It’s not just the currency

Paul Krugman writing in June 2012 on the UK-Spain interest differential, attributing it to the constraints of currency union -

Then there’s the lender of last resort issue, which turns out to be broader than even those who knew their Bagehot realized. Credit for focusing on this issue goes to Paul DeGrauwe, who pointed out that national central banks are potentially crucial lenders of last resort to governments as well as private financial institutions. The British government basically can’t face a “rollover” crisis in which bond buyers refuse to purchase its debt, because the Bank of England can always step in as financier of last resort. The government of Spain, however, can face such a crisis – and there is always the risk that fears of such a crisis, leading to default, could become a self-fulfilling prophecy. As DeGrauwe has pointed out, Britain’s fiscal outlook does not look notably better than Spain’s. Yet the interest rate on British 10-year bonds was 1.7% at the time of writing, whereas the rate on Spanish 10-years was 6.6%; presumably this liquidity risk was playing an important role in the difference.

At the Jackson Hole Federal Reserve Bank of Kansas City central bankers symposium yesterday, one of the more interesting papers, by Faust and Leeper –

Why, if Spanish debt was in safe territory, did its 10-year bond yields begin to rise in 2011? Figure 14 suggests that more than bond-market vigilantism was in play. During the decade of good fiscal housekeeping, Spanish inflation was chronically above union-wide inflation, at times by more than a percentage point. Thoughtful observers would note that in a monetary union, Spain’s persistently higher-than-union-wide inflation rates could damage the country’s competitiveness and future growth prospects. With weak future economic growth come lower tax revenues and higher social safety-net expenditures that reduce the expected flow of Spanish primary surpluses and shift the country’s fiscal limit in toward prevailing and growing debt levels. Whether from lack of competitiveness or some other source, Spain did experience a second dip in economic growth from 2011 through the middle of 2013. Unemployment continued the upward march that it began during the recession, rising well above 20 percent before peaking at 27 percent in February 2013. These developments raised concerns about Spain’s ability to finance government debt that rose from 69 to 92 percent of GDP between 2011 and 2013. Movement of debt toward Spain’s fiscal limit coincided with an inward shift in the country’s limit distribution, a combination that Bi’s (2012) fiscal limit analysis predicts would raise risk premia.
Fiscal limits tell us that debt-GDP ratios are an incomplete—and potentially misleading— summary of a country’s fiscal health. What matters is the distance between current debt and the fiscal limit distribution. The position and shape of that distribution, in turn, depend on the great many factors that determine the discounted value of future primary surpluses. As the Spanish and U.S. fiscal stress examples illustrate, interactions between cyclical outcomes (inflation and unemployment) and longer-run developments (fiscal financing and sustainability) run in both directions to compound the confounding dynamics.

Bottom line: the interest differential that seemingly favoured the UK over Spain is about more than the Bank of England’s ability to finance the government in a crisis. It’s also about the other factors which determine the likelihood of such a crisis in the first place.

Burden sharing

Eurogroup statement on Greece –

Once approved, the full re-engagement of the IMF is expected to reduce subsequently the ESM financing envelope accordingly.

Is the Eurozone generally so transparent that the reason to have the IMF on board is to lesson the amount that a group of the world’s richest countries have to put on the table to sustain one of their own?


Growth is a driver of migration. Get used to it.

A seriously important blog post. Migration is a problem of success, not failure.

As sub-Saharan Africa increasingly rises out of deep poverty, more people can afford to emigrate and are aware that life might be better somewhere else. The propensity to migrate is positively correlated with real per-capita GDP. In Latin America, however, the correlation is negative. Potential migrants are likely to be better off at home, except the poorest of the poor.

The conclusions we can draw from this are salutary. First of all, they’re not going away. The development train has left the station, and one of its effects is that migration has become an option. Perhaps the pressure will reduce as more countries reach the middle-income level, but it’s not as if there aren’t plenty of migrants from Latin America to the US.

Second, neither calling for more development aid (that you have no intention of delivering) or giving lectures on corruption and good governance will help at all, because migrants, as opposed to refugees, are not motivated by desperation but rather by hope. Nor will yelling about “benefits”, because they’re not beggars but economic migrants in the truest sense of the word.

It’s also worth pointing out that the distinction between a refugee and a migrant is a spectrum rather than a bright line – if you can’t think of a way to persecute people by economic means you’re not trying, and as Rick points out above, development encourages movement for refugees, too.

Third, very visibly, they are following the same routes trade follows, carrying their smartphones and wearing their FC Barca shirts. You can’t have 44-tonne trucks driving in two or three days from Dover to eastern Turkey and not have people moving along the same roads.

The overwhelming conclusion is that we’ll just have to live with them. Punkt, ende. However I expect a lot of squirming on the hook before this sinks in. Like the War on Drugs or the rules of the eurozone, immigration is one of those issues where nobody believes in the system, nobody would design anything like it again, but it stumbles forward by the sheer inertia of incumbency.

What is happening to the soft Eurosceptics?

A while ago I wrote at the Pol that British public opinion had been moving steadily towards staying in the European Union. I used the YouGov poll series as my source. This is a different polling firm, Survation, but it is telling that their basic result is 45% YES, 37% NO, 18% DK. They also provide a breakdown of voters by level of conviction.


There are substantially more hard YES voters than hard NOs. Interestingly, there are fewer soft YES voters than soft NOs (12% vs 14%), which is good news for the YES – they have fewer potential switchers from their side, and more potential gains from the NOs.

Survation polled the same question back in May, and they got 47% YES 40% NO 13% DK. However, at the time they had a different relationship between soft and hard votes; 30% soft-YES, 16% hard-YES, 27% soft-NO, 12% hard-NO.

Clearly there’s movement from the “soft” category to the “hard” category. It’s not the same for the NOs as it is for the YESs, though. The percentage of hard YESs has doubled (16% to 30%), while that of soft-YESs has fallen only 4 percentage points (16% to 12%). The percentage of hard NOs has increased rather less (13% to 23%), while the soft NOs have roughly halved (28% to 14%). Although both camps seem to be firming up their vote, the YESs are gaining overall and the additional voters are coming from the soft NOs. This is roughly what I predicted in the Pol.

This is fascinating, given that since May we’ve had the #Grexit drama and a massive refugee crisis. Perhaps, though, when bits of Kent can’t restock the shops because the M20 is full of lorries parked up due to disruption at the Tunnel and the port of Calais, it’s unusually obvious that we are in fact part of Europe, and it’s not as if leaving the EU would change anything. Does anyone imagine the tunnel would be bricked up, or the flow of trade down the M20 just stop? No. Does anyone seriously want that? I doubt it.