Category Archives: The European Union

Playing Chicken And Rooster With Hungary

Posted on by
2

Tension surrounding the application of a series of so-called “unorthodox policies” by Hungary’s Fidesz government has certainly been rising in recent days. While Washington has been reasonably quiet as govenment emissary Tamas Fellegi meets with top IMF officials, Brussels has seen a veritable avalance of official statements and policy initiatives. Despite constant rumours that an agreement with the IMF is near, I find it pretty implausible that any deal can be reached without some kind of EU assent.  At the present time this assent is unlikely to be forthcoming, and indeed the ”ante” has been pushed up and up. The latest example here is the fact that Brussels has given the Hungarian administration till next Tuesday to do something about altering the country’s new constitution or face the prospect of legal action, and possible suspension from the EU under article 7 of the EU Treaty. Budapest on the other hand has been full of conciliating words, but the key point is we have yet to see anything meaningful in terms of action. Continue reading →

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

Posted on by
3

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.

Not Really Uniting, to Not Really Save the Euro…Not Really

Posted on by
Reply

The British newspapers are full of lines like “UK vetoes EU uniting to save euro” and worse. This illuminates a huge problem with the European Union.

The first problem is that this assumes that somebody’s going to save the euro. This is an error of the same form as the classic Yes, Minister joke:

We’ve got to do something. This is something. Therefore we’ve got to do it.

Given what I’ve already said about this, I’m very far from convinced that balanced-budget amendments will “save the euro”. Further, the UK isn’t opposed to the euro as a matter of policy and you have to be very, very Commission-minded to imagine that everyone outside is secretly either desperate to get in, or else desperately trying to keep the euro from sucking them in. Also, there’s nothing intrinsically good about “uniting around” a bad idea. Being united and wrong isn’t a good thing. As we used to say at school:

Why did you do it? Lee told me to do it. If Lee told you to do it, would you jump off a cliff?

But all this is a special case of a general problem. There is a dreadful poverty of discourse about the EU. Whatever happens gets discussed in terms of europhiles vs. eurosceptics, intergovernmental vs. supranational, nation A vs. nation B. In the UK’s national context, this meant that the prime minister could announce a veto on lower reserve capital requirements for banks and be accused of selling out to the City. I mean, it’s weird enough in itself, but it doesn’t make sense to claim that he’s selling out to the banks in doing something that directly, mathematically costs them money.

It is rare that any policy proposal regarding the EU gets discussed seriously on its content, rather than as part of a specialised form of horse-race journalism. Is one nation or institution getting an edge in the game of diplomacy? Last week’s summit cut across all the standard EU dichotomies. A Tory veto on lower reserve requirements? French and German backing for a purely intergovernmental arrangement? Core European demands for aggressively procyclical economics? If you were working on any of the usual rules, you’d be completely disoriented, and it’s painfully obvious that so many people are.

So let’s discuss the merits. The headline proposal is to make everyone have a balanced-budget amendment in their national constitution. (They weren’t exactly holding back!) This sets a limit of 0.5% of GDP for the cyclically-adjusted structural budget deficit, and requires a 1/60th reduction every year in the public debt over and above 60% of GDP. This sounds pretty Hooverite, but it’s worth noting that it’s also full of language that leaves lots of room for interpretation. “Cyclically adjusted” means that there could be leeway for a stimulus, and a “structural” budget deficit is precisely whatever the person who defines “structural” wants it to be.

Further, it mentions leveraging the EFSF and states that the EFSF and ESM will operate with the European Central Bank as their agent. This sounds like something worth having, and the ECB’s announcements on Friday do suggest that there might be quite a bit more central bank liquidity coming.

It also takes note of the trade problem – at last. This is important. There is language in there that accepts that the intra-eurozone trade imbalances are a problem and that it’s not enough to flog the deficit states. However, if the budgetary outs were vague, this is far vaguer.

And finally, there were a gaggle of added extras like wanting to have all transactions in euros cleared via the ECB and maybe moving the European Banking Authority to Paris, which seems to have freaked out David Cameron something good and proper. I can’t see why this stuff should have been on a serious agenda – it’s more Silvio Berlusconi’s style – but perhaps the temptation was unavoidable, and I may come back to this in a post on the diplomatic side of the story.

In conclusion, whether this “fiscal compact” is going to be Euro-Hooverism or “hard Keynesianism” seems to depend mostly on political will and interpretation, the first being the father of the second. A reading that emphasises the hard numbers and takes an ungenerous definition of “cyclical” and “structural”, that considers the ECB’s role as “agent” to mean just acting as a broker, and that considers the clause on trade imbalances to be hot air, will give us the first.

However, a reading that takes a sceptical view of the reality of “structural”, that thinks the pits of a depression are the place to exploit a cyclical adjustment if there ever was one, and that insists on pushing the imbalances clause, would get us somewhere else entirely, especially if it also suggests that the “agent” might have more “agency” than just processing transactions.

It’s not dead, it’s resting

Posted on by
5

Financial Times 22 November 2011:
In the longer term lending markets, Europe’s banks have largely been unable to raise new senior unsecured debt, the bread and butter of their funding, in recent months as investors fret over the effects of the eurozone crisis.
Since the beginning of July, the region’s banks have sold a collective €11bn of senior unsecured debt according to Société Générale data. That compares to €121bn raised year to date, and about €150bn raised annually in 2009 and 2010. In the longer term lending markets, Europe’s banks have largely been unable to raise new senior unsecured debt, the bread and butter of their funding, in recent months as investors fret over the effects of the eurozone crisis.Since the beginning of July, the region’s banks have sold a collective €11bn of senior unsecured debt according to Société Générale data. That compares to €121bn raised year to date, and about €150bn raised annually in 2009 and 2010.

Irish Times 19 November 2011 processology on the 2010 Irish IMF/EU program  –
Tension surfaced as [Brian] Lenihan [Finance Minister] sought to raise the possibility of imposing losses on senior bank bondholders, to ease the burden on the State, which the ECB opposed but the IMF believed would be feasible. Fearing an outburst of contagion in wider bank markets, the ECB insisted that a “relatively small amount of money” was at stake against the risk of destabilising the total stock of European banking debt. But the IMF refused to yield, saying the question should not be ruled out. “The idea smouldered in the background,” says a source. The ECB kept seeking to have the notion taken off the table entirely while the IMF and the government sought the opposite. Legal advice was taken, yet there was no end to the stalemate.

So the ECB is requiring Ireland to make payment in full to legacy bondholders in Irish banks with the rationale of not scaring the market for senior unsecured bank debt … a market that is now, of its own accord, dead.

The ECB is still very much in the game

Posted on by
6

It was widely reported last week that the Bundestag had “ruled out” or set a “red line” against any further ECB intervention in the market for government bonds. This is nonsense, and based on the common practice of not reading German. The vote, which for a start was a vote taken after debating a statement from Angela Merkel and not anything more concrete, expressed the Bundestag’s agreement with a text containing three statements. The first of these is under the heading “Sachverhalt” (Factual Background) and summarises the current state of play with regard to the EFSF.

The second is headed “Vor diesem Hintergrund stellt der Deutschen Bundestag fest:” (In the light of these facts, the Bundestag understands/recognises/realises) and contains the statements that the Bundestag (I’ll use the abbreviation, Bt. from here on) knows that the EFSF must be used more efficiently, and that it is aware that leveraging it carries a risk, that the existing instruments will be used and that the EFSF shall only be used under the terms of the treaty creating it, and finally, that “with the entry into force of the EFSF, the continuation of the ECB Secondary Market Program is no longer necessary”.

Note that, well, the opinion of the Bt. is a jolly one to have. It explicitly doesn’t say that “The ECB SMP shall not be continued”, and of course the ECB is banned by its charter from accepting any instructions from politicians. Also, this clause – which is the one that was doing the work – is in the first section of the resolution, which merely takes note of its content as facts.

The second section begins very differently: “Der Deutsche Bundestag fordert die Bundesregierung auf:” (The Bt. calls on the Federal Government to…). You will note that we have moved from merely taking note of the facts and expressing an opinion, to a demand from the legislature, which is the supreme power in the German constitution, that the executive do something. There is no reference to the SMP in this section of the document. The only reference to the ECB in it refers to the fact that it is forbidden to buy government bonds direct from government, rather than buying them in the open market or accepting them as collateral on the discount window. This neither rules out continued ECB intervention, nor does it even rule out the EFSF buying bonds from governments and then selling them to the ECB (or, if it gets its bank licence, posting them for rediscount).

On Friday, of course, the rate on Italian paper hit 6% and, as has repeatedly happened before, the ECB presses rolled into action. In fact, it seems that the ECB is operating an implicit decision-rule that it will buy whenever the rate on Italian debt hits 6%. There’s a nice discussion here of the semantics of Merkel’s use of the words “firewall” and “Schutzwall” – the most common meaning of the first is something which selectively permits access to a network, and the second manages to combine both Nazi and East German connotations in one sweeping infelicity.

But it seems to me that the ECB is operating something more like an electric fence. Cows will try to push through the electric fence a few times, unwisely prodding it with their sensitive noses and getting zapped. But then they will leave well alone. The question is how often you need to zap a bond trader before they get the point.

UK shadow chancellor, Ed Balls, for one, got the point faster than either the cows or the bond trader:

I think the most important thing in the markets today is that the European Central Bank has actually intervened and bought Spanish and Italian debt and that shows that the ECB is doing its job. But fundamentally will there be the scale of financial backing for sovereign countries like Italy? We don’t know. What will the actual details of this plan be? We don’t really know. What is going to be the bank recapitalisation? We don’t know. Will the European economy grow next year? That’s really in doubt…I don’t think it’s sensible for Britain to make bilateral contributions to a euro bailout fund. The ECB should be doing this job.

Meanwhile, perhaps we should all worry more about the fact that the European Council communiqué promised “very specific measures” to boost competitiveness and growth, without naming any very specific measures. It’s reminiscent of the famous company launched during the South Sea Bubble to “carry on an enterprise of great advantage, but no-one to know what it is”. But this is the opposite – the South Sea Anti-Bubble, even if the original South Sea Company was in fact a device to inflate away government debt.

Update: Mooo!

Science Fiction?

Posted on by
1

“What do I think about the legacy of Atatürk, General? Let it go. I don’t care. The age of Atatürk is over.”
Guests stiffen around the table, breath subtly indrawn; social gasps. This is heresy. People have been shot down in the streets of Istanbul for less. Adnan commands every eye.
“Atatürk was father of the nation, unquestionably. No Atatürk, no Turkey. But, at some point every child has to leave his father. You have to stand on your own two feet and find out if you’re a man. We’re like the kids that go on about how great their dads are; my dad’s the strongest, the best wrestler, the fastest driver, the biggest moustache. And when someone squares up to us, or calls us a name or even looks at us squinty, we run back shouting ‘I’ll get my dad, I’ll get my dad!’ At some point; we have to grow up. If you’ll pardon the expression, the balls have to drop. We talk the talk mighty fine; great nation, proud people, global union of the noble Turkic races, all that stuff. There’s no one like us for talking ourselves up. And then the EU says, All right, prove it. The door’s open, in you come; sit down, be one of us. Move out of the family home; move in with the other guys. Step out from the shadow of the Father of the Nation.
“And do you know what the European Union shows us about ourselves? We’re all those things we say we are. They weren’t lies, they weren’t boasts. We’re good. We’re big. We’re a powerhouse. We’ve got an economy that goes all the way to the South China Sea. We’ve got energy and ideas and talent – look at the stuff that’s coming out of those tin-shed business parks in the nano sector and the synthetic biology start-ups. Turkish. All Turkish. That’s the legacy of Atatürk. It doesn’t matter if the Kurds have their own Parliament or the French make everyone stand in Taksim Square and apologize to the Armenians. We’re the legacy of Atatürk. Turkey is the people. Atatürk’s done his job. He can crumble into dust now. The kid’s come right. The kid’s come very right. That’s why I believe the EU’s the best thing that’s ever happened to us because it’s finally taught us how to be Turks.”

The Dervish House by Ian McDonald, pp. 175-76

Revisiting the Eurodebate

Posted on by
20

This post of P O’Neill’s made me think of something. That is, the British debate on joining the Euro, and on Europe more generally. I was strongly pro-Euro, something which now looks as bad a decision as joining the Liberal Democrats was. It’s hard to avoid the conclusion that had the UK had Eurozone interest rates in the 2000s, we would have had an even huger housing bubble and even more gigantic bank balance sheets, and we would have had to resolve them without being able to use the central bank as lender of last resort, and we would have been unable to devalue the currency as a stimulus mechanism.

Any counter-argument requires that the influence of the Bank of England in ECB policy would have been both powerful and right. The first is debatable, but we have to accept that the Bank didn’t restrain the housing bubble and also failed to respond to the crisis in the real economy in 2008, sitting on its hands and mumbling about inflation while the labour market cliff-dived and the bank regulators across the corridor frantically juggled with Halifax-Bank of Scotland, Lloyds, and Northern Rock. Also, the early 2000s situation of a bubbly periphery and a stagnant core would have been even worse with the London housing market in the Euro, and it’s hard to say how that would have panned out.

But what were we really debating in the 90s?

The arguments in favour, at least the economic ones, were that we might benefit from being fully integrated in a bigger trading bloc, that we would benefit from currency stability, that lower interest rates would be nice to have, and that the Eurozone restrictions would be a force that would require industry to be more competitive (or did they just mean lower wages?). The arguments against, at least the economic ones, were that the Stability & Growth Pact would be an anti-Keynesian force for deflation and that the option of devaluation would be removed.

Then there was a whole lot of other stuff. A lot of the “for” side thought it would make us more European and meant by this that it would make us more social-democratic (or Christian-Democratic, or even Free Democratic), although I don’t think any of them could have articulated a mechanism by which this would happen. I suspect that for a lot of us it was a bit like the Estonian MP who told Tim Garton Ash that “Europa ist…nicht Rußland!”, or in our case, Europe was not-America.

A lot of the “against” side seemed to agree with the idea that joining the Euro meant the triumph of social democracy, because they at least claimed to think that the European Union was an inherently socialist institution. Some of them still think this now, when it has imposed structural adjustment on three European countries in order to avoid the nightmare of fiscal expansion in Germany. Others took the Friedmanite line that currency adjustment was a form of free market competition and therefore desirable. This was at least defensible. And others thought that it was a scheme to redraw the UK’s internal borders or replace the flag or something.

The interesting contradiction here was that the same people who worried that we would be unable to devalue the currency were also fervent austerians who didn’t believe in demand management of any kind. It was as if they believed in hardcore new classicism up to the point where it affected their re-election. How could it happen?

Obviously, whether you felt the SAGP would be useful discipline or an anti-Keynesian straitjacket simply depended on whether you expected the economic problem of the 2000s to be inflation or deflation. But the economic argument that was very rarely discussed was the one that is now fascinating everybody – exactly how the Eurosystem, rather than the Euro, would function in a financial crisis. Apparently this was discussed in specialist circles, but it didn’t make even the best of the national press.

To sum up, I agree that the yes side was wrong about fixing the currency. To be honest, when asked, I always said I was in favour of joining if we could join at a significantly lower exchange rate. The benefits of which Jaguar-Land Rover just demonstrated. But this is a cop-out on my part. On the other hand, I think the Eurosceptics and some of the conservative Europhiles should accept that they were wrong about the SAGP – yes, Virginia, inflation was a phantom menace, and the ghosts of 1929 were not finished with us. And we can all agree that we were all wrong about the banking and financial aspects of the Eurosystem, in that we didn’t even bother to argue about them.

I promised to blame somebody in the last post. Here it comes: the key European politicians, especially the French and the Germans and the European Commission officials, who designed the Euro and the Eurosystem. They created a system that had a structural deflationary bias in an era of deflation, one that delivered rock-bottom interest rates to countries in the grip of land fever, and one that couldn’t cope with a banking crisis although it included the biggest banking system in the world. And then they kept putting up interest rates. What’s worse is that they now have the gall to give lectures about virtuous savers – even when they are the same individuals, like Wolfgang Schäuble, who were in power in the 1990s.

AF447 Economics

Posted on by
5

For Ed everything is always about demographics. For Kevin Drum and others everything is always about energy. Other people have decided that productivity is so high that unemployment is inevitable, or that all consumption is now welfare reducing. Still others that the Chinese are our rightful masters – submit! although poor old Europe runs a trade surplus. And of course these aren’t the only discoveries.

Other people still will tell you that millions of Americans who were gainfully employed up to 2008-2009 are suddenly of literally zero productivity – well, they surely are as long as they’re on the dole, but that’s not what they mean – or just that everyone went mysteriously lazy in a sort of spontaneous mass conversion event. Or that the United States has a serious deficiency of fast trains, which only became apparent all at once in 2008. It has been an era of enormous creativity in the analytical function of economics, which has been more than matched by the united consensus among practitioners in its policy-advising function.

Behold the power of Leszek Kolakowski’s Principle of the Infinite Cornucopia. This holds that there is an infinite cornucopia of arguments in favour of whatever course of action or inaction you happen to have decided on for whatever reason. All these fancy intellectual theories, and none of them consider the possibility that there’s a recession on. If that was accepted, of course, it would suggest that things really are this bad, Alan Greenspan really was this incompetent, maldistribution works like it did in the 20s, this is as bad as it looks, and simply taking your hands off the stick and leaving it to George was relatively the best policy, just because it wasn’t actively harmful.

Actually, the aviation analogy worries me; I keep thinking of the pilots of Air France 447, who flew an entirely airworthy aeroplane from 35,000 feet into the sea in a fully developed stall without seriously trying to recover because (as far as anyone knows) the immediate effects were counterintuitive.

I’m sympathetic to the energy explanation, but I do think the idea that there’s a recession on might still be worth a crack, and we might try pushing down the nose and increasing the air speed.

Going Dutch – One Possible Solution To the Euro Debt Crisis?

Posted on by
37

Looking back over the last 18 months of Europe’s debt crisis, European Central Bank Executive Board member Lorenzo Bini Smaghi recently invoked Winston Churchill’s famous quip, “You can always count on Americans to do the right thing — after they’ve tried everything else.”

Europeans too, he assured his audience would also get it right, eventually. Unfortunately all the coming and going, procrastination, denial and half measures we have seen since the Greek crisis first broke out have not come without a cost, and this cost can be seen in the growing lack of confidence in the markets that a lasting solution to the underlying problems of the common currency will finally be found. Only adding to the problems, even the Americans seem to be having difficulty finding the right thing to do this time round, or at least doing it at the right moment, as the market turbulence following the S&P downgrade has served to underline.

It’s probably too soon to say whether what Europe’s leaders are about to agree on what will ultimately be the “right thing”, but at least there now does seem to be a general recognition that a defining moment is fast approaching, and fundamental changes to the continent’s institutional structure are now on the table. Among the options now being openly advocated and debated is to be found a measure thought unthinkable a year ago — ending Europe’s 13 year experiment with a single currency. But even if this ultimate possibility – the so called nuclear option – were to come to pass, as always there would be a right way and a wrong way of going about it. Continue reading →