Europe muddles through: Mediterranean edition

This Politico piece of mine argues that Europe has talked itself around to sharing the effort to rescue shipwrecked migrants in the Mediterranean, having floated a variety of draconian threats to justify getting warships down there and then quietly backed out of them.

I hang this story on the voyage of HMS Bulwark, which started off by sitting the crisis out in Turkey, was then offered by the British to take part in some ill-defined military option, and ended up being congratulated by Defence Secretary Michael Fallon and, dear God, the Daily Mail for its role in the search-and-rescue operation.

Bulwark‘s deployment is up in a few days, and the government has promised to relieve her – however, the relief is HMS Enterprise, a specialised hydrographic survey vessel of all things, lacking Bulwark‘s flock of landing craft, vast flight deck, field hospital, or headquarters facilities. The answer is that the Italians have taken over the command, with the carrier Cavour offering many of the same capabilities (less from landing craft, more from aviation).

Operation Mare Nostrum from last year has, indeed, been internationalised, and this is a major policy change. But what a manipulative and twisted way we took to get there! The lessons for other major European issues, I trust, are obvious.

Greece and Iceland, controls and controls

Now that Greece has controls on outtake from banks, capital controls, many commentators are comparing Greece to Iceland. There is little to compare regarding the nature of capital controls in these two countries. The controls are different in every respect except in the name. Iceland had, what I would call, real capital controls – Greece has control on outtake from banks. With the names changed, the difference is clear.

Iceland – capital controls

The controls in Iceland stem from the fact that with its own currency and a huge inflow of foreign funds seeking the high interest rates in Iceland in the years up to the collapse in October 2008, Iceland enjoyed – and then suffered – the consequences, as had emerging markets in Asia in the 1980s and 1990s.

Enjoyed, because these inflows kept the value of the króna, ISK, very high and the whole of the 300.000 inhabitants lived for a few years with a very high-valued króna, creating the illusion that the country was better off then it really was. After all, this was a sort of windfall, not a sustainable gain or growth in anything except these fickle inflows.

Suffered, because when uncertainty hit the flows predictably flowed out and Iceland’s foreign currency reserve suffered. As did the whole of the country, very dependent on imports, as the rate of the ISK fell rapidly.

During the boom, Icelandic regulators were unable and to some degree unwilling to rein in the insane foreign expansion of the Icelandic banks. On the whole, there was little understanding of the danger and challenge to financial stability that was gathering. It was as if the Asia crisis had never happened.

As the banks fell October 6-9 2008, these inflows amounted to ISK625bn, now $4.6bn, or 44% of GDP – these were the circumstances when the controls were put on in Iceland due to lack of foreign currency for all these foreign-owned ISK. The controls were put on November 29 2008, after Iceland had entered an IMF programme, supported by an IMF loan of $2.1bn. (Ironically, Poul Thomsen who successfully oversaw the Icelandic programme is now much maligned for overseeing the Greek IMF programme – but then, Iceland is not Greece and vice versa.)

With time, these foreign-owned ISK has dwindled, is now at 15% of GDP but another pool of foreign-owned ISK has come into being in the estates of the failed bank, amounting to ca. ISK500bn, $3.7bn, or 25% of GDP.

In early June this year, the government announced a plan to lift capital controls – it will take some years, partly depending on how well this plan will be executed (see more here, toungue-in-cheek and, more seriously, here).

Greece – bank-outtake controls

The European Central Bank, ECB, has kept Greek banks liquid over the past many months with its Emergency Liquid Assistance, ELA. With the Greek government’s decision to buy time with a referendum on the Troika programme and the ensuing uncertainty this assistance is now severely tested. The logical (and long-expected) step to stem the outflows from banks is limit funds taken out of the banks.

This means that the Greek controls are only on outtake from banks. The Greek controls, as the Cypriot, earlier, have nothing to do with the value or convertibility of the euro in Greece. The value of the Greek euro is the same as the euro in all other countries. All speculation to the contrary seems to be entirely based on either wishful thinking or misunderstanding of the controls.

However, it seems that ELA is hovering close to its limits. If correct that Greek ELA-suitable collaterals are €95bn and the ELA is already hovering around €90bn the situation, also in respect, is precarious.

How quickly to lift – depends on type of controls

The Icelandic type of capital controls is typically difficult to lift because either the country has to make an exorbitant amount of foreign currency, not likely, a write-down on the foreign-owned ISK or binding outflows over a certain time. The Icelandic plan makes use of the two latter options.

Lifting controls on outtake from banks takes less time, as shown in Cyprus, because the lifting then depends on stabilising the banks and to a certain degree the trust in the banks.

This certainly is a severe problem in Greece where the banks are only kept alive with ELA – funding coming from a source outside of Greece. This source, ECB, is clearly unwilling to play a political role; it will want to focus on its role of maintaining financial stability in the Eurozone. (I very much understand the June 26 press release from the ECB as a declaration that it will stick with the Greek banks as long as it possibly can; ECB is not only a fair-weather friend…)

Without the IMF it would have been difficult for Iceland to gather trust abroad in its crisis actions – but Greece is not only dependent on the Eurozone for trust but on the ECB for liquidity. Without ELA there are no functioning Greek banks. If the measures to stabilise the banks are to be successful the controls are only the first step.

*Together with professor Þórólfur Matthíasson I have earlier written on what Icelandic lessons could be used to deal with the Greek banks. – Cross-posted at uti.is

Club within a club

Reuters

One official said Eurogroup chair Jeroen Dijsselbloem would make a statement following the meeting of the 19 before a further meeting of the 18 with creditor institutions, including the ECB and IMF.

Greece is excluded from that latter meeting. Greece is a member of the IMF. The IMF’s Articles of Agreement give the first of its purposes as –

To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.

Is there a precedent for the IMF sitting in on a meeting of a currency union, minus one of its members, for the purposes of agreeing some kind of currency quarantine of that member?

Very, very foolish words.

This FAZ story, suggesting that Angela Merkel and Wolfgang Schäuble are not on the best of terms over negotiations with Greece and that Wolfi might even resign, should be read in the context of Merkel’s past career.

Schäuble wiederum habe nur zufällig von dem Treffen vorab erfahren und zwar nicht von der Kanzlerin, sondern weil ihm Lagarde davon erzählte, berichtet die „Bild“-Zeitung. Und zitiert einen anonym gebliebenen Berater Schäubles mit den Worten (über Merkel): „Das war eine Solo-Nummer von der Dame.“ Außerdem habe der Beamte in Schäubles Ministerium noch hinterher geschickt: „Merkel lässt sich gerade über den Tisch ziehen.“

So the Bild reckons Wolfi wasn’t invited to the meeting in Berlin where Hollande, Merkel, Juncker, Draghi, and Lagarde got together. (A Bild trigger-warning is probably appropriate, but still.) They also quote an anonymous source as saying “it was one of the lady’s solo numbers” and that Merkel “is getting the wool pulled over her eyes”.

All I can say here is: Watch out! Also, there’s this, which at least has a name attached to it and some direct speech:

„Wolfgang Schäuble geht keine faulen Kompromisse ein, er wird seine Glaubwürdigkeit nicht gefährden“, sagte der CSU-Politiker Hans Michelbach der „Bild“. Und fügte hinzu: „Und ohne Schäuble stimmt die Fraktion nicht zu.“

So, according to a CSU MP, Michelbach, the party won’t vote for anything Schäuble doesn’t support. The first problem here is that Michelbach isn’t in his party. The second, and much more important, is that there’s a word for grey men from Bavaria who patronise Angela Merkel: dead. Or at least mundtot. And just try re-reading that first quote. Either Bild really did make it up – not impossible for them – or someone really went out of their way to make trouble.

Everyone’s now rapid-rebutted the story, which of course they would have done if it was true. But nobody should doubt that she would get rid of Schäuble in a hot minute if that seemed expedient, nor that she’d be entirely willing to use SPD votes to crush Michelbach and Co, if she didn’t just call their bluff. That the AfD was last seen suing itself over whether to elect delegates to a party conference or find a hall big enough for the whole membership only underlines the point.

The graveyard is full of the indispensable, and the CDU chapel within it is full of grand sub-Helmut Kohl male egos who got in Merkel’s way.