past few years. A recent report by Fitch Ratings and Oxford Economics has analysed the impact of this stimulus and the results are positive (Big up to all you Keynesians out there!).
From the Fitch summary of the report:
"Stimulative Policies Driving Recovery: To better understand the future sustainability of the current U.S. economic recovery, Fitch Ratings and Oxford Economics have collaborated to analyze how much of the U.S.’s postcrisis economic growth is attributable to policy actions by the federal government and the Federal Reserve. Oxford Economics’ Global Economic Model (GEM) suggests that the U.S. policy response to the recession increased aggregate GDP by more than 4% two and three years after the trough of the last crisis than otherwise would have been the case (see graph...). These policies helped to support GDP growth of 3.0% in 2010 and 1.7% in 2011, implying that the U.S. might still be mired in a recession absent this stimulus. ...
Credit Implications: The current level of uncertainty associated with the future growth trajectory of the U.S. economy increases risk in general. This uncertainty, in turn, has the potential to affect the creditworthiness and credit ratings of all U.S. sectors, including corporates, municipal finance, and structured finance. A scenario of lower U.S. growth could also have global rating implications, particularly on foreign firms that rely on the U.S. as an export market. Until it becomes clearer that the economy can continue to grow sustainably without the support of stimulative policies, Fitch anticipates limited future rating upgrades within the sectors most closely tied to the U.S. economy.
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Any views on the economic and political views of the Greek New Left? How about this article in th NYT?
http://www.nytimes.com/2012/05/19/world/europe/tsipras-greek-political-star-puts-europe-on-edge.html?emc=eta1
Fitz.
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Fitz
Good to see the NYT present a reasonably balanced view of the situation. The UK press seem to be hounding Tsipras/Syriza despite him representing a majority view in Greece that the bailout should be renegotiated.
My big question is: how can Greece be kicked out of the €? What is the legal mechanism?
The Greek left have asserted they want to stay in the € but renogotiate the bailout deal. It seems the rest of the EU's leaders doesn't want the Greek left to win the election and Cameron has been charged with asserting that they will kicked out of the € if the left are voted in (scare tactics?). This appears to be a high stakes game: the Greek left will look to renegotiate the bailout or default - the former is possible but the latter is a nightmare scenario for the EC. Of course the Greek left can already point to their stance as democratic given the breakdown of the voting in the (inconclusive) election earlier this month.
I suppose the EC doesn't want to capitulate to a left leader (whose hero is Chavez in Venezuela) but it seems they may have to. At present the Greek left appear to be representing popular sentiment in Greece and this is likely to be reconfirmed in the upcoming election. The big difference between the Greek left and the rest of the European left is that the Greek left appear to reject the neoliberal consensus - the rest of the European left (Hollande, Milliband et al) are simply watering down the austerity emphasis within the neoliberal consensus. Interesting times.
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This is a remarkably prescient article from 1998 by Paul de Grauwe:
http://www.econ.kuleuven.be/ew/academic/intecon/Degrauwe/PDG-papers/FT_articles/FT%201998%2002.htm
Here's an extract:
'Suppose a country, which we arbitrarily call Spain, experiences a boom which is stronger than in the rest of the euro-area. As a result of the boom, output and prices grow faster in Spain than in the other euro-countries. This also leads to a real estate boom and a general asset inflation in Spain. Since the ECB looks at euro-wide data, it cannot do anything to restrain the booming conditions in Spain. In fact the existence of a monetary union is likely to intensify the asset inflation in Spain. Unhindered by exchange risk vast amounts of capital are attracted from the rest of the euro-area. Spanish banks that still dominate the Spanish markets, are pulled into the game and increase their lending. They are driven by the high rates of return produced by ever increasing Spanish asset prices, and by the fact that in a monetary union, they can borrow funds at the same interest rate as banks in Germany, France etc. After the boom comes the bust. Asset prices collapse, creating a crisis in the Spanish banking system.'
I picked this link up from an article in today's FT on the Ireland's debt-deflation spiral.
http://www.ft.com/cms/s/0/fa75223a-a834-11e1-8fbb-00144feabdc0.html#axzz1wExYQnFD
There are some interesting comparative statistics on public sector remuneration in Ireland in the comments.
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Just heard Paul Krugman invite the Irish to vote 'no' in the forthcoming referendum. The logic being that even if the 'good soldiers' vote against austerity, this might push the Germans into making the right move, i.e., increasing government spending, reducing taxes and allowing German inflation to get above the European average.
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It is a pity that he did not issue his advice when it was really needed and appropriate to do so: warn against awful tax policy, start a campaign against corrupt politicians, advise that bank regulation would be a “good thing” and that high public sector salaries might not be sustainable when the bubble caused by these would bust instead of promoting a “No” Vote to get the German to change policy. Does he think that the Germans will be bothered by an Irish No Vote. Ireland will sort itself out better with a No Vote and if the Germans do relax, will be in a far better position to benefit as the necessary adjustments will be in place. Go home Yanks and sort your own problems out!
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To be honest, I don't think the specific purpose of his being over this side of the water was to promote a 'no' vote. This just came up as a side issue in the interview, which was mainly concerned with US and UK fiscal policy.
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A reality check from you who are closer to the action, please. It is about a year since we started discussing this crisis. At, or near the beginning, I set out my view of a workable proposal that could deal effectively with the EU situation. Although I consider myself reasonable intelligent and somewhat experienced is pfm and especially decentralization and institutional issues, I have no illusions that I have unique intelligence. In addition, most of you, my colleagues, have made several useful comments and suggestions pertinent to the situation and its resolution. Today, I am posting some items from today's Washinton Post, including an editorial that promotes an approach to resolution that is within the ballpark of our suggestions. I know that we all have spent much of our professional lives working with, and or for, governments, and on pfm issues. My question is, do you have any insights on why seemingly well-educated and (in some cases) highly intelligent persons find it difficult to do apparently sensible things, and prefer to risks the well-being of millions of people, including those who put them in the position they occupy as leaders? I do realise that they will initially upset or alienate some/many of these people, but they truly believe that they are better off taking the bigger risks of going down blind alleys? I pose this as a serious question, because it is at the heart of what we do for a living - how do we encourage our clients to face reality about the greater good, and act accordingly?
Below are the posts:
http://www.washingtonpost.com/opinions/europes-financial-fog/2012/06/02/gJQAH6Pq9U_story.html?wpisrc=emailtoafriend
http://www.washingtonpost.com/politics/on-foreign-policy-obama-focuses-on-economic-issues-not-on-syrian-turmoil/2012/06/02/gJQAVrSX9U_story.html?wpisrc=emailtoafriend
Fitz.
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I was pleased (and relieved) that Ireland voted yes - they are showing a maturity that adjustment is a necessary evil especially when they know they have been living on distortions - I believe that sound policy will bring relative prosperity in the end which will be sustainable and lead to growth. Ireland had growth but it was build on a chimera of the politicians and their banking friends, and gladly picked up developers and "investors"- if only the distortions had not fuelled that growth excessively, the country would have been growing steadily as by and large some aspects of policy was good - investment in infrastructure and education with a pro export strategy.
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Fitz,
Paul Krugman is reported in the Guardian today by Decca Aitkenhead as suggesting an answer to your question of why seemingly intelligent people do daft things. It seems that according to Krugman they mix with the wrong sort of exciting people and are too heavily influenced by them. " Why would economists claim ordinary people were getting much richer if they weren't? "The answer, I think, has to be that you need to ask: 'Well who are the people who say these things hanging out with? What is their social circle?' It seems to make quite a lot of sense to me." (And me).
http://www.guardian.co.uk/business/2012/jun/03/paul-krugman-cassandra-economist-crisis?INTCMP=SRCH
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Stone, I have to confess that I am simultaneously a Krugman and Stiglitz fan - maybe because they generally make sense to me. It does help that they have seemed to be right in their separate ways from early on in this crisis. What is especially interesting at the moment is that the dialogue - at least in the Washinton Post - is creeping steadily towards them (and towards many of our posts on this discussion). Here are 2 more:
Fitz.
http://www.washingtonpost.com/opinions/euro-zone-on-the-brink/2012/06/04/gJQAiUOVDV_story.html?wpisrc=emailtoafriend
http://www.washingtonpost.com/business/economy/as-euro-problems-fester-ecb-eyes-a-more-perfect-economic-union/2012/06/04/gJQAYTBaEV_story.html?wpisrc=emailtoafriend
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This article in the FT suggests that Europe needs a Lehman moment to break the logjam.
http://www.ft.com/cms/s/0/5d62de3e-ab1c-11e1-b675-00144feabdc0.html#axzz1wiQANeIo
'To restore stability, the eurozone needs to institute jointly guaranteed eurozone bonds underpinned by ironclad and enforceable centralised fiscal discipline; eurozone-wide deposit insurance; and mandatory recapitalisations. But political will to do this will not be fully mobilised as long as the alternative of “buying time” appears available: politicians will always choose that option if it is open to them. Even more importantly, the necessary political will cannot be mobilised as long as any of the main beneficiaries, such as Greece, are seen as undeserving.
Greek default and eurozone exit would address both of these issues. After a Greek exit, eurozone leaders would not be able to buy further time. They would face a very clear choice: unite immediately behind a comprehensive fix to secure the countries next in line (Spain, Portugal, Ireland etc) or watch the entire eurozone project disintegrate.'
Let's hope not, because I think post-Lehman was touch and go.
Soros believes that Germany will eventually do the minimum necessary, but the cost will be long-lasting misery in the eurozone periphery. To see what that means, maybe think of Italy's mezzogiorno - 150 years after reunification and a currency union - but without the fiscal transfers.
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Fitz, I don't think agreeing with Paul 'n Joe is something you need absolution for. I'm with Mario Draghi on this: we just need a bit (lot?) of vision and less invertebrate fudging from European Economy and Finance Ministers and their Heads of State and Government bosses - chatting on Skype will not suffice.
I found Goldfarb's piece on BBC news interesting - hadn't realised California was struggling - it has some good reminders from history - that the Marshall Plan had nothing to do with altruism - just good old fashioned national interest.
http://www.bbc.co.uk/news/magazine-18281576
From a parochial point of view, the French Prime Minister's insistence that newly appointed Ministers will have to resign if they do not get elected in the forthcoming legislative elections, whilst admirable from a respect for Parliamentary democracy viewpoint, is not the best way of focussing the mind on the wood. I wonder if the European Commission has any suggestions on, er, harmonising electoral cycles in Member States.
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Petagny, The reminder of Mezzogiorno is an important one. George Soros, I hope, is being purposefully and provocatively pessimistic: who knows? it may just be an attempt at making Schaeuble blink, but having just read an interview between a very grumpy Wolfgang Schaeuble and Handelsblatt I doubt he will. (By the way - not the sort of 'interview' one would see in a French newspaper - brazen in the questioning and verbatim in the answer!).
Schaeuble (as far as my woefully neglected German allows me to glean) is clear that there will be no softening on the line that saving brings growth (in that sequence) and fiscal union is a sine qua non for any solution to the euro-crisis which in any event will not be 'comfortable" but 'just' ("gerecht") (and not 'fair' as some anglophone financial press have suggested as a translation - 'fair' is used and widely understood in German in the same way as in English.)
I'm afraid it takes me back to my first observations on Fitz's superb initiative on the EU as a decentralisation project topic that the EU is par contre a centralisation project manque.
I do so enjoy this part of the Board where we reflect and comment on a (the?) great issue of the day, but I wonder if we haven't lost our focus. As a PFM Board should we not discuss what we as PFM practitioners might suggest for establishing and, of course, enforcing "ironclad and enforceable centralised fiscal discipline" in the spirit of Fitz's observation on the EU's weak institutional arrangements? Perhaps it requires first a recapitulation (beyond me!).
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On the subject of what to be done in Europe I thought it might be interesting to try to criticise the economic policies of the anti neo-liberal SYRIZA party from Greece:
“Immediately after cancelling the memorandum, the government will repudiate the odious terms and will ask for the renegotiation of the loan agreement,” he said.
“We will push for a new restructuring with the aim of reducing our debt or a moratorium and suspension of interest payments until the economy stabilizes and shows sign of recovery,” he said. “The debt servicing must be linked to the Greek economy’s growth rate.”
Tsipras said that a prospective SYRIZA government would also immediately repeal a 22 percent reduction of the minimum wage, raising it to 751 euros per month again, and extend unemployment benefit to two years, rather than one. It would also repeal recent labor market reforms that allow employers to negotiate individual deals with their employees if a collective contract has expired.
The other immediate goals are to scrap all emergency taxes, starting with low income earners and those living close in poverty.
Tsipras set out how his government would stabilize the economy. He said public spending would be set at between 43 and 46 percent of GDP, rather than under 36 percent as agreed in the memorandum. He said this would be paid by raising revenues from 41 percent of GDP to the eurozone average of 45. The extra revenues would be raised from taxing wealth and large incomes, the SYRIZA leader said.
The leftists would immediately suspend any cuts to social spending, pensions and public sector salaries. They would also conduct a public expenditure review and form a central state body to conduct procurements.
Tsipras proposed the creation of a register for assets for Greeks living in the country and abroad. He said anyone submitting false details would have their assets seized. SYRIZA also wants to change the tax brackets to reflect the European average and to ease pressure on low incomes. Value Added Tax would also be reduced, particularly on basic goods such as milk and bread. This would also boost consumption among low income families, Tsipras said.
The SYRIZA leader said he would make greater efforts to tackle tax evasion, including the hiring of new personnel and improving the technology available. He also plans to reach an agreement with shipowners to end the 58 tax exemptions that apply to their sector. He also called for the nationalization of all banks that are being recapitalized as part of the EU-IMF bailout.
He added that his government would use revenues from oil and gas exploration and other public assets to create a fund that woud guarantee the viability of Greece’s social security system.
Tsipras said he would also make efforts to encourage depositors to return their money to Greece and to make better use of EU regional and structural funds.
“We don’t claim that there’s plenty of money,” he said. “Greek people aren’t asking for money. They aren’t beggars. They are asking for work and the ability to meet their living expenses.
“We can guarantee that this can be achieved without the harsh cuts of the memorandum,” concluded the SYRIZA leader.
From ekathimerini.com, Friday June 1, 2012 (17:59)
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Here is a different way to see (literally) the debate. It is a link to perhaps (I think) the best TV discussion program in the US. It is hosted by Charlie Rose. This is a discussion of the EU situation with Rose, Gillian Tett (Fin Times) and Joe Nocera (NYT). What fascinated me was how, at various times, they edged up to the recognition that the only conclusive solution in the realms we have been discussing, then backed away from actually stating it. I could not resist the conclusion that there is an unspoken pact not to ever be so explicit, as that may doom it ever being seriously considered. Enjoy:
Tonight on Charlie Rose:
June 12, 2012
Tonight we look at the European debt crisis with Gillian Tett of 'The Financial Times' & Joe Nocera of 'The New York Times.' Next Mark Shriver on his book “A Good Man – Rediscovering My Father, Sargent Shriver.' We close with Adam Johnson on his book 'The Orphan Master's Son.'
www.charlierose.com
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There is a story in the Telegraph today that Chancellor Merkel "addressing parliament in Berlin, rejected "miracle solutions" such as issuing joint euro bonds or creating a Europe-wide deposit guarantee scheme ... Instead, she called for gradual steps towards the "Herculean task" of building a European political union."
Should we now declare victory and begin to write Volume 1 of our proposed publication?
I think I know the likely answers, but I also think that we will all enjoy the way our colleagues express their views!
Fitz.
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Thanks Fitz - well worth watching and a decent summary of the issues, especially the importance of political reform to be made hand in hand with economic changes. of course as aid professionals we are already conversant with the issue of organisations that have numerous fingers on the decision making button (UN, EC, etc.) and how clear leadership is therefore rendered difficult. It seems to me that the only rational way forward is for Germany to press for banking union a la Barroso with political union advanced at the same time - but as is expressed in the video - this is very unlikely. I just wish they had said that if there was a committee to save the € then the deal would be to do this!!
Was a bit disappointed that the far left and far right are spoken of in the same light.
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Writing as the Greeks are at the poles it occurs to me that many of the swing voters will have woken up this morning, some of the them with sore heads no doubt, with a feeling that some national pride has been restored and that there are some things that are not wholly negative about the nation just now - in the same way that many Russians will be waking up in disbelief at what happened last night. I suspect many of them, especially where a vote for the populist and somewhat mendacious left would be for some at least an expression of anger and frustration, may now consider using their votes to embrace the pain of austerity rather than the denial of reality offered by the left. Maybe that will be enough for Greece to form a government that accepts EU conditions for their bail-out (even if this were to represent just a postponement for the ultimate rejection of EU conditions). We won't have long to wait and see in any case.
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On the 7/14 post I mentioned a story in the Telegraph that quoted Chancellor Merkel addressing Parliament, calling for gradual steps towards "the Herculean task" of building a European political union". The following day the Washington Post (can't find the paper at the moment, but if there is a request for the reference I will find it on-line) the German Finance Minister was reported as supporting for some time, the idea of a European Political Union. Clearly, this will not be achieved overnight (if at all), but various steps - a real Central Bank, a more substantial collective budget, seemed to be placed on the prospective agenda as steps towards this eventual political union. I assume that this story, in some form, must also have been circulating in Europe. There are fascinating questions to be addressed if this is to go forward. Are there other known or suspected supporters of this objective and strategy? Who might they be? What would be a credible timetable, if this was to go anywhere? I think it would be interesting to try to construct a strategy and scenario(s) by which could actually be achieved. Any takers?
Fitz.
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Fitz, sorry no original thoughts, but this is how Wolfgang Munchau summed up the present dilemma in Sunday's FT:
'The Bundesbank said there should be no banking union until there is a fiscal union. Angela Merkel said that there should be no fiscal union until there is political union. And François Hollande said that there should be no political union until there is a banking union. They have 10 days to disentangle that knot.'
Interesting that both Paul Krugman and Lawrence ('Larry') Summers are both drawing attention to the scale of fiscal transfers involved in a functioning monetary union and asking if Europe is really ready to bear them. Krugman writes in Tuesday's Herald Tribune:
'Consider, for example, what would be happening in Florida right now, in the aftermath of its huge housing bubble, if the state had to come up with the money fr Social Security and Medicare out of its own suddenly reduced revenues. Luckily for Florida, Washington rather than Tallahassee is picking up the tab, which means that Florida is in effect receiving a bailout on a scale no European nation could dream of.'
Krugman goes on to talk about the scale of the transfers following the 1980s savings and loan crisis, as does Summers (in Monday's FT):
'A good guess would be that during the US savings and loans crisis, the American south-west received a transfer from the rest of the country equal to at least 20 per cent of its gross domestic product. Is there a real will to commit to potential transfers of this scale in Europe?' [Not sure where the 20% estimate comes from as there is no reference in the article].
To finish, here's Willem Buiter in today's FT:
'The greatest fear of the core nations is not the collapse of the euro area but the creation of an open-ended, uncapped transfer union without a surrender of national sovereignty to the supranational European level.'
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petagny, If Buiter's assessment is correct, the core nations also are correct to fear this outcome. As we have been advocating, a genuine Central Government with appropriate authority is essential. The crtical aspect is to establish appropriate boundaries to that Central Government. While I do not regard the US structure to be the last word in its current manifestation, I do believe that it has the appropriate elements. I would look for an alternative to partizan selection of Supreme Court Justices, and as I have argued before, every one need not be equal in all elements except in with regard to instruments and incentives to do better. I think there is inherent fairness in categories based on performance against measures of principled behavior, and I don't believe it is beyond our ken (is that term still in use?) to design a reasonable and workable structure. Somehow, it appears that there is a huge lack of confidence that keeps everyone close to their bases. Yet it also appears that there may be a willingness to put a couple more cards on the table. (See the Washinton Post story below). It would appear that the major risks are of at least two types: waiting too long to seriously think through, and build support for, a sensible struture with sensible rules, before the system falls apart, and/or rushing to jerry-rig a solution that is easiest to sell, but in reality - to use a US phrase - kicks the can down the road, to the next crisis.
Fitz.
http://www.washingtonpost.com/world/amid-crisis-leaders-of-germany-france-italy-and-spain-meet-in-rome/2012/06/22/gJQAMaieuV_story.html?wpisrc=emailtoafriend
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Is this in accord with the current views in Europe? See attached below:
Fitz.
http://www.washingtonpost.com/world/europe/germany-offers-vision-of-a-more-perfect-european-union/2012/06/27/gJQAILtk6V_story.html?wpisrc=emailtoafriend
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A bit frivolous but might make cheery reading for those depressed by it all.
Dummies guide to what went wrong in Europe
Helga is the proprietor of a bar. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem she comes up with a new marketing plan that allows her customers to drink now, but pay later. Helga keeps track of the drinks consumed on a ledger (thereby granting the customers' loans).
Word gets around about Helga's "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Helga's bar. Soon she has the largest sales volume for any bar in town. By providing her customers freedom from immediate payment demands Helga gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer - the most consumed beverages.
Consequently, Helga's gross sales volumes and paper profits increase massively. A young and dynamic vice-president at the local bank recognises that these customer debts constitute valuable future assets and increases Helga's borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral. He is rewarded with a six figure bonus.
At the bank's corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS. These "securities" are then bundled and traded on international securities markets. Naive investors don't really understand that the securities being sold to them as "AA Secured Bonds" are really debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses. The traders all receive a six figure bonus.
One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Helga's bar. He so informs Helga. Helga then demands payment from her alcoholic patrons but, being unemployed alcoholics, they cannot pay back their drinking debts. Since Helga cannot fulfil her loan obligations she is forced into bankruptcy. The bar closes and Helga's 11 employees lose their jobs.
Overnight, DRINKBOND prices drop by 90%. The collapsed bond asset value destroys the bank's liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.
The suppliers of Helga's bar had granted her generous payment extensions and had invested their firms' pension funds in the BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations; her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.
Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multibillion dollar no-strings attached cash infusion from the government. They all receive a six figure bonus.
The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who've never been in Helga's bar.
Now do you understand?
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Will the British members and readers, especially, please comment on the attached:
Fitz.
http://www.washingtonpost.com/world/britains-continental-drift-away-from-the-european-union/2012/07/15/gJQARaQslW_story.html?wpisrc=emailtoafriend
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Not being British, but happily living there, I suspect this does represents the gripes of the woman and man in the street with respect to over regulation on not relatively important issues in the grand scheme of things, but maybe to them as individuals. However, translating this sentiment to a withdrawal vote may be a different thing. Perhaps the Vote on Scottish independence may provide a pointer!
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I have been waiting for someone to do this assessment that I have posted below - it is from the Washington Post, by one of its best investigative columnists. I was hoping that one of the monetary economists would write on this, as I don't fancy myself as better than literate in this area (I think I understand what they say), but I suspect that Ignatius has really done his usual thorough homework, and talked to knowledgeable experts. Have you read or heard of similar assessments?
Fitz.
http://www.washingtonpost.com/opinions/david-ignatius-central-banks-face-a-giant-bill-coming-due/2012/07/20/gJQALdJsyW_story.html?wpisrc=emailtoafriend
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I am breaking my promise to myself - to not post anything during the Olympics - because I could not resist this one:
http://www.washingtonpost.com/opinions/anne-applebaum-europe-must-face-up-to-ongoing-euro-crisis/2012/07/25/gJQAnYey9W_story.html?wpisrc=emailtoafriend
Enjoy the Olympics respite...
Fitz.
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I must confess that I am surprised that you are reading these postings despite much more action available in the Olympics. As I suffer from the same weakness, I thought I should acknowledge your commitment (?) with this posting from the NYT. Do any of these ideas deserve a medal? If so, what metal?
Fitz.
http://www.nytimes.com/2012/08/01/business/economic-thinkers-try-to-solve-the-euro-puzzle.html?emc=eta1
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Fitz, Just saw this in Le Monde - might dredge up an earlier part of the discussion.
http://economieamericaine.blog.lemonde.fr/2012/10/08/le-traite-budgetaire-europeen-et-la-lecon-americaine-de-1837/
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Stone,
Is there an english translation for those of us whose French is inadequate? From my limited interpretation, it does seem worth reading accurately!
Fitz.
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In case Stone does not find it in English, try
http://translate.google.com/
The quality of the transaltion has increased significantly recently.
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Thanks Napodano! I was able to read it in this version of the translator. I do think the article misses key aspects of the US Federal system: a considerable proportion of States expenditures come from the Federal budget and there are no population migration limits between States, thus those who are recklessly profligate have at least 2 sources of relief while they get their act together, while still suffering some penalty while they recover. The EU has neither of these options...
Fitz.