Category Archives: Economics: Currencies

ECB decides now is not the time for complexity

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Strangely timed ECB announcement –

The Governing Council of the European Central Bank (ECB) has decided to discontinue the preparations for the Collateral Central Bank Management (CCBM2) project in its current form. In the project detailing phase, a number of challenges in the field of harmonisation were identified and the Eurosystem has decided to address these issues first before proceeding further with a common technical platform. The existing Correspondent Central Banking Model (CCBM) for cross-border collateral management remains in place.

Tracking back through the link trail, it seems that CCBM2 is a project that has existed since 2007, and was being jointly led by the Central Banks of Belgium and the Netherlands. It was focused on unifying the platforms for handling of cross-border collateral posted with the national central banks. Now while the functions of CCBM2 embraces some hot-button issues such as collateral and Target2 balances, this all appears to be a sensible decision that an IT-heavy project was dragging on, getting more complicated than first envisaged, and probably diverting time from other more important tasks. But with the fevered speculation out there about this weekend, did this seem like a good day to bury bad news that could instead be the wrong day to be telling people that the Eurosystem collateral management system has a few holes in it that won’t be fixed for a while?

 

Some thoughts on institutional capacity in South-Eastern Europe

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Now everyone’s seen the title and stopped reading…Nouriel Roubini has a simple plan for Greece:

Grezxit path: election, default, exit, capital controls, deposit freeze, drachmatization of euro claims, depreciation, return to growth/jobs

Bada bing, bada boom, and it’s peace and jobs and freedom all the way up. Dr Doom makes it all sound so simple, stuffed into 140 characters. Now, I’m sympathetic to the Greeks here, and I think that, for example, the idea of imposing nominal wages cuts across the private sector is not just counterproductive but getting on for gratuitiously cruel. But I think we could do without 140 character eurozone exit plans.

What is being suggested here is a stupendous exercise in sheer administration and logistics. Apart from the problem of issuing a new currency, it’s probably going to be necessary to pull this off as a surprise. Obviously nobody will be very surprised, but there is such a thing as tactical surprise as well as strategic surprise, and although the capital flight is inevitable, less of it would be much better. All kinds of contracts must be re-written, and it’s important to get it right first time in order to minimise the amount of vulture-fund tiresomeness down the track.

Setting up capital controls basically means shutting off international payments, and without fucking up so badly that it will be impossible to start things going again. There are all sorts of trappy administrative details – what happens to OTE’s balance with their roaming partners? Olympic Airways aircraft down-route? And there’s the oil question. Some people seem to think motor fuel rationing is literally the worst thing in the world, some would disagree, but nobody would argue that a good, solid, tested contingency plan is vital.

These are all the kinds of questions Sir Humphrey Appleby would have asked. I was wondering what the Greek equivalent of Sir Humphrey was, until I realised that of course the concept is absurd. Humph is a satire of a powerful, independent, professional, and highly competent civil service, and if Greece had anything like that, it might not be in this mess.

J. K. Galbraith remarked that poverty is an equilibrium state. Now, a government that literally can’t bring in the taxes with a gun to its head isn’t something that arises by accident. There is a qualitative difference between one that could perhaps do more to collect on super-rich individuals who go to expensive and inconvenient lengths to pay no tax (like, for example, Sweden), but generally collects every damn penny it can, one that is a bit flaky but which will, by default, collect your income tax routinely (like France), and one that makes it harder to pay your taxes than not. Being that perverse takes effort, and it happens for a reason, that being “keeping the political nation together and keeping politics mostly non-lethal”.

We could go on, and we’d discover that the history of how things got this way places a lot of responsibility on the UK, Germany, the Soviet Union, and other major world powers with highly effective civil services. But none of this is going to solve anyone’s problems. Neither is barking at the Greeks to bring in the taxes, because their institutions weren’t designed that way. Trying to convert the Parthenon into a supertanker is an insane project no matter how much you need another tanker.

So much for the austerity plan.

But Dr. Doom’s plan-in-a-tweet could be expanded to Jim Hacker sending Sir Humphrey an e-mail like so:

“All the economic policy decisions since 1979. I want you to reverse them, over a Bank Holiday weekend. Can I have a brief on one side of A4 for the Cabinet? Thx xoxo PS THIS MUST NOT LEAK”

Now, well, quite a few people would say that rolling back every economic decision since ’79 sounds great. Some of us have had that feeling for much of the intervening period. But I think everyone would agree that it’s quite the project. In fact, if it came from a left-wing political party we’d probably think it unrealistic, romantic, and impractical. Which of the French Trotskyist presidential candidates was it who wanted to use war emergency powers to requisition the banking sector in its entirety? These days, it’s hard to tell them apart from Roubini and I for one think this is an improvement.

I reckon the UK civil service might be able to come up with a roughly workable contingency plan, and shut up about it. I think this because, at least into the 1970s and possibly later, they regularly maintained an economic analogue of the military’s War Book mobilisation and transition-to-war plan covering the case in which the UK had to quit the multilateral clearing system, never mind the ERM. (And they didn’t leak it.) With all due respect, I’m not so sure about the Greek civil service.

As a result, I’m forced to consider that this might be more bish bosh, loadsa money than bada bing, bada boom. And any half decent civil servant would point out that if your policy advice is impossible to implement, that’s not something you can just laugh off. Plans that cannot be implemented are so much wind, whether they come from Roubini, Syriza, or the European Central Bank.

If you want a one sentence answer-in-a-tweet, Greece doesn’t need the EU to send it a tax commissioner. It needs the EU to send it a default commissioner.

2012 – The Year We All Learn To Live Dangerously

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Well, the latest batch of EU interim growth forecasts are out, and there are few surprises after so much prior comment. The Euro Area as a whole is expected to contract, but of course within the aggregate contraction some will fare rather better than others. “The EU is set to experience stagnating GDP this year, and the euro area will undergo a mild recession”, according to the press release. What this means in practice is that Greece is expected to contract by 4.3%, while the German economy is forecast to grow by 0.6%. During yet another year Eurozone economies are expected to diverge far more than they will converge. Downward revisions of one percentage point or more were made to the forecasts for Estonia, Spain, Greece, Italy, and the Netherlands, while those for Germany, France, Austria, Slovakia, Denmark, Poland and the UK were either left unchanged or reduced by less than a quarter percentage point. No one was revised upwards. Continue reading →

Quick Reality Czech

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The Czech Republic is the first economy in central and eastern Europe to slide back into a full technical recession during the current downturn (evidently it is unlikely to be the last), with a 0.3 per cent quarter-on-quarter GDP decline in the last three months of 2011, after a 0.1 per cent drop in the previous quarter.

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Italy Braces Itself For The Full Monti

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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 →

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

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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.

Irrelevant Merkozy

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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.

Last Days Of Pompeii?

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This week we got what seemed to be some good news in the ongoing Euro debt crisis. Bond spreads in many of the countries on Europe’s periphery tightened vis-their German equivalents. Unfortunately we also got some bad news to go with it (no silver lining these days without the accompanying black cloud it seems): the tighter spreads were the result of a weakening of German bunds (or a rise in their yields) following what many considered to be a failed bond auction.
Continue reading →

Occupy the space to the left of the European Council. There’s a lot of it

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This morning’s Irish Times reports that German opposition leader, former environment minister, and Social Democrat Sigmar Gabriel was in town. And what did he say? Every damn thing.

THE AUSTERITY measures being imposed on Greece are “mad”, and indicate that Europe learned no lesson from the rise of the Nazi Party, Germany’s main opposition leader said yesterday. Sigmar Gabriel, the chairman of the Social Democratic Party and potential future chancellor, said the measures were “mad” and amounted to an “evil circle”….At a seminar organised by the Institute of International and European Affairs in Dublin yesterday, Mr Gabriel cited the example of Weimar Republic chancellor Heinrich Brüning, who cut successive budgets during the Great Depression. Germany ended up with six million people unemployed. Brüning’s cutbacks contributed to a rise in support for the Nazi Party, which grabbed power in 1933.

He went there. Wham.

Mr Gabriel said it would be “impossible” for Greece to solve its problems without a policy for growth and unemployment. He accused the European Council of leading the country into a “dead-end street”.

Mr Gabriel said countries such as Greece and Italy should have taken advantage of lower interest rates when they joined the euro zone to develop their economies and infrastructure and become more competitive. Instead, they used it for current spending.

That, at least, isn’t controversial. But this is:

He also criticised his own country, which had accumulated about €1 trillion in savings that could have been invested in the real economy, but instead went into high-risk investments and real estate.

Well, yes. As I said back in May, 2010:

Every Sparbuch is the flipside of a tax break for a mobbed-up developer setting fire to a Greek hillside. Obviously, it would be silly to hold individual German savers responsible – but the Great Banks of Frankfurt, the institutions through which the German trade surplus is recycled?

However virtuous all those savers in Exportland were (if you go with Angela Merkel) or however successful German internal devaluation was (if you go with Kantoos) or however ruthless German politicians and executives were in demanding wage cuts in Germany and a massive trade surplus with the rest of Europe (if you go with me), it seems pretty clear that the European financial sector failed to allocate the capital it collected up north into productive uses. Instead, well, we got golf courses in the semi-desert of Andalusia and ships flagged-out to Liberia.

You might not be surprised to find that Gabriel’s remarks were part of a coordinated push. Here’s the piece the German, Swedish, and UK opposition leaders pushed out later in the day. The key points are that austerity everywhere isn’t helping, that something needs to be done about banks, that the politicians have lost legitimacy and authority, and that we need the surplus states to reflate and enjoy some sunshine, already.

It’s high time there’s an opposition program in Europe. This could be better, but it’s a start.

Meanwhile, of all people, Marine Le Pen is going to Occupy Wall Street. That’s what narrative power sounds like.