Funny how harshly time deals with economics textbooks sometimes.
From: Artis and Nixson, Eds, The Economics of the European Union. 2007.
“Gains from Euro adoption come at the expense of relinquishing monetary policy as a stabilization tool. […] One early […] study for the fourt large EU-15 countries found that, in comparison with a free float, EMU would reduce […] output variability.“
GDP per capita:
all data from Eurostat
Heiner Flassbeck in the FTD reminded me of a development that Sarkozy had hinted at – or hoped for really – back in December already (am not finding that quote). Namely, that banks are using the ECB’s new liquidity providing rules in order to pull in a healthy profit on European governments’ debt. Thus at a time when those governments could very well use those profits themselves the ECB effectively is subsidizing commercial banks’ net gains at an – indirect – cost to taxpayers. Why are they doing? Mostly for – German – ideological reasons it seems.
Let’s expound. The ECB announced last December that it would give out unlimited long-term – up to three years now – loans to commercial banks at a refinancing rate of 1% and while accepting as collateral virtually anything tradeable – de iure not de facto – on the markets. In other words if I own a Greek government bond currently trading at somewhere around 30%, I may use it as collateral to receive a loan from the ECB of 100% – Disclaimer: I am not sure about this part. Please let me have it if you know any better – of its value at an interest rate of 1%. Now, if I were to invest that money in, say, Italian government bonds currently yielding at somewhere around 6% it’s easy to see, that I will be able to pull in a healthy profit on this transaction. This especially as this operation really functions as a sort of financial perpetuum mobile as I can now use my newly acquired Italian bonds as collateral with the ECB in order to acquire a new loan.
There is a risk involved of course, namely that Italy (or whichever country is involved in any particular scenario) will default or that the Eurozone will fail. If we’re abstracting from Greece though, how likely is that really? And seeing as lots of European commercial banks will go bankrupt anyway, wouldn’t it be worth it to double down and potentially significantly expanding on their profits, while not fundamentally changing their position in a default scenario?
Why is this a problem then? After all this sort of subsidized speculation attenuates the Eurozone crisis by increasing demand for periphery debt on secondary markets. Check Italy, Portugal, Ireland, or Spain bond yields. Think those improved numbers are due to the Fiscal Pact Treaty being discussed? Didn’t think so either. While this effect of the ECB’s increased lending – close to 500 billion € in the first week alone – seems to be rather limited according to Barclay’s, it is the best case scenario that I have laid out here.
To sum up then, the ECB has initiated a long-term, low-interest lending program that a) doesn’t really work and b) lower yields for governments bonds to some extent when it does function properly while creating a subsidized profit to commercial banks. Now let’s say the ECB were instead to spend most of that money on buying up sovereign debt itself. Not only would yields go down far more than they have but the profits accrued on these operations – assuming the Eurozone holds and Italy (or whoever else) does not default – would benefit the ECB itself, which in turn means the European national central banks of course and finally European governments and indirectly their taxpayers.
But then why should one do what makes sense when – German and other – ideology opposes this kind of monetary policy. After all ideological purity is more important than obtaining results. Right?
As Merkozy said today negotiations on the so-called Fiscal Pact (really: International Treaty on a Reinforced Economic Union) are advancing and it is expected to be signed by March at the latest. A second draft of said treaty has been leaked meanwhile. Open Europe has put forward a discussion of the revisions between the first and second draft treaties circulating. I believe that the most important change between the two versions lies in the expanded role of the European Court of Justice (ECJ) in the second draft. As Open Europe puts it:
Article 8 stipulates that the ECJ would have jurisdiction over any violation of the entire Title III, i.e. on all the provisions of the so-called “fiscal compact”. In the previous draft, the ECJ only had a say on Article 3(2), i.e. on whether national governments have correctly transposed the balanced budget rule into their national legislation;
Furthermore, according the revised text the Commission “may, on behalf of Contracting Parties, bring an action for an alleged infringement of Title III” before the ECJ.
In the previous draft the ECJ effectively only would have had the power to judge the validity of the national implementation of a debt brake or golden rule of ‘constitutional or equivalent nature.’ This time around it has additionally been be given a de facto veto over national budgets! Signatories of the Fiscal Pact will have to ‘apply the following […]: The budgetary position of the general government shall be balanced or in surplus.’
In other words any country having signed the pact (including non-Eurozone states in my understanding) or the Commission may take any other signatory in front of the ECJ if that first country’s budget is not ‘balanced or in surplus.’ The ECJ will have to allow for ‘the budgetary impact of the economic cycle […] and […] exceptional economic circumstances, or […] periods of a severe economic downturn,’ but in principle it will have the power to declare a sovereign country’s budget invalid. Think about this for a second.
Obviously the vague definitions and circumstances laid out above hardly make this kind of judicial enforcement fool proof and for normative reason that is probably for the better. Still, the symbolism of the heart of national parliamentary sovereignty to undergo supra-national control represents another step towards increased integration.
The Süddeutsche Zeitung (SZ) published a really interesting article on Friday arguing that the EFSF’s guarantees were in fact sufficient to last for all of 2012. I took a look at the numbers myself in order to check their math. The EFSF has been endowed with effectively usable guarantees of 440 bn €. Of the bailouts already agreed to, the first Greek package was financed bilaterally and thus does not affect the EFSF. Ireland will receive 67.5 bn € in total with 17.7 bn € coming from the EFSF. Portugal was promised 78 bn € a third of which (26 bn €) will come from the EFSF. Greece meanwhile has been promised a second bailout package of 109 bn €, the IMF will put up some of this money, which I have estimated as to be a third, leaving 73 bn € to be financed via the EFSF. Let’s see what that gives us (note that all figures here are in billion €):
|Bailout promises given to / coming from||total||EFSF||IMF||EFSM||bilateral|
|Greece||110,00 €||30,00 €||80,00 €|
|Ireland||67,50 €||17,70 €||22,50 €||22,50 €||4,80 €|
|Portugal||78,00 €||26,00 €||26,00 €||26,00 €|
|Greece II||109,00 €||72,67 €||36,33 €|
|available funds total||440,00 €||60,00 €|
|remaining non-promised||323,63 €||11,50 €|
The not yet leveraged EFSF thus has 323 bn € in guarantees remaining for countries apart from Greece, Ireland and Portugal. In addition to the Commission’s having an additional 11 bn € in unused funds lying around. What happens when we take into account the most recent leverage option, which assumes a multiplier of 3, then? For this we need to look at how much money the EFSF actually has dispersed already, not on promises it has given for the future.
|Funds actually dispersed||total||EFSF||IMF||EFSM|
|Ireland||29,20 €||6,60 €||8,70 €||13,90 €|
|Portugal||30,40 €||5,90 €||10,40 €||14,10 €|
|remaining funds (minus Greece, Ireland & Portugal contributions)||397,15 €||1.191,46 €|
|+ minus Italy||318,57 €||955,71 €|
|+ minus Spain||266,35 €||799,05 €|
|+ minus Belgium||251,10 €||753,29 €|
|+ minus remaining promises to GR, IR & P||147,23 €||441,69|
We also need to deduct those countries bowing out of its EFSF obligations because they are in receivership of aid coming from this company [sic!]. That still leaves us with almost 400 bn leveragable Euros, 1.2 trillion € if we assume a multiplier of 3 may be relied on. Now if we continue to play this (mind-)game and see how much money would be available if Italy, Spain and Belgium drop out, taking into account promises already given to Greece, Portugal and Ireland, we have only 147 bn € remaining, which gives us a leveraged 441 bn €. Let’s look at what kind of sums relevant countries (Italy, Spain & Belgium effectively as everybody else is either too small (Cyprus), already in receivership (Greece, Ireland & Portugal) or not (yet?) truly threatened (France)) are looking to refinance in the mid- to near-future.
|Debt maturity||> 1 Yr|
In a worst case scenario of Italy, Spain and Belgium needing EFSF financing for their debt then, the EFSF even leveraged would not be sufficient for the Eurozone to even last 2012. The SZ needs to redo its math on this. Interestingly enough though, a leveraged EFSF would be capable of re-financing all of Italy’s governmental debt for 2012. Note that this overview does not take into account neither the ECB, further bilateral loans, the ESM, nor the remaining – admittedly limited – EFSM funds.
Last week saw a flurry of relevant players weighing on the debate of how to escape from the crisis trap and shape Europe going forward. Lots of interesting ideas and proposals floating around.
The speech that arguably caused the biggest uproar was Radek Sikorski‘s (the Foreign Minister of Poland) in Berlin. He laid out a stark dystopian-utopian dichotomy of Europe warning of ‘disintegration with appalling human cost‘ (Yugoslavia) or federation, ‘deeper integration, or collapse‘. His choice is clear as he – in broad strokes – lays out what a reformed European Union could look like. His proposals effectively includes more majority-vote decision-making (even if he never explicitly says so), automatic sanctions to strengthen fiscal discipline, stronger roles for the Commission, the Council and the European Court of Justice, the European Central Bank (ECB) as a true lender of last resort (LoLR) and calling on it to act soon, a smaller (‘Member States should rotate to have their commissioner‘!), more effective Commission, an empowered European Parliament formed at least in part via ‘pan-European‘ lists. In other words a strong move towards a more federalized EU, spearheaded by the Eurozone but not taking place outside of existing community institutions and based on significant treaty changes. For this, in a striking statement, he calls for Germany to lead, to – finally – act. ‘I fear German power less than I am beginning to fear German inactivity.’
So much for Poland, in France two differing visions were put forward by President Nicolas Sarkozy in Toulon and the French Parti Socialiste‘s presidential candidate François Hollande in front of the Socialist Group in the European Parliament. Hollande attacks the German-inspired austerity model as a solution to the crisis and disdains the need for treaty change, he in turn proposes a pact of responsibility, governance, and growth (‘une pacte de responsabilité, de gouvernance et de croissance‘). Most notably this were to include an increase in the guarantees going to the EFSF, a partial European debt collectivization (maybe along the lines of the Redemption Pact proposed by the economic advisers of the German government), and the ECB as a true LoLR. He wants an investment program at the same time financed via Eurobonds (Me: ’cause that’s gonna happen…) even while promising to lower French debt in the short- and mid-term (‘un déficit de 3% du PIB en 2013, un retour à l’équilibre en 2017‘).
Sarkozy has less manoevure for campaign promises as the opposition candidate in his proposals on Europe’s future. He also wants to reduce French government debt, while also reforming labor market laws (‘la retraite à 60 ans et les 35 heures ont été des fautes graves‘). Sarkozy stresses the Franco-German partnership, ‘la convergence‘ between the two in a Europe of stability (‘une zone de stabilité‘). He puts forward the (Franco-German) company line of more European solidarity necessitating more (fiscal) discipline (‘L’Europe a besoin de plus de solidarité. Mais plus de solidarité exige plus de discipline‘). He wants to re-found Europe (‘Elle doit être refondée‘) not in a supranational manner though but in a (Gaullist) intergovernmental one. At the same time he wants to move more decision-making into qualified majority voting (QMV) procedures. He is in favor of a government of the Eurozone, essentially run or at least dominated by the heads of state and government. He wants to create a European Monetary Fund (EMF), which were to take its decisions under QMV. The ECB he considers an independent actor, while emphasizing his hope and conviction that it will intervene in the face of deflationary pressure. Finally, he is in favor of increased coordination on budgetary questions coupled with automatic and more severe sanctions for those states not adhering to the debt rules. All this should be reflected in a new treaty. One last add-on, in a typical Sarko populist move, he wants to revise Schengen to be able to deal better with immigration questions.
On to the Germans then, were Bundeskanzlerin Merkel laid out her vision in front of the Bundestag on Friday. Following Merkozy’s newly agreed upon decision to not lay pressure on the ECB anymore she also stresses the bank’s independence. What she stresses – little surprisingly – are automated actions against states in infraction of debt rules, these procedures should be controlled by the Commission or the ECJ. Merkel once again stresses that Eurobonds are not a viable solution right now (‘Euro-Bonds [können] jetzt nicht als Rettungsmaßnahme gegen die Krise eingesetzt werden’). She wants to empower the ECJ to allow it to take cases because of infractions against the debt rules. More generally she wants to create a -n ill-defined – Stability and Fiscal Union, including a strong ESM and reforms of labor laws in some member states. Does that mean her proposed treaty changes include labor and maybe social policy transfer to the European level, at least partly? She makes clear that the treaties need to be changed either within the EU 27 or within the Eurozone if not possible otherwise.
Last but most definitely not least, here is arguably the most important speech of last week (at least in the short term). Mario Draghi’s, the President of the ECB, statement in front of an apparently almost empty European Parliament. Draghi interestingly enough stressed the ECB’s goal ‘of maintaining price stability […] in either direction‘ and as applied to ‘both the setting of official interest rates and the implementation of non-standard measures‘. Will the ECB increase its – non-sterilized – intervention then? Secondary Market Purchases (SMP) 3.0? Draghi also calls for ‘fiscal compact‘ as the ‘most important signal from euro area governments for embarking on a path of comprehensive deepening of economic integration.’ He then answers to critics wondering how such a ‘longer-term vision can be helpful in the short term‘ by telling them that ‘other elements might follow‘. Ever greater, monetary expansionary union?
So what are we left with then? Sarkozy and Merkel are preparing treaty changes – intergovernmental one, much more federalist the other. Both are stressing the independence of the ECB, Sarkozy with the explicit hope of it intervening massively, Merkel – as insinuated by the opposition – only praying for it at night. Sarkozy wants more solidarity (Eurobonds!), Merkel believes they are the wrong solution as of this moment. Sarkozy wants to move ahead with tighter – again: inter-governmental – economic governance within the Eurozone, Merkel prefers treaty change for the EU 27 or at least with an opt-in for everybody interested (Poland! Sweden?). Lots of issues to work out before Monday’s episode of Merkozy running Europe. The German opposition wants the EFSF to become a bank, Hollande is looking for a European investment program based on Eurobonds – I think we can safely ignore both of these for the time being, the latter more so than the former. Sikorski is practically begging the Germans to finally put an end to this crisis, while effectively calling for a federation of Europe. Draghi, finally, hints at ECB intervention once a ‘fiscal compact‘ is underway.
It’ll be an interesting week once more to say the least.
I was playing around with the ECB’s SMP numbers this morning, while waiting for last week’s purchase figures to be released (8.58 bn €). The resulting overview is quite striking:
The very idea of national ‘master plan’ always smacks a little too conspiratorial for me, at best I see it as an extreme simplification of a systemic interplay of national actors working for differing goals in an international setting, especially within the EU where borders between national and European policies have increasingly become blurred. Either way, the CDU’s Leitantrag (proposal) on Europe for its current party conference comes as close to a (CDU = major coalition partner ~ ) German ‘master plan’ for Europe as it can get.
For reasons incomprehensible for me, neither the German nor the foreign media seems to have really picked up on this. Neo Nazi crime, the minimum wage, the conservatism debate at large are focused on much more extensively even if arguably changes of this magnitude to the European institutional framework will have a much more important long-term impact. What does this plan entail then?
For the most part it is a compilation of little surprising previously known CDU positions. They are opposed to a centrally organized and governed Europe (Wir wollen kein zentralistisch organisiertes und regiertes Europa), no European debt collectivization (eine unkalkulierbare Vergemeinschaftung der Staatsschulden), no Eurobonds ([wir] lehnen […] die Einführung von Eurobonds strikt ab), current account surpluses as a source of strength not an international problem (Es kann nicht darum gehen, die Starken zu schwächen). In regard to the infamous transfer union there is an interesting emphasis on the opposition to automatic/permanent financial transfers leaving open the possibility of one time payments and other methods (Wir wollen in Europa keinen automatischen Finanzausgleich nach dem Vorbild des deutschen Länderfinanzausgleichs und keine automatischen Haftungsverpflichtungen).
Most revealing though are the actual proposals themselves. The is in favor of ‘more Europe in important policy areas’ (Wir brauchen in wichtigen Politikfeldern mehr Europa), which includes integrative changes to the Economic and Monetary Union and a move of the European Union towards a strong Political Union (Deshalb wollen wir die Wirtschafts- und Währungsunion vollenden und die Europäische Union als starke Politische Union gestalten), which can act internationally also ([die] in der Lage ist, unsere Anliegen international durchzusetzen).
Monetary Union shall be converted into a Stability Union (aus der Währungsunion eine Stabilitätsunion machen). Specifically, the CDU is in favor of the introduction of debt brakes all over the currency zone and as a condition for new Eurozone member states ([wir] setzen […] uns weiterhin für die Einführung einer Schuldenbremse nach deutschem Vorbild in allen Euro-Staaten ein. Die Aufnahme in die Eurozone soll nur noch möglich sein, wenn zuvor entsprechende Regelungen in der Verfassung des beitretenden Staates verankert worden sind).
On the European level the Stability and Growth Pact is supposed to be integrated into the EU Treaties in order to effectively function as a Eurozone-wide debt brake (wir auch den Europäischen Stabilitäts- und Wachstumspakt in die EU-Verträge integrieren, damit er die Wirkung einer Schuldenbremse auf europäischer Ebene entfaltet). In order to reinforce the pact, the European Court of Justice shall be empowered to fine malefactors (der Europäische Gerichtshof (EuGH) [soll] die Einhaltung des Stabilitäts- und Wachstumspaktes künftig durchsetzen und Verstöße ahnden). States incapable of following macro-economic regulations will in a first step receive ‘advising help’ (Beratungshilfe), followed by ‘human resource support’ (personelle Unterstützung) in both cases coming from the Commission. In a last step the ESM shall be activated where ‘unavoidable’ (unabdingbar) and under strict economic and financial conditions (strenge finanz- und wirtschaftspolitische Auflagen). If a debt restructuring becomes necessary an EU Savings Commissioner (Sparkommmissar) shall be allowed to oversee restructuring measures (Restrukturierungsmaßnahmen), he/she shall also be allowed to overrule the state’s government in question (dieser [soll] auch Durchgriffsrechte erhalten, falls der jeweilige Staat seinen Pflichten nicht nachkommt).
Less concrete measures are more spectacular and surprising. Thus the ESM is supposed to be evolving towards a European Monetary Fund. The aforementioned Political Union shall receive a symbolic head with the President of the Commission to be elected by all citizens of the EU! The CDU also wants the emergence of a ‘democratic two chamber system’ (demokratisches Zwei-
Kammer-System) consisting of the European Parliament and the Council, both are to given the right to initiate legislation also (beide Kammern […] [sollen] das Initiativrecht für die EU- Gesetzgebung erhalten). Within this framework of a move towards a more integrated European Political Union and society, the CDU also proposes a common European People’s Party leading candidate for the next EP elections. The European Parliament should also reflect EU population more in the future, more MPs from the bigger member states in other words.
What else? A two speed Europe, potentially outside of existing treaties, is seen as potential but acceptable evil (Die Umsetzung dieser Maßnahmen kann in einer Übergangsphase auch auf der Basis zwischenstaatlicher Lösungen erfolgen) even if everything should be integrated into the EU treaties at some point (neu geschaffenen Regeln der zwischenstaatlichen Zusammenarbeit [sollten] mittelfristig in die EU-Verträge integriert werden).
Really what has to be taken away from this is that the CDU clearly is asking for ever deeper union at this point, subsidiarity is all of a sudden seen as a principle requiring the policy transfer to the European level ([wir] sehen […] die Übertragung von Kompetenzen auf die europäische Ebene im Rahmen des Subsidiaritätsprinzips als die zeitgemäße Form an). Merkel’s party after initially generating some doubts about this during the early months of the Eurozone crisis has clearly laid an emphasis of integration as the way forward.