What’s Up Doc?

According to Wikipedia, Kabuki is a classical Japanese dance-drama known for the stylization of its plot and for the elaborate make-up worn by the key performers. This definition also seems to fit the drama in an unknown number of acts currently being acted out on the European stage by some of the continent’s leading central bank players perfectly.

It all started last Thursday when, as surely everyone but my blind and deaf uncle must now know, Mario Draghi made what is widely though to have been an important speech. We will do whatever it takes, as long as it is in the mandate, he is reported as saying. And since stopping anything which could be life-threatening to the Euro dead in its tracks forms part of the bank’s mandate under any conceivable interpretation, the ECB now have the widest possible brief within which to circumscribe their actions. The only limitation is that it should be enough, just enough, and no more. As Mario Draghi said, “believe me, it will be enough”.
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There is no pony.

Leaving aside scepticism about the Euro for a moment, and turning to the European Union, Nosemonkey argues that the idea of “auditing the costs of EU law” is silly. Well, it’s a Cameron policy proposal…but enough snark.

British Eurosceptics tend to like estimates of the “costs of regulation” a lot. But there is a big problem with this argument. Specifically, if the British public love economic libertarianism so much, why don’t they vote for it?

Getting rid of the costs of regulation by leaving the EU only makes sense if, as well as completely re-orienting foreign and trade policy, we also completely revolutionise our internal policies in a whole range of fields. The libertarian claim for Euroscepticism is that we’d have the utopia, if it wasn’t for those pesky kids, or rather, foreigners. But there is no evidence that the UK electorate would vote for this implied, but never stated, political programme. The Libertarian Alliance is not a big force in British politics, to say the least.

Further, where’s the evidence that the UK has become a more regulated economy since 1973? Europe didn’t seem to slow down Thatcher much. Big Bang, privatisation, the campaign against the unions, various macroeconomic nostrums, we got them all.

Eurosceptics should be honest, and say that they intend to leave and then pass a massive program of economic Texanisation. Or else, they should sit down and shut up – at least as far as bignum forecasts of regulatory savings go. They can’t deliver them, because the British won’t vote for them.

Meanwhile, perhaps the Euro has too many friends and the European Union too few.

No unsecured funding please, we’re French

The IMF Article IV report for the UK is as one would expect an interesting and data-packed read. But its messages were well-flagged in the concluding statement after the actual visit, and as the BBC’s Stephanie Flanders notes, the weight of its messages come more from the source than the content, which accords closely with the many critics of the Coalition austerity. So one has to look elsewhere for eye-openers in the report, to which we submit the above figure in Box 1, which shows US money market funding exposures to European banking systems. Note their almost complete disengagement from France over 8 months in 2011, a much sharper withdrawal than any other country (they were already out of the high debt countries before then) and on a scale that looks like Lehman proportions.

How was this done without a huge recession in France? Mostly by overseas asset dumps by French banks, but still, this looks like an impressive feat of balance sheet management given its scale. “Headwinds” is a popular phrase, but here there are in real life. Nicolas Sarkozy might wonder about his electoral outcomes had the country bank’s not been navigating these headwinds last year.

It’s sunk costs all the way down

Important Wall Street Journal article reporting that the ECB has changed its position on whether senior unsecured bondholders in insolvent banks can be bailed in:

The ECB’s new stance can also be explained by the different scenarios, including the existence of a bank-restructuring framework for Spain that didn’t exist for Ireland, and the fact that the Irish government, unlike Spain’s, guaranteed much of its banks’ debts.

But a chief reason [finance] ministers decided not to make more privileged bondholders take losses was the Irish precedent, two people said. Dublin has had to pump more than €60 billion, equivalent to around 40% of its annual gross domestic product, into several struggling lenders, forcing it to request a €67.5 billion bailout from other European countries and the International Monetary Fund in 2010.

Forcing senior creditors to take losses in Spain would have raised more questions in Ireland about why taxpayers were forced by the EU to take on the huge burden of repaying high-ranked bondholders.

So: Ireland’s critical error was to protect legacy bondholders who were completely stuck (the money was long since lent), but now that Ireland made that error, we can’t let Spain come up with a better policy because then there would be questions about Ireland.

Portugal – Please Switch The Lights Off When You Leave!

The recent decision by the Portuguese constitutional court to unwind public sector salary cuts included by the government in its austerity measures has once more given rise to speculation the country may not meet it’s 4.5% deficit target for 2012. The court – which ruled the non-payment of the two traditional Christmas and Summer salary payments for the years through 2014 was unconstitutional took the view that since the measure did not also apply to the private sector, it was discriminatory. Whatever view we may take on how the Portuguese Constitution defines “discrimination” the important detail to note is that the decision will not apply to 2012, and will hence only have the impact of forcing the government to find additional adjustments for 2013 and 2014, or at least a new formulation which allows them to constitutionally cut public sector pay.

Nonetheless, despite the fact it will not affect this years fiscal effort the coincidence of the timing of the court decision with the appearance of a report from the parliamentary commission responsible for monitoring the execution of this years budget only served to heighten nervousness about the possibility that, with unemployment rising more sharply than anticipated and the economic recession still accelerating, this year’s deficit numbers may not add up as planned. Continue reading

Whom The Gods Would Destroy

The Times They Are A Changin, as the old song goes. Neither in jest nor in total earnest was a truer word ever said in terms of the 2 year old Euro Debt Crisis. The to-ing and frow-ing we have seen over the last few days as commitment to decisions taken at the recent summit started to wobble only serve to underline how hard it is at times to change. These days I have no central “Euro” scenario. Only tail scenarios exist, under which the debt crisis veers in either one direction or the other according to the decisions taken or the absence of them. Naturally this makes the eventual outcome very hard to foresee, which is why the financial markets are having such a hard time of it, and why we see so much volatility.

In the case of the full banking, political and fiscal union scenario the efficient causes which could make it happen are obvious: just keep the various participants looking down into the abyss often enough and long enough. In the case of complete breakup things are rather different, since it is hard to concretise what would actually bring it about, although the risk is evident, and indeed in many ways it seem a more probable end point than the other one.

After thinking about this for some time, the conclusion I have reached is that it is towards political risk, and the progressive destabilizing of Europe’s democratic systems, that we need to look, which is what makes recent events in Romania look like something rather more than a mere historical footnote. Continue reading

ECB board member: Euro-bashing is Anglophone overload

Germany’s man at the ECB, Jörg Asmussen, in a speech about monetary policy communication today:

For the euro area and the ECB, the situation is even more peculiar, because the influential “commentariat” comes predominantly from outside the euro area. The big English-language newspapers, the news agencies and wire services that shape opinions in the economic and financial sphere on the Continent are all writing from outside the euro area. There is, of course, nothing wrong with friendly outside advice. And I certainly do not wish to come across as whining and complaining.

But it simply remains a fact: the analysis, discourse and policy prescriptions that are propagated come from the outside. Maybe inevitably, they come with a certain disinterested detachment. As if the outside “spectators” are not affected by what is happening.

And they come with a dangerously narrow and exclusive perspective on the economics of the monetary union. But if the profound political commitment of Eurozone countries to the historical project of “ever closer union” is neglected, the assessment remains superficial and partial. And the suggested policy responses may be biased or naïve.

Why does it matter? Because the discourse influences some of the most important financial markets for the Eurozone. If expectations that have been built up are not fulfilled, if alleged certainties do not materialise, if actions from politicians or central bankers are not forthcoming as anticipated by the “market consensus”, the reaction can be grave: volatility, contagion, all the way to complete market dysfunction. The systemic impact can be major, driving financial institutions, as well as sovereign borrowers into real difficulties.

It doesn’t take much extrapolation of what he says to envisage that at least in the ECB’s mind, there is a SPECTRE-like entity of cackling pundits consisting of Paul Krugman, Martin Wolf, Simon Johnson and others, though who exactly has the white cat sitting in their lap as they press “Publish” is not specified. More substantively. there is a strange symmetry between this view and the pre-crisis gloating of the European Commission that the single currency’s American critics had been all wrong.

And Then There Were Six – Is Slovenia Next?

Slovenia is in the news. According to press reports (and here) solving the problems which have accumulated in the country’s banking system may well mean the country is next in line for some sort of EU bailout assistance. Speculation was fueled last week when ECB Governing Council member and Bank of Slovenia Governor Marco Kranjec said that the country may well eventually need assistance, even if for the moment it will not be necessary. Sounds a lot like the other denials we have heard just before the “happy event”.

“We do not exclude anything … but for now this is an entirely hypothetical question,” he told his conference audience,”Conditions (in the Slovenian banking sector) are going in the bad direction, but for now I do not see a reason that Slovenia would need to ask for (international) help.” He also made the point that “Yields on our (Slovenian) debt are very high but poor availability of (financial) resources is even more worrying,” Continue reading

Lowballing German growth

The latest IMF annual surveillance report for Germany has been released. Within the constraints of the structure of these documents — by the time they are published, they reflect consensus views — it is quite interesting. The most striking thing, at least for those who don’t follow the German real economy closely, is the estimate of the economy’s potential growth rate: 1.25%. Which, by the way, it is expected to reach by the end of 2012. Nor is any prospect of this changing seen:

Moreover, with the aging of the population, the shrinking of the labor force would adversely affect potential growth over the longer term. In addition, productivity growth in the services sector unrelated to manufacturing, which provides some 60 percent of private employment and about 70 percent of value added, was about a quarter of that in goods production during 2000-07. Investment has also lagged and has contributed to external imbalances despite healthy corporate balance sheet positions.

With this perspective comes a host of conclusions that are not promising for the Eurozone as a whole: with growth about to hit potential, there’s not much room for fiscal stimulus, because even if Germany wanted to stimulate an overheated economy, the ECB would react accordingly by tightening monetary policy. So there’s a lot riding on that 1.25 percent projection.

Potential growth is roughly comprised of labour force growth and productivity growth and it seems odd that an economy of Germany’s dynamism can only eke out such a low number for these combined elements. More concretely, the IMF report notes elsewhere that (1) Germany is picking up increased migration as a result of the Eurozone crisis and (2) there has been a massive current account switch from outward capital flows to inward flows, again as a result of the crisis. In other words, Germany is going to have more workers, and it will invest more. Which sounds like the ingredients of higher potential growth — and thus more room for expansionary fiscal policy and at least accommodative monetary policy.

Thus the irony: the Eurozone crisis is having side effects that undermine the economic rationale for Germany not doing more to help ease the Eurozone crisis. Why could these effects not be incorporated into the growth discussion?