Christian Noyer: Much Ado About Nothing?

The euro fell briefly below $1.19 yesterday. There is nothing surprising or exceptional about that, the common currency has been drifting steadily downwards against the dollar for a number of, by-now, pretty well known reasons – better economic performance in the US, a growing interest rate differential between the ECB and the Fed, political issues following the referendum noes, and an incapacity to decide what to do with the SGP. Yesterday however, an apparently new element was introduced: Christian Noyer, and his appearance before the Foreign Affairs Committee of the French National Assembly.

That this should have caused a stir surprises me. Christian Noyer is Governor of the French national bank (and not simply, as much of the press report, an ECB governing council member). It is therefore perfectly logical that when asked whether any country could leave the eurozone, he should reply in the affirmative. EU member states are, as Noyer says, still sovereign nations. He would therefore have been lying to answer ‘no, it is impossible’. Curiously, the other part of M. Noyer’s recorded testimony, that any exit would put in question continued membership of the EU is far more debateable, yet seems to have attracted far less attention.

Membership of a currency union is (or should be) an economic, not a political decision. Decisions on entry or exit should therefore be taken on economic grounds, and discussions of the issues involved should be possible without an atmosphere of emotional hysteria. Of course, if your currency falls simply because someone states the obvious (I mean the information content *is* zero), then this may indicate that there is a rather deeper problem knocking around somewhere or other.

Update: Jean-Claude Trichet yesterday defended the current ECB TWIRP stance (two per cent interest rate policy) before the European parliament?s monetary affairs committee and understandably rejected a call for an annual evaluation of the benefits of the common currency for zone-member citizens.

On Monday night Mr Trichet told the parliament that long-term interest rates were at the lowest level for a century and the cost of borrowing was giving ?considerable support? to economic growth. However, he rejected a proposal by parliamentarians for an annual ECB evaluation of the benefits of the single currency for citizens, citing ?methodological and data constraints?. The committee?s report said the ECB had ?reacted correctly to economic and financial developments in 2004? and said it should continue to be vigilant over ?oil prices, residential property prices and to the still prevailing excess liquidity?.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

19 thoughts on “Christian Noyer: Much Ado About Nothing?

  1. Membership of a currency union is (or should be) an economic, not a political decision.

    One should add that the success of currency unions which have no political authority in place to back them up is abysmal.

    I recall the former European Commission President, Romano Prodi, stating more than once that joining the ?uro was a political not an economic decision. I agree with that view.

    An interesting article in the September 2001 of the German Law Journal – The Euro is Forcing the Realisation of Political union notes that:… a political union is to be one which makes decisions of great political significance and which fundamentally affect the lives of the European citizens. Foreign and security policy are especially relevant, as are internal security policy and all policies that directly affect the citizens’ assets, i.e., their wallets.Broadly speaking I agree with the view that the ?uro will, over time, force political union …. which means that joining the ?uro must be a political decision.

    Currently there is problem in that a number of ?urozone member states (France, Germany, Italy) seem to want to be part of the single currency union but, for internal political reasons, not bound by the rules that underpin it i.e. the Growth & Stability Pact. We now have a situation where the “markets” might indirectly force them to abide by the rules, with all that entails in terms of structural economic reform and the deep unpopularity that such reform brings in its wake for national governments.

  2. “I recall the former European Commission President, Romano Prodi, stating more than once that joining the ?uro was a political not an economic decision. I agree with that view.”

    Yes Peter, but this was a horrible error.

    “Broadly speaking I agree with the view that the ?uro will, over time, force political union …. which means that joining the ?uro must be a political decision.”

    Or, the resistance to having political union will force a ‘break-up’ of the euro. Really, given what is at stake, I’m not sure that a good case couldn’t be made out for having a separate referendum on political union in those states which belong to the eurozone, with the issues involved being clearly spelt out. Of course there would be no guarantee of yes votes, even if a no vote would mean the effective end of the euro, so I don’t imagine anyone will seriously propose this, in the same way that Trichet doesn’t want any annual assessment of how the euro is working.

    “We now have a situation where the “markets” might indirectly force them to abide by the rules,”

    Or they might ‘indirectly’ force break-up. I suspect it will be the latter.

  3. However, as is well known, financial markets retain a touching belief in the efficacy of incantation. Whatever the realities, central bankers and such are expected to be Tough, and any perceived reduction in public displays of Toughness is treated as a real event.

  4. Edward’s right: the press are wrong to focus on the scare headlines about euro breakup.
    We would be too. It’s a healthy sign that it’s not taboo, and it’s an interesting subject in its own right.
    But I don’t think it helps us figure out what’s what in European economic policymaking. Instead, it tends to funnel people into opposing camps that mirror a wider European split: advocates of flexibility on the one side and integration on the other.

    A different tack might help. What do we talk about when we talk about a political eurozone?

    Answer #1: Spending and public debt?
    The designers of the euro wanted to avoid the “moral hazard” of national governments, safeguarded by a shared currency, selfishly piling up debt. The fiscal straitjacket they made split its seams the moment it came under stress. (The ironies of the German role in all this are, to some, rich and satisfying.) We are left with a policy that can only conceivably be applied to those member states weak enough to be pushed around. Large member states will be granted the fiscal leeway to respond to the economic cycle and other pressures; small countries, apparently, will not. To allow this state of affairs to remain is to ask for trouble. Dutch dissatisfaction was a major factor in their recent No.
    So, there’s a glaring need to answer the following questions. First, at what point does maximum fiscal flexibility (a benefit for individual eurozone members) undermine the euro internationally (a cost to all eurozone members collectively)? Second, can a committee of politicians define this border with sufficient clarity to defend it credibly? Finding good answers should be a priority for the promoters of political Europe.
    While you’re holding your breath, recent developments in the markets might offer some hope for an alternative source of fiscal discipline. Distinctions are beginning to be drawn between different countries’ euro-denominated debt. Credit is due to the ECB on this: if politically-motivated bailouts were seen as the likeliest response to future fiscal crises, these rate spreads wouldn’t be opening up. So there’s a follow-up question for the ECB: how far should it encourage and support this process.

    Answer #2: Interest and exchange rates?
    The mess national finance ministers have made of fiscal coordination should inspire caution among those keen to give them a role in monetary policy. A stable, predictable interest rate regime is an important part of economic growth. The experience of the US, postwar Germany and postTory Britain all point to the advantages of insulating these decisions from political control. Yet there are variations in the model. At present, ECB policy seems closest to Bundesbank-style ruthless pursuit of inflation. Greenspan’s recent looser policy of reflationary expansion provides a contrast. That, it seems to me, provides the bounds of the present dialogue, to which Wolfgang Clement’s remarks are only the loudest recent contribution. In this context, those who wish to muddy the monetary waters by adding an exchange rate objective are missing a good opportunity to shut up.

    So much for looking at fiscal and monetary policy separately. What about the scope for coordination between the two?
    Samuel Brittan (grande dame of British economic commentators) is worth reading on this. Essentially, he thinks the pain of the supply-side reforms needed to boost eurozone trend growth might usefully be cushioned with some monetary loosening. It’s an attractive case, and politically realistic about the difficulties of seeing through a reform programme. But I’m worried that in the wider world the case for such coordination is being made by people like de Villepin. Let me put it this way: while I believe every child in the world needs the gift of love, when I hear Michael Jackson on the subject I get queasy. Despite his protestations, de Villepin’s goal is not a dialogue between politicians and bankers – that’s happening anyway – but an institutionalisation of that dialogue. And, once his foot is in the door, I don’t believe for a moment that he has a positive agenda. Rather, monetary policy would be diverted to exchange rate manipulation as a means of avoiding reform.

  5. “The designers of the euro wanted to avoid the “moral hazard” of national governments, safeguarded by a shared currency, selfishly piling up debt.”

    This is part of the issue Rob, there was also a more concrete problem in mind: the sustainability of finances in an ageing context. Basically most zone members have financial liabilities that are going to be increasingly called down as we move into the next decade. Some of the pressure can be taken off this by devaluing the liabilities through pension reforms etc, but this in itself won’t be sufficient, political realities wouldn’t allow for it. Inter-generational responsibilities wouldn’t either. So part of the workload is going to be done by increasing the debt stock as a % of GDP. If this is going to be feasible without the member state in question im-ploding (or ex-ploding) its finances then it is very important that they start from a reduced base. This is the logic behind the 60% target, which was I think Slobes’ doing (IMHO Almunia hasn’t got a clue, he’s a party machine man, one that the EU was unfortunate enough to receive as a ‘trade’ when Solbes was unexpectedly called back to Spain after the PSOE victory. Almunia was owed a favour, and Zapatero certainly wasn’t going to have it called by letting him into the government).

    Anyway, I digress. 60% may be an arbitrary value, but this isn’t rocket science, and it has, as I say, a certain logic. The other change, to make it structural and not cyclical also seems to me to have been reasonable.

    “The fiscal straitjacket they made split its seams the moment it came under stress”.

    Yes, but I think you need to distinguish between the first group of candidates, especially France and Germany, and the group which is arriving now – Italy, Greece, Portugal. The situation of this new ‘group’ is much more serious, even in the short to mid-term. The new issue would be the Balance of Payments situation, and to this there is no obvious remedy. Traditionally the choice is between devaluation and deflation, and since devaluation – at least to the extent necessary – just isn’t available, deflation is the only cure which is on offer, but this will choke the ability of internal consumption to grow in the affected economies. I would not underestimate for one minute the importance of this development.

    Basically the cheap money which became available with EMU has turned out to be a mixed blessing for these economies, they have gotten into debt OTOH, and the additional inflation produced has, OTO, has deprived them of the only real competitive advantage they had – cheap labour – in an increasingly competitive global economy.

    “We are left with a policy that can only conceivably be applied to those member states weak enough to be pushed around.”

    I don’t think they are even going to be able to do that. It is politically impossible to enforce anything on the three states in question in the short term, as this would only make a bad situation worse, and two years from now it may be even more difficult without forcing them to leave in a way which would be disastrous for everyone.

    “First, at what point does maximum fiscal flexibility (a benefit for individual eurozone members) undermine the euro internationally (a cost to all eurozone members collectively)?”

    When someone’s debt dynamics become so serious that they will have no alternative but to contemplate sovereign default. My guess is that the first to reach this point will be Italy.

    “Second, can a committee of politicians define this border with sufficient clarity to defend it credibly?”

    I doubt it. We are in a double bind (a la Gregory Bateson). If the SGP were going to work, it already would be doing so. I had hoped, and even naievely imagined, that after the French referendum a serious attempt might have been made to defend the new line. This hasn’t happened, and I think from now on in it will become increasingly more difficult to contemplate. If we hadn’t the heart to put the straitjacket on Italy now, imagine the difficulties in doing it in a much worsened situation. The others, if they push Italy too hard, will only get the backdraft themselves.

    “Distinctions are beginning to be drawn between different countries’ euro-denominated debt.”

    Yes, I’m tracking this on Afem, eg here:

    http://more.fistfulofeuros.net/archives/001639.php

    and here

    http://more.fistfulofeuros.net/archives/001637.php

    “Credit is due to the ECB on this: if politically-motivated bailouts were seen as the likeliest response to future fiscal crises”

    Actually I don’t see who would be doing the bailing out here, since the ECB is not the IMF and doesn’t have the resources to make big loans, and I don’t see too many other sovereign central banks queueing up to buy the debt of the government under attack. The EU budget isn’t designed for this kind of thing either. The corrector was the monetary policy control and the SGP straitjacket, in a context where these prove ineffective the growth in bond yield spreads is the logical development.

    The big issue is that it was assumed there would be some sort of convergence, but this evidently hasn’t happened, making a common interest rate for all a pretty blunt instrument.

  6. “Actually I don’t see who would be doing the bailing out here”

    Yep, point taken. So what am I saying? Basically that there is a large group of people who will tell you that the euro is an irreversible step in the construction of Europe, and must be supported and defended on political as much as economic grounds. Faced with a choice between shedding a member and bailing it out, these people would start passing round the hat. One can imagine all sorts of ways this might be attempted. Five years or so ago, the atmosphere was different enough from the current sourness that they might even have succeeded.

    You don’t tend to find this sort of person in the ECB (take Noyer’s comments as an e.g.) So the credit due has been accrued by a roundabout route: by quietly making clear that policy is under the control of unemotional men unencumbered by political precommitment. It’s kind of reminiscent of Monnet-style technocracy, or an aspect of it at least. If there’s a contradiction here its one I embrace: by acknowledging the difficulties faced by member states and the possibilities of failure, the bankers have reinforced the credibility of the enterprise.

  7. “Basically that there is a large group of people who will tell you that the euro is an irreversible step in the construction of Europe, and must be supported and defended on political as much as economic grounds.”

    Yes, I think this is the heart of the problem. I think this turns monetary arrangements into a kind of surrogate religion. I think we agree that whether the euro will work or not, it is important that people feel free to say what Noyer is reported as saying. I agree with you, that doesn’t make it weaker, it makes it stronger.

    I think any political or economic project needs to be available for evaluation. To take an example from another quarter, the US is stronger for having a debate about the advisability of the Iraq war, even while it is going on. The war may be won, or the war may be lost, but this won’t be as a result of the debate. Precisely not having the debate would make you vulnerable to a sudden change in fortune (as happened in Spain on 11 March 2004) producing a dramatic and possibly traumatic political impact.

    The same with the ECB and the euro.

    I think the EU will continue with or without the euro. I think those who put the European political process at most risk are those who try to avoid having any open discusssion. Voters then sense that there are issues they are not being informed about, and then, as we have seen, one day the back reaction comes. So I agree with this:

    “by acknowledging the difficulties faced by member states and the possibilities of failure, the bankers have reinforced the credibility of the enterprise.”

    “these people would start passing round the hat.”

    Whether or not this would work, even were it possible, depends on the gravity of the case. If the Bank of Portugal got low on reserves (tricky question this, given the existence of the euro) because of a balance of payments issue, then, and provided a way could be found to turn the situation round, there would be no reason not to bail out. But if the problem was one with no solution other than a strong devaluation, then a temporary bail-out would serve no purpose, it would just put off the day.

    Mentioning Argentina here normally sounds emotive, this isn’t my intention. But…… the IMF put (what was it) $20 billion into Argentina at the start of 2000. This was really a mistake, and the money didn’t really help, since the problem was a currency arrangement, and what was needed was devaluation, which solved the problem but only after Argentina had made its debt problem much worse thanks to the various bailouts.

    The political limits to attempts to go the other road, and not devalue but try and endure a deflationary recession in an attempt to restore competitivity, were plain enough. I don’t think that just because this is Europe and not Latin America the issue changes in any important way.

  8. A good example of what not to do just came from the European Parliament, where members yesterday voted down the monetary affairs committee report on the ECB on the apparent grounds that they felt the ECB wasn’t giving enough importance to growth.

    I wouldn’t put it this way, I would say that the ECB gives too much importance to the danger of inflation, and not enough to possible deflation, but this isn’t the issue. I think they just made it *more difficult* for the ECB to cut rates, or at least so to do and retain credibility. So I think the vote was stupid, and very short sighted.

    Also note that Italy is about to reduce the growth outlook for this year to zero (which may well be the trend growth level for Italy as things are) and that the 2005 deficit forecast is being revised up to 4.3% of GDP. I just feel I can’t over-emphasise how important this situation is.

    http://news.ft.com/cms/s/b3d15ff4-ed8a-11d9-9ff5-00000e2511c8.html

  9. I think we agree that whether the euro will work or not, it is important that people feel free to say what Noyer is reported as saying. I agree with you, that doesn’t make it weaker, it makes it stronger.

    Noyer is not “people”. He’s a central banker. He has exchanged the right of free speech for the job. Of course he shouldn’t lie when asked. But that he’s asked that question at all is significant.

    I think any political or economic project needs to be available for evaluation.

    That makes it weaker. The utility of a common currency rests in:
    * less adminstrational overhead
    * lowered transaction costs
    * no currency risk

    If a currency is evaluated at all, this utility will vanish in large parts. You must now seriously prepare for quick administrative change and more importantly, a Euro in doubt is worse than the old system. When you are dealing with a foreign currency you know it can fluctuate in a certain reasonable range which you can buy insurance against.
    Now if you have a currency in doubt you are not even sure what currency you will be paid in and nobody will offer you a “Euro breakup insurance”

  10. I think we agree that whether the euro will work or not, it is important that people feel free to say what Noyer is reported as saying. I agree with you, that doesn’t make it weaker, it makes it stronger.

    Noyer is not “people”. He’s a central banker. He has exchanged the right of free speech for the job. Of course he shouldn’t lie when asked. But that he’s asked that question at all is significant.

    I think any political or economic project needs to be available for evaluation.

    That makes it weaker. The utility of a common currency rests in:
    * less adminstrational overhead
    * lowered transaction costs
    * no currency risk

    If a currency is evaluated at all, this utility will vanish in large parts. You must now seriously prepare for quick administrative change and more importantly, a Euro in doubt is worse than the old system. When you are dealing with a foreign currency you know it can fluctuate in a certain reasonable range which you can buy insurance against.
    Now if you have a currency in doubt you are not even sure what currency you will be paid in and nobody will offer you a “Euro breakup insurance”

  11. I think we agree that whether the euro will work or not, it is important that people feel free to say what Noyer is reported as saying. I agree with you, that doesn’t make it weaker, it makes it stronger.

    Noyer is not “people”. He’s a central banker. He has exchanged the right of free speech for the job. Of course he shouldn’t lie when asked. But that he’s asked that question at all is significant.

    I think any political or economic project needs to be available for evaluation.

    That makes it weaker. The utility of a common currency rests in:
    * less adminstrational overhead
    * lowered transaction costs
    * no currency risk

    If a currency is evaluated at all, this utility will vanish in large parts. You must now seriously prepare for quick administrative change and more importantly, a Euro in doubt is worse than the old system. When you are dealing with a foreign currency you know it can fluctuate in a certain reasonable range which you can buy insurance against.
    Now if you have a currency in doubt you are not even sure what currency you will be paid in and nobody will offer you a “Euro breakup insurance”

  12. I think we agree that whether the euro will work or not, it is important that people feel free to say what Noyer is reported as saying. I agree with you, that doesn’t make it weaker, it makes it stronger.

    Noyer is not “people”. He’s a central banker. He has exchanged the right of free speech for the job. Of course he shouldn’t lie when asked. But that he’s asked that question at all is significant.

    I think any political or economic project needs to be available for evaluation.

    That makes it weaker. The utility of a common currency rests in:
    * less adminstrational overhead
    * lowered transaction costs
    * no currency risk

    If a currency is evaluated at all, this utility will vanish in large parts. You must now seriously prepare for quick administrative change and more importantly, a Euro in doubt is worse than the old system. When you are dealing with a foreign currency you know it can fluctuate in a certain reasonable range which you can buy insurance against.
    Now if you have a currency in doubt you are not even sure what currency you will be paid in and nobody will offer you a “Euro breakup insurance”

  13. Oliver, I can’t think of a better recipe for fear uncertainty and doubt than for the people running the system to provide no guidance on a fundamental issue widely discussed elsewhere.

  14. But they are the ones who cannot.
    Whatever an ECB representative can say in favor of the Euro is like a cow advocating a vegan lifestyle. He could kill it with a single sentence, but he cannot strengthen it. All he can do is prolong the discussion.
    If you want to see the Euro strengthened you need the members’ governments to take the SGP seriously.

  15. Rob, I don’t know whether you have a strong sense of humour, but the situation is rather comic. The attempt by the European parliament MP’s to have a regular report-back on the benefits of the euro I think was genuine. They would lijke to have more communication, more info, and more arguments they can take to their voters.

    Now Trichet had to resist this, not because in principle he needs to (I don’t agree with Oliver here – Greenspan is pretty communicative about the dollar), but because he understands better than those MP’s that there are problems, and the last thing he wants to do is air these issues in public till they have clearer how to handle them.

    As it stands, apart from saying what a unique success it is, it is hard to give detailed arguments that the euro is working well, since it isn’t. As I say, most bankers wouldn’t be clear what you can do about Italy’s problems. So they are working to try and find solutions, and meantime they don’t want too much attention focusing on what they are doing. At least, that’s my hunch.

  16. Greenspan is pretty communicative about the dollar

    He’s never been asked to justify its very existence. Mr. Trichet would necessarily end up doing just that. If he had to take about the interest rate he would have to say whom it is too high and whom too low for. Also it might be noted that his talk is always a bit of monetary policy.

    You may say that this is a basic flaw with the Euro and I would agree, but if you want to keep hidden a basic flaw you need to lie.

    Now I would argue that a discussion about this and acting on the conclusions would be better for Europe in the long run, but that is not a central banker’s job. He’s there to make it work. He’s sold his immortal soul and his tongue for the job. If this is to be discussed, independent economists should do that.

  17. Edward, I started by saying we shouldn’t obsess about breakup. Like a rotten tooth though we can’t resist.

    I don’t think I’m being too complacent when I say that this was always going to happen and there’s still every chance it will turn out happily. Or at least acceptably. So I disagree with one of the points you make above: this is convergence. It was never going to be pretty.

    You have an engine driving at full speed. You flip a switch and lock an important set of gears. There are ugly grinding noises, juddering and squeaking. Your speed drops. Bits of the engine may fall off. You need to be a good driver to stay on the road, and a skilled mechanic to carry out running repairs. And there’s a always a chance you may end up in a ditch.

    I know there are many longstanding prophets of doom who now see portents all around them. And you don’t need to be Malthus to be worried about demography. But, while failure of the euro is an option (and exit by one or more current members is starting to look like a likelihood), its not preprogrammed.

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