Italy Braces Itself For The Full Monti

The Italian government, Mario Monti informed the country’s parliament last Thursday, is now planning to concentrate its attentions on achieving economic growth. A timely decision this, since the statistics office announcement a day earlier that the country had once more fallen back  into recession, while not being a surprise nonetheless does constitute a cause for concern.

Not that Italy is any stranger to recession, since the country has now had five of them since entering Europe’s Monetary Union at the turn of the century. In fact the Italian economy has now contracted in eight of the last 15 quarters, and GDP is back in the good old days of 2003, stuck below the level it first attained in the first three months of 2004. And of course it is now going backwards in time again. Depending on the depth of the recession now being provoked it is touch-and-go whether the economy might not at some point even revisit levels last seen in the closing years of the 1990s. And remember, this is not deflation ridden Japan, this is real, not nominal GDP we are talking about here. So far Italy hasn’t been experiencing deflation, or at least not yet it hasn’t. Continue reading

Is Finland Really A Closet Member Of The Eurozone Periphery?

At a time when many eyes look hopefully towards the ECB for the kind of action which may prove to be the salvation of the much beleagured Eurozone other, more critical, ones are casting themselves back over the recent track record of the institution itself, and asking what, if any, responsibility the Frankfurt-based bankers have for having allowed Euro Area government finances to fall into the sorry state they are now in. Continue reading

If you don’t want to read about the content, this is the post for you

So, a bit of Euro-summit processology and diplo-speak. Why not? This was a failure of diplomacy, after all – all the states involved are allies and have largely convergent interests, the problem is managing conflict politely, but here we are.

The first question I’d really like answered is why David Cameron didn’t take the same course as the other states that disagreed, and simply say that he needed to consult parliament. It is theoretically possible for a British prime minister to both sign and ratify treaties executively, but it’s been assumed since the first world war that they must be at least seen by the House of Commons, and anyway this one required some very serious legislation at the national level.

I can’t imagine that the Tory hard right would be anything other than delighted by the chance to kick it out, even if the fact of being consulted and given power over a real goddamnit treaty didn’t fix them in itself. Had the Commons killed it, there’s no reason why it wouldn’t just have been another ratification foul-up, like the ones we regularly have with Irish referendums and decisions from the courts in Karlsruhe. Of course, it might never have happened – the treaty will need ratifying, quite probably this will mean one or more referendums, super-majority votes, recourses to the supreme court, and the like.

This raises a further question. Why did we need all 27? They’re not all in the Euro. The Eurogroup is a thing, and the French especially are in favour of it. It is, I suppose, still considered important to pretend that everyone will one day join, but this seems a bit remote as an argument.

And why was daft pork like the location of the European Banking Authority even up for discussion? It’s the sort of thing you expect from someone like Berlusconi, whining that there’s no food in Finland in the hope of some marginal-constituency shiny. The best explanation I can think of was that somebody was hoping that this would derail the whole project, without spoiling Franco-German relations, but it got a bigger response than they expected.

Another way of looking at it is that the European Commission has come out weaker – the new new thing is a pure side-deal, even if the Commission (or at least its EMU Directorate-General) has been very austerity-minded. Either a full 27-state amendment, or a Eurogroup one, would have protected its status and special role.

But then, I seem to recall Daniel Davies arguing that the Commission could be seen as Germany’s soft currency lobby. There ought to be such a thing – it’s Germany! the great exporter! – but it often seems to be nonexistent. On the principle that a revived mark would rise relative to the euro, the logic goes, the European institutions are the lobby for a lower German currency.

If this is so, it makes a lot of sense that the German hard-currency lobby would want to cut out the Commission and even the ECB, which implies going for an intergovernmental solution. Form requires, however, that it stays officially all blue and yellow, so all 27 must be involved in a treaty revision. The French didn’t like the idea much, but liked the idea of openly disagreeing with the Germans less, and hoped the Brits would kill it. The Brits thought it was the final triumph of euro-socialism, or something, and over-reacted. As a result, it went through anyway, with any waverers whipped-in by being told that it was just the Brits being bad Europeans. I think this story fits the facts.

Not Really Uniting, to Not Really Save the Euro…Not Really

The British newspapers are full of lines like “UK vetoes EU uniting to save euro” and worse. This illuminates a huge problem with the European Union.

The first problem is that this assumes that somebody’s going to save the euro. This is an error of the same form as the classic Yes, Minister joke:

We’ve got to do something. This is something. Therefore we’ve got to do it.

Given what I’ve already said about this, I’m very far from convinced that balanced-budget amendments will “save the euro”. Further, the UK isn’t opposed to the euro as a matter of policy and you have to be very, very Commission-minded to imagine that everyone outside is secretly either desperate to get in, or else desperately trying to keep the euro from sucking them in. Also, there’s nothing intrinsically good about “uniting around” a bad idea. Being united and wrong isn’t a good thing. As we used to say at school:

Why did you do it? Lee told me to do it. If Lee told you to do it, would you jump off a cliff?

But all this is a special case of a general problem. There is a dreadful poverty of discourse about the EU. Whatever happens gets discussed in terms of europhiles vs. eurosceptics, intergovernmental vs. supranational, nation A vs. nation B. In the UK’s national context, this meant that the prime minister could announce a veto on lower reserve capital requirements for banks and be accused of selling out to the City. I mean, it’s weird enough in itself, but it doesn’t make sense to claim that he’s selling out to the banks in doing something that directly, mathematically costs them money.

It is rare that any policy proposal regarding the EU gets discussed seriously on its content, rather than as part of a specialised form of horse-race journalism. Is one nation or institution getting an edge in the game of diplomacy? Last week’s summit cut across all the standard EU dichotomies. A Tory veto on lower reserve requirements? French and German backing for a purely intergovernmental arrangement? Core European demands for aggressively procyclical economics? If you were working on any of the usual rules, you’d be completely disoriented, and it’s painfully obvious that so many people are.

So let’s discuss the merits. The headline proposal is to make everyone have a balanced-budget amendment in their national constitution. (They weren’t exactly holding back!) This sets a limit of 0.5% of GDP for the cyclically-adjusted structural budget deficit, and requires a 1/60th reduction every year in the public debt over and above 60% of GDP. This sounds pretty Hooverite, but it’s worth noting that it’s also full of language that leaves lots of room for interpretation. “Cyclically adjusted” means that there could be leeway for a stimulus, and a “structural” budget deficit is precisely whatever the person who defines “structural” wants it to be.

Further, it mentions leveraging the EFSF and states that the EFSF and ESM will operate with the European Central Bank as their agent. This sounds like something worth having, and the ECB’s announcements on Friday do suggest that there might be quite a bit more central bank liquidity coming.

It also takes note of the trade problem – at last. This is important. There is language in there that accepts that the intra-eurozone trade imbalances are a problem and that it’s not enough to flog the deficit states. However, if the budgetary outs were vague, this is far vaguer.

And finally, there were a gaggle of added extras like wanting to have all transactions in euros cleared via the ECB and maybe moving the European Banking Authority to Paris, which seems to have freaked out David Cameron something good and proper. I can’t see why this stuff should have been on a serious agenda – it’s more Silvio Berlusconi’s style – but perhaps the temptation was unavoidable, and I may come back to this in a post on the diplomatic side of the story.

In conclusion, whether this “fiscal compact” is going to be Euro-Hooverism or “hard Keynesianism” seems to depend mostly on political will and interpretation, the first being the father of the second. A reading that emphasises the hard numbers and takes an ungenerous definition of “cyclical” and “structural”, that considers the ECB’s role as “agent” to mean just acting as a broker, and that considers the clause on trade imbalances to be hot air, will give us the first.

However, a reading that takes a sceptical view of the reality of “structural”, that thinks the pits of a depression are the place to exploit a cyclical adjustment if there ever was one, and that insists on pushing the imbalances clause, would get us somewhere else entirely, especially if it also suggests that the “agent” might have more “agency” than just processing transactions.

The Extraordinary Aside

Bond contracts and diplomatic notes aren’t the only places where the casual asides can be more rewarding than the main text.

NASA announced yesterday that its Kepler space telescope has helped scientists identify an exoplanet clearly positioned in an orbit that would allow it to have liquid water on its surface.

Twice before astronomers have announced planets found in that zone, but neither was as promising. One was disputed; the other is on the hot edge of the zone. Kepler 22-B is the smallest and the best positioned of the more than 500 planets found to orbit stars beyond our solar system to have liquid water on its surface — among the ingredients necessary for life on Earth.

Good news of course, and with its mass size estimated at 2.4 times Earth’s, it’s the closest match yet to our own. But did you see what the author did right after the word “of”? Mentioned that, just by the by, humanity has now found more than 500 planets orbiting stars beyond our solar system. Five. Hundred.

Moreover, “With the discovery, the Kepler space telescope has now located 2,326 potential planets during its first 16 months of operation.” I’ve written about this before, but it never ceases to amaze. This is what living in the future is like.

ps Six years ago, the smallest confirmed exoplanet had a mass size of about seven times Earth’s. The intervening years have tripled the precision of humanity’s detection capabilities.

Chart of the week, IMF edition

Via the TUC Blog, this chart from the IMF is worth studying. It shows the sources of public debt in Europe since 2007 for Germany, Italy, France, and the UK.

You will notice that: yes, Virginia, the Germans bailed out the banks. Also, the Germans carried out the biggest discretionary fiscal stimulus in Europe at 5% of GDP. In all, German public debt increased as a percentage of GDP by more than Italy or France’s and second only to the UK’s. Also, Italy’s problems are entirely to do with growth or else with interest rates. And it looks like the political ability to pull in taxes is pretty important (something Daniel Davies pointed out not so long ago).

Irrelevant Merkozy

So “Merkel acts to save the euro”, as various British headline writers misleadingly put it. This action consists of proposing that the 17 eurozone states make a side-agreement – therefore not requiring a full Inter-Governmental Conference – to have a European authority scrutinise their budgets and fine them if they run big budget deficits. Crucially, this would be approved by qualified-majority voting rather than unanimity, so there would be no national veto over the sanctions. It is somehow amusing how literally every great and little issue in the European Union seems to end up in a row about qualified-majority voting. Of course, this is an example of the basic truth that politics is about power. But it is in practice pretty rare that the distinction matters much.

Now, don’t kid yourself that any of this is going to happen quickly. All 17 will have to get round a table, agree, ratify, etc. Although Merkel apparently said that it wouldn’t affect German sovereignty (I’m moving home and reliant on spotty Internet connectivity, so I don’t have her actual words to hand, so this may be wrong), I find it hard to imagine that the same little caucus of law professors as always will not demand that the Constitutional Court rule on the matter, so we’ll probably be waiting a good long time while the sages of Karlsruhe mull it over.

But speed is not really the biggest problem here. It’s a big problem – one of the underreported issues in the mainstream media is the degree to which this crisis is still about banks and the dread of a run on the banks, and few things move faster than a bank crisis. Here’s a data point – the volume of funds banks (and big industrial companies that happen to have a bank licence somewhere around, like Siemens) are holding on deposit at the European Central Bank, for fear of putting them anywhere else, is spiking. But it’s not the only problem with this proposal. The problem with this proposal is that it is simply irrelevant in terms of its content.

Had it been in force through the 2000s, what would have been different? It would have been much easier to sanction the decade’s violators of the Stability & Growth Pact – Germany and France. Of course they got sanctioned anyway, but perhaps they would have had to pay a fine. Let’s be charitable for a moment and assume that this would indeed have caused them to run a lower public sector deficit. This would have changed what, precisely? Had it depressed internal demand in Germany, all other things being equal, it would have caused Germany to increase its trade surplus. A bigger trade surplus implies a bigger deficit elsewhere, and it also implies that German and French banks would have lent the private sector “elsewhere” the money they needed to buy the additional exports. An additional problem might have been that, had German bonds been in shorter supply, investors would have sought other AAA-rated assets and piled up even more bubbly mortgage-backed securities, which the banks would have been delighted to sell them.

Perhaps lower deficits in Germany or France would have inspired German and French consumers to spend via the magic of Ricardian equivalence, but this does feel awfully like assuming a pony. You can argue about that.

But one thing this proposal would categorically not have done is to stop Italy or Spain or Ireland running up more public debt. Public debt fell in these countries from 1995 to 2007. Even Portugal and Greece didn’t exactly explode. Ireland would still have a budget surplus if it hadn’t massacred itself to save the banks (in part because the ECB wouldn’t help). Greece, well, perhaps, but it seems to be clear that just yelling at the Greeks is insufficient to fix Greece’s problems.

Public debt/GDP for EU crisis states, 1995-today

We’ve had a massive asset price bubble, funded by an explosion of private debt, largely borrowed from a few huge banks that grew to enormous size processing the international settlements required by the huge intra-eurozone trade imbalance. But this proposal says nothing about asset prices, private debts, banks, or trade, and very little about growth. Instead, if we were to try to reverse engineer this proposal’s purpose from its design, we would have to conclude that the source of the eurozone crisis is that the German Government has too much debt.

And I think we can all agree that, whatever explanation you prefer for the crisis, that isn’t it.

There are other problems, too. The combination of “Durchgriffsrechte” – rights of direct intervention – with no eurobonds has toxic politics, as it gives whoever will “durchgreifen” power without giving them any responsibility, and also doesn’t give the other eurozone states any benefit (like lower interest rates) in exchange for this concession. It seems hard to imagine why anyone would accept this.