The Eurozone bailouts: learning more

The Independent Evaluation Office (IEO) for the IMF released its evaluation of the Eurozone bailouts last week. Unfortunately, the excellent report was released on the Thursday of what was for Bureaucristan the last working week before September, and was released as a package with prebuttal of the recommendations by the Fund itself, which diluted its impact. And even in the financial pages of the newspapers, attention was more focused on the banking stress tests which came the following day [UPDATE: good attention to the IEO report from the New York Times]. Nevertheless, the report deserves a long shelf life; below the fold (direct quotes in italics), a selection from its more striking findings: note, these findings may have been documented elsewhere sporadically before, but one value of the report is collecting them all in one place and integrating them into a broader narrative.

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Headline chasing

IMF note to the G20 meeting in Shanghai in February –

The global recovery has weakened further amid increasing financial turbulence and falling asset prices. Activity softened towards the end of 2015 and the valuation of risky assets has dropped sharply, especially in advanced economies, increasing the likelihood of a further weakening of the outlook. Growth in advanced economies is modest already under the baseline, as low demand in some countries and a broad-based weakening of potential growth continue to hold back the recovery. Adding to these headwinds are concerns about the global impact of China’s transition to more balanced growth, along with signs of distress in other large emerging markets, including from falling commodity prices. Heightened risk aversion has triggered global equity market declines and brought a further tightening of external financial  conditions for emerging economies. Strong policy responses both at national and multilateral levels are needed to contain risks and propel the global economy to a more prosperous path.

IMF note to the G20 meeting in Chengdu in July–

“Brexit” marks the materialization of an important downside risk to global growth. The global outlook, set for a small upward revision prior to the U.K.’s referendum, has been revised downward modestly for 2016 and 2017, reflecting the expected macroeconomic consequences of a sizable increase in economic, political, and institutional uncertainty. But with “Brexit” still very much unfolding, more negative outcomes are a distinct possibility.

The two notes, which are written barely 6 months apart, read together bizarrely. The earlier note sees anxiety in financial markets and searches around for any narrative that could justify that — to the point where even a fall in oil prices could be bad! The new note has the luxury of an actual negative shock — Brexit — to work with, but with one big problem relative to the doom-and-gloom narrative of February:– it says that if it wasn’t for Brexit, the IMF was ready to along with the evaporated panic from February, and anyway financial markets haven’t taken Brexit particularly badly!

Could it be that the financial market-led narrative in February was a panic in search of a problem, except that the markets — and thus anyone using that as their lens — missed the one problem that was actually on the horizon, namely Brexit? As it happens, financial asset prices could well be a bit player in the way Brexit eventually plays out.

A simple solution for #Brexit-related uncertainty

Prominent Brexiter Andrew Lilico, I see, argues that we could avoid the uncertainty created by triggering the Article 50 process by not doing so:

The Treasury says an instant triggering of Article 50 post-referendum would be a driver of uncertainty. In which case, maybe don’t do that?

Indeed. Article 50 of the Lisbon Treaty lays down the process for voluntary withdrawal from the EU. You trigger it if you want to leave the EU. If you haven’t, you haven’t left the EU. Not triggering it – staying in the EU – would indeed avoid quite a lot of uncertainty.

But, Andrew, we could go one better. We could completely eliminate it. All we need do is vote to stay in.

#Brexit, trade, and the J-curve

A couple of thoughts on the economic consequences of #Brexit. HM Treasury, the Institute for Fiscal Studies, and others have published their efforts to forecast the short- to medium-term impacts of leaving the EU, and it’s fair to say none of them are good. The point I would like to highlight is that everyone seems to expect a big – 15% is a consensus number – devaluation in sterling post-Brexit.

I’m usually quite a “cheap pound” guy, so you might think I’d see this as an offset to the risks of Brexit. Actually I don’t, and here’s why. Just as a “strong” currency isn’t good in itself, but instead good for some groups in society and bad for others, a “weak” currency is good for some people – exporters, basically – and bad for others – importers, basically. A fall of 15% in the sterling trade-weighted index will help exporters in that it’s an immediate 15% price cut, and harm importers by the 15% increase in their prices. On balance, you’d expect it to reduce the current account deficit by 15% * some elasticity parameter.

It’s not that simple, though – there’s the famous J-curve effect. It might take time for exporters to increase their volumes, while import prices go up straight away. As a result, devaluations often have a contractionary effect immediately, and then a greater, expansionary one later. The problem, in the Brexit scenario, is that we propose to do something that will induce a substantial devaluation at the same moment that we commit ourselves to a whole lot of uncertainty regarding trade with Europe.

The case for it all turning out OK is basically a bet that the lower sterling trade-weighted index will lead to enough growth in export volumes to make it up. However, we’re meant to be taking this bet just at the time we do something that’s likely to constrain volumes on about 44% of our exports, even if only temporarily. Also, a lot of export-heavy companies are manufacturers integrated in international supply chains, who probably use quite a lot of intermediate products sourced from inside the EU. These companies will see their input prices rise sharply, while they may not be able to take advantage of the cheap pound on about half their market. As a result, they will experience quite a dramatic margin squeeze.

I can certainly see this leading to a beast of a J-curve recession, even if it doesn’t manage to push the housing market off the wall. One important trigger for a big drop in sterling, by the way, would be a drop in foreign portfolio investment in the UK. A hell of a lot of that is real estate, and there is already evidence of investors putting purchases on hold.

Before you all write at once, I stick with the 44% number. This has been criticised due to the so-called Rotterdam effect, where goods going to the wider world get trans-shipped through EU load centre ports like Rotterdam, Antwerp, or Hamburg, and therefore counted in the port statistics as exports to the Netherlands, Belgium, or Germany. There’s a good account of it here. I do not accept that this is a problem. Rather, I do not accept that it is a valid argument that European trade is less important than we think.

If shippers in the UK choose to ship to, say, China via Rotterdam rather than direct ex-Felixstowe or Southampton, they presumably do so for a reason, typically that bigger volumes and bigger ships mean lower freight rates and more choice of routes and sailings. There is no reason, I think, to expect Maersk or whoever to call at UK ports more often post-Brexit. Shipping via Rotterdam to somewhere extra-European represents trade with the EU in that the UK imports port services from the Netherlands, paid for out of the revenue from exporting. If we had a port the size of Rotterdam, we certainly wouldn’t discourage European shippers from using it! And of course, we do – just it’s an airport, and it’s called Heathrow, and just listen to the business lobby hollering for more capacity there.

In conclusion, one of the contradictions of Brexit that bothers me is that its strongest advocates seem to believe that relatively petty regulatory burdens are enormous restraints on the economy, whose removal would lead to a surge of growth, while they also seem to believe that incurring even relatively petty trade barriers would mean, well, nothing much. You can’t have it both ways. Either the economy is robust to petty interference, in which case we might as well stay in, or it’s not, in which case we surely have no business putting a new layer of it between us and Europe. After all, it’s unrealistic to imagine the electorate ever agreeing to some sort of Donner Party libertarian utopia – we wouldn’t be swapping open trade, with levels of regulation that don’t seem to do German exporters any harm, for a tariff, but zero regulation. Instead we’d likely get a worse relationship with Europe by quite a lot, offset by a few doubtfully useful regulatory changes at the margins.

I find this baffling. Perhaps, in the end, the belief is that even trivial regulatory changes would be transformative, and the relationship with the EU would, well, somehow turn out OK in an unspecified manner. That strikes me as too many leaps of faith for one lunchtime.

PS – don’t trust me, ask a Felixstowe docker!

It will make a difference. FXT will surely suffer as they will no longer be able to tranship to R’dam and elsewhere without documentation as they can now. Why would shippers go through two lots of clearance procedures when they can cut FXT out and ship straight to the continent?

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?

 

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.

suv

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.

Pay no attention to the social democrat behind the curtain.

Perhaps we’ve been watching the wrong German politician throughout the whole Greece/Eurogroup drama. Usually, the Vice-Chancellor of Germany is one of those posts that comes with a lot more dignity than it does power, like the US vice-presidency in the pre-Cheney days when it wasn’t worth a pitcher of warm spit. It tends to be given out as a decorative title to a junior coalition partner, rather in the way Nick Clegg was given the title of Deputy Prime Minister, something which has even less basis in British constitutional practice.

But Bernd Hüttemann reminded me of something important on Twitter yesterday, as follows.

Sigmar Gabriel, for it is he, is not just vice-chancellor and SPD leader, but also federal minister of economic affairs, and the minister responsible for government-wide coordination of European policy. The ministry gives details of its role here.

It has to ensure that the German government has a common line-to-take towards the European institutions, to keep the Bundestag informed, and to give directions to the German representatives in COREPER 1. That’s the boring-but-important stuff such as Competition, Energy, Agriculture, etc. It also gives directions jointly with the ministry of foreign affairs to German representatives in the more politically glamorous COREPER 2, including the General Affairs council, Justice & Home, and crucially, ECOFIN. It is the government’s authority on European law. Its officials chair most committees on European issues within the German federal government, including the permanent secretaries’ committee on European affairs, which they lead jointly with the foreign ministry.

The foreign minister is, of course, Gabriel’s fellow Social Democrat, Frank-Walter Steinmeier. This gives him a lot of agenda-setting power and a lot of access to Angela Merkel. He probably has more executive power than Joschka Fischer did as vice-chancellor and foreign minister. Having a bigger gang behind him, and also a European crisis, means he also has more than FDP leaders Westerwelle or Rösler although they had the same ministry.

This is important. In a sense, even decades after reunification, we still see two Germanies. People on the Left tend to swing between admiration for its social democracy, long tenancies, environmental commitment, demonstrative feminism, cycleways, safe-standing terraces at the football, and the like, and utter exasperation with its commitment to European monetarism, bourgeoisity, inflation dread, and tolerance of Bild Zeitung‘s ravings at the Greeks. People on the Right tend to wish they could have a budget surplus, a Bundesbanky monetary policy, and more public churchiness, except when they’re convinced Germany is a terrible warning of the inevitable doom of the welfare state. It wasn’t that long ago.

Wolfgang Schäuble, of course, personifies the hard-money version of Germany. But Germany doesn’t only have a finance ministry. It also has a ministry of economic affairs that has an eye to industrial priorities and real institutional strength, rather like the brief Department of Economic Affairs Harold Wilson set up in the UK back in the 1960s was meant to be. The DEA was intended pretty much as an anti-Treasury, and I think we can read Gabriel’s role at the moment as something similar – a growth-oriented lobby that would structurally lean towards a lower exchange rate, because it represents mostly export-heavy manufacturers and industrial workers.

In practice, a lower effective exchange rate for Germany means keeping the Euro show on the road, complete with Greece. Either leaving the euro, or kicking out the south, would surely cause the rate to rocket upwards with ruinous consequences for Gabriel’s clients. It’s therefore very significant that the export lobby in German politics has managed to get more influence over Germany’s interface with the European institutions. And here’s the man himself:

This might explain an important feature of the agreement the Eurogroup eventually reached. Greece is said to have “capitulated” by accepting the “November 2012 targets”. However, the agreement specifically doesn’t set any fiscal target for the year 2015, and proposes that we meet again in June to negotiate a new program replacing that of November 2012. Therefore, the targets don’t exist for this year, and those for future years are by the by. Perhaps they will influence the talks in June, but this strikes me as a concession without much substance. A bit like making the FDP leader vice-chancellor. And the talks will be heavily influenced by the boring technical stuff Gabriel’s ministry has most power over.

This might also explain why Schäuble seems quite so grumpy these days. Much of the content of policy reaches German officials in Brussels and elsewhere via Gabriel and Steinmeier’s staffs. In a real sense, he only has full and undivided control when ECOFIN (or the Eurogroup, which isn’t explicitly evoked by the ministry’s text) is meeting at ministerial level, and he is physically present. Which puts an interesting light on the whole row about that nonpaper that was supposedly issued after he left the building…

When he isn’t, his main means of influence is either shouting the odds in the media, or else going via Angela Merkel, who is of course free to support him or not. Merkel’s interests are well served by this. She keeps the options open, and avoids having to explicitly back either lobby. At the same time, it rules out either the two social democrats, or else Schäuble plus one of them, ganging up on her to commit Germany to some policy of their own. I would therefore cautiously discount some of Schäuble’s bluster in front of journalists.

Hamburg

It’s probably worth keeping an eye on German elections at the moment. Hamburg voted today, and the results below will update as more results come in, via Der Tagesspiegel. Basically, the SPD won big but will need a coalition partner, probably the Greens, the FDP and the Left had a respectable showing, the AfD version of the far-Right just, just scraped into a western German parliament for the first time, and the CDU had a nightmare, literally their worst result ever.

Click on “Gewinn/Verlust” for the changes in % terms – the CDU lost 5.9%, the AfD picked up 5.8%. Ouch. But most of all, the Non-Voter Party had a great night, picking up 44.5% of the vote.

On that score, I expect the main effect to be “That’s over with now” rather than “Chase the AfD”.

Euro-European politics over #Greece

This is old news now, but it’s a good example of a theme we should be watching in the Greek negotiations – as it were, Euro-European tensions. Conflict in the EU, whether between nations, parties, lobbies, or individuals, tends to be expressed as conflict between the institutions.

So Jean-Claude Juncker has quietly said that the Commission could accept the withdrawal of the troika mission from Greece, which matters because a lot of the staff will be from the Commission. In this, of course, he’s accepted a Greek negotiating point although not a very important one.

He immediately gets a blast of verbal from Volker Kauder, the chairman of the CDU parliamentary party, who says he’s going soft and the identity of Europe is at risk and Juncker doesn’t get to decide what the Bundestag thinks. Get that combination of the identity of Europe on one hand, and pseudo-eurosceptic tractors-off-our-lawn stuff!

But then again, it’s not as if Kauder has any right to tell Juncker what to do. As he knows very well, if there is an agreement, he will have to pass the bits that affect bilateral treaties through the Bundestag, and of course he will. That’s what party whips do in life. When Merkel says so, he’ll spring to it, knowing that the job is a great platform if he wants to be chancellor one day.

There’s probably a good case to be made that the Greeks are right in trying to pick off Juncker and the Commission. The whole point of the Commission as an institution is that being in charge of the administration and the policy staff support is important. Traditionally, it gets to set the agenda, and the member states get to use a veto.

Things are more complicated these days, with the stronger parliament and the intergovernmental institutions like the High Representative for Foreign Affairs and the Eurogroup, but I for one wouldn’t bet on any final text being very heavily influenced indeed by the Commission staffers who drafted it and who will watch over its implementation.

Also, the Commission is more committed than any other institution to The Project, with which it is deliberately synonymous. And it has a lot of independence. Juncker only needs the support of his own institution to act, while even the Germans need to line up a coalition in the council of ministers or the eurogroup if they want to do anything positive.

The ECB is a bit like this, too, but it actually has less independence, as its directorate is chosen by the national central banks and actually reports back to them. By contrast, although politicians always try to give orders to European commissioners, the commission is meant to reject this.

It’s an interesting question which institution would jump which way on the question of a Cyprus-like scenario, staying in the € with capital controls in place. Both the Commission and the ECB are highly committed to keeping the project going, but it comes down to which of them is more committed to the original vision of open borders and free trade. The national finance ministers can accept a Cypriot solution most of all. Neither institution would like it, but the ECB could trigger it.

Probably, Greece is hoping to manage the ECB into not doing anything drastic, while convincing the Commission, so that the Council of Ministers can adopt a text the Commission cooks up.

#charlie impact: the UK joins the Schengen Information System

At the extraordinary meeting of interior ministers in Paris back on the 11th January, immediately after the Charlie Hebdo attack, the following statement was issued. Nobody paid it much mind at the time, but there was something genuinely interesting in there:

We hope to swiftly finalize work engaged under the auspices of the Commission to step up the detection and screening of travel movements by European nationals crossing the European Union’s external borders. To that end, we will more extensively detect and monitor certain passengers based on objective, concrete criteria which respect smooth border crossings, fundamental liberties and security requirements.

Furthermore, we are of the opinion that the rules of the Schengen Borders Code should be amended in a timely fashion to allow for broader consultation of the Schengen Information System during the crossing of external borders by individuals enjoying the right to free movement.

This is some high-grade diplospeak, so let’s unpack this a bit.

External borders here mean the borders that demarcate the member states of the European Union from the wider world. Sometimes, the external border of the EU is also the external border of the Schengen zone. Inside this zone, there are normally no controls on the internal borders between the participating countries.

Obviously, there’s no problem with consulting the Schengen Information System, SIS II – the enormous shared database of suspects maintained jointly by the Schengen states – in this case. However, the EU external border isn’t always identical with the Schengen zone external border, because not all EU member states are also Schengen participants. If you’ve managed to cross from the Schengen zone into some non-Schengen EU state, your identity won’t be checked against SIS II when you cross the external border out of the EU. Nor will you be checked against it when you cross the external border back into the EU. But because you’re an “individual enjoying the right of free movement”, you’re unlikely to be bothered much there either.

So, “amend the rules in a timely fashion to allow for broader consultation of the Schengen Information System during the crossing of external borders by individuals enjoying the right to free movement” can be translated as something like “the non-Schengen EU countries are going to integrate their border control databases into SIS II”.

Which is why the first thing I said when I saw the statement was: “It looks like we just joined Schengen”. (It was easy – my dad predicted this years ago.) And now, just under a month later, GOV.UK lights up with the following statement:

The Second Generation Schengen Information System (SISII) will provide law enforcement alerts on wanted criminals, suspected terrorists, missing people, and stolen or missing property. A meeting of ministers in Europe has formally approved the UK joining the system on 13 April 2015.

Not, of course, that they’re going to take down the border posts – don’t expect to leave your passport at home any time soon. They’ve definitely signed up for the big database, though. As usual, the UK is much more integrated into the EU than either it, or the EU, would admit.