Taking A Man At His Word

Legendary hedge fund supremo Ray Dalio is in ebullient mood. Following a series of moves by Mario Draghi to underpin European government financing Dalio told Bloomberg that, in his opinion, the euro will now “likely” stay together because existing growth-constraining austerity measures will henceforth be balanced by money printing over at the European Central Bank. His statement was, of course, a response to ECB President Draghi’s save the Euro pledge. Continue reading

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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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

Political union is transfer union

It is very often suggested that there is no point looking at solutions to the European crisis that don’t involve more “political union”, an EU institutional term meaning a move towards a more centralised and “federal” (in the special EU sense) union. This argument is curious.

For a start, what is it about political union that is meant to solve the problem? Some people will probably say that it would be “a message” or “a signal” or something, a demonstration of commitment to the European Union that would in itself create confidence. But this sounds a lot like hand-waving to me, or the kind of genius that suggested introducing a pan-European tax as a way of making the Union more popular (yes, Mr. Verhofstadt, it is not entirely forgotten).

More seriously, political unions tend to have a substantial budget and the capacity to use it in a discretionary sense. In the political union between the provinces of Germany, there is a systematic redistribution of money between richer and poorer parts of the union. In the political union between the states of America, there is less overt redistribution, but there are very large federal agencies that in practice tend to redistribute money around the union. NASA, for example, had a secondary and very important role subsidising the industrial development of the South-Eastern US, and this goal influenced important design decisions in the Apollo and Shuttle programs.

It is also true that some degree of redistribution is inseparable from anything that could be described as a political union. Try to imagine the opposite. The political union would have to be designed so as to make absolutely no change to the a priori distribution of income, an exercise that boggles the mind in its complexity and futility.

The simplest model would probably be a libertarian utopia/dystopia with a minimal state devoted solely to defence, funded by a flat tax on the citizens. But now imagine what would happen when its army deployed for annual exercises. A large quantity of income collected all over the union would suddenly be spent in the exercise area. If, as is likely, there were a limited number of convenient training areas, or the army tended to train where it expected to fight strategically, we would expect to see a military-industrial complex emerge in those areas.

Just because your biggest customer is the army doesn’t make you useless, of course, it may make you indispensable. And in that case, our political union that is not a transfer union would have to think about how to keep you going between deployments, in which case it would be undertaking both industrial and regional policy. A state (or political union) that has no budget, or a budget that is economically indistinguishable from the absence of one, is no state (or political union). Marx thought that the state would wither away in true communism; you can argue about what he meant, but I think he imagined a society in which the functions of the state were either unnecessary, or else carried out by the citizen as a matter of course, not even perceived as a duty. A state whose budget changed the structure of the economy so little as to be totally non-redistributive would, I think, have a fair claim to have withered away.

I can’t see how an entity that made no transfers of wealth or income can be considered to have the functions of a political union. Further, even if a political union was created that was not also a transfer union, it wouldn’t solve the problem. Various parts of Germany need transfers from others; the same goes for all political unions. Declaring “political union” doesn’t solve the problem in itself. It might be taken to mean “direct ECB management of Greek public finances”, but then this is just hoping that the Greeks can find some more money with more will, and perhaps a pony as long as the pony is Karlsruhe-compliant.

Here is the problem: political union is transfer union, or it is not political union, and anyway, if it is not transfer union it is no solution. Transfer union is unacceptable. Therefore, political union is unacceptable, and anyone who talks political union is saying “Let the file mature while we do what the EU does best, holding an Inter-Governmental Conference”.

On The Brink Of What?

This weekend I have been thinking quite a lot about what the world is gonna look like on Monday, and have come to the conclusion that it won’t be that different from the way it was last Friday. The big news surprise of the weekend was in fact Greece related  – since the national football team qualified for the quarter finals of the Eurocopa, beating the Russia by a resounding 1-0.

Oh yes, they also had elections in Greece, didn’t they? Continue reading

ECB decides now is not the time for complexity

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

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

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

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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