The ECB in July 2013 published an extremely interesting paper on “The Impact of Political Communication on Sovereign Bond Spreads.” Here are some highlights.
Keep in mind that, “Euro area countries are more exposed to the risk of self-fulfilling crises whereby investors generate a liquidity crisis that can degenerate into a solvency crisis.”
Correcting for financial, economic and other political events, this study finds that political communication – both of a positive and negative nature – does have a daily contemporaneous effect on sovereign bond yield spreads.
Similarly, an interesting finding is that economic fundamentals appear not to have a significant influence on bond spreads in the short term, but are instead overwhelmed by statements, credit rating changes and country specific events.
Bond investors will price risk appropriately only if the realistically face a danger of default. Governments will run sound fiscal policies only if they know that they are not going to be bailed out by the euro area and that they might face higher financing costs. This debate about incentives and principles is a fully legitimate one in open democratic societies. However, it has sent a possibly destabilising message to potential investors in the bonds issued by troubled countries, namely that those bonds are not safe assets because the probability of a complete redemption was seen as reduced, and this with a perceived (semi-)official sanction. Investors have therefore demanded a large risk premium. This, in turn, may have contributed further to the fiscal problems in the peripheral euro area countries over the past two years. Policy-makers are therefore confronted with a certain trade-off between conducting open democratic debates and respecting the needs of the financial markets, reflected by the controversy over the notion of a “democracy in conformity with market needs.”
This study does not find any strong empirical evidence that the amount of political communication has an impact on the level of government bond yields. Rather, our finding is that the connotation of the communication determines the type of impact on government bond yields: positive communication can lead to a compression of spreads, whereas negative communication can cause a widening of pspreads.
Communication policy would be more effective if certain principles were respected in the design and implementation of politicians’ communication strategies.
At several points during the crisis, certain types of political communication may have added uncertainty rather than certainty to market perceptions about the sovereign debt crisis in the euro area, and that unconstructive and inconsistent communication can have real and tangible effects on countries, their financing conditions, and by extension, on their populations, as well as on the cohesion of the euro area.
I fear that one can safely argue that the impact of governmental change in Germany in 2009 and especially the entry of the FDP into power was not a good thing for the Eurozone.
It’s an interesting subject that I’ve been working with quite closely for my thesis, his argument essentially is that until very recently Germany was seen as belonging to the ‘bad basket of overregulated European labor markets’ and that thus flexibility of the labor market is insufficient to explain performance in the crisis. I kind of agree but am a) not really convinced by a statistical measure that claims Germany has a less flexible labour market than France does and b) DO see a clear (if not exclusive) link between the unemployment rate and rigidity of employment protection during the crisis.
On what concerns a), the OECD has developed a EPL (employment protection legislation) index, which inspires more trust in me than the Fraser Institute (whom I am not familiar with though, maybe it is amazing). According to this index Germany’s labour market legislation is less rigid (if not massively) than France, Spain, and Portugal. Note that Spanish and Portuguese reforms in 2011-2012 are not yet contained in this graph.
Source: EU Employment Observatory
More importantly though, and on b), it is the nature of flexibility that truly matters in the end. Thus, both Spain and Portugal showcase strong duality between permanent and fixed-term contracts coupled with a very low degree of wage and working-time flexibility due to the manner in which collective wage bargaining is handled (a more detailed discussion of which would go to far here). The combination of these two means that adjustment in the Spanish and Portuguese labour markets occurs almost exclusively on the employment and not on the wage and working-time side (as it did in Germany with its famed Kurzarbeitprogramm – short work programme). Additionally, the people who are being fired are those that can be fired at a less costly price, meaning the ones who are on “atypical”, fixed-term contracts with lower severance payment benefits.
Especially the Spanish labour market due to its dual nature, directly linked to the flexibility of its – differing – labour contracts, is extremely pro-cyclical then. During the boom years of the late 1990s / early 2000s, an astonishing number of people were integrated into the economy. The reverse has happened in response to the crisis with unemployment jumping up even while Spain’s loss in GDP has actually been – relatively – limited. Increased flexibility for permanent contracts or a reform of the collective wage bargaining mechanism (which initially has been done with results not yet clear as the reform dates from February 2012) would have had (and hopefully will) have an impact on unemployment then.
Having said all that it is clear that other factors including export performance, the drying up of the banking sector, domestic demand et al also play an important role in the determination of unemployment. Yglesis is thus right to point out that it is far from being a cure-for-all, wonder device.
There is some buzz in the English-language media (Reuters, EU Observer, Bloomberg, Spiegel English) about reports of a new anti-euro party having been founded in Germany. This, in combination with the fact that “one in four Germans would back anti-euro party” (Reuters), is seen as spelling trouble for Merkel (see the Telegraph). Observers – especially Anglo-Saxon ones – tend to over-interpretate euro- or integration-sceptic voices, here is why they are wrong.
Most obvious is the misleadingly titled Reuters article above, a proper summary of the cited survey should instead read “one in four Germans could imagine voting for an anti-euro party.” In reality a huge majority of these seemingly eurosceptic voters will line up behind their usual mainstream party of choice in September.
Ambrose Evans-Pritchard in the Telegraph cites Hans-Olaf Henkel as an inspiration for the newly-founded Alternative für Deutschland and then mentions only one of the astounding amount of professors of economics that can be found on the new party’s supporters’ list: Bernd Lucke. Now, the first of these, Henkel, is a common feature on the German TV-talk circuit who holds little political credibility, the other hardly anyone has heard of before. There is little threat of a Grillo-style populist success based on this line-up of old, conservative intellectuals far removed from the public at large. Maybe a Thilo Sarrazin could change that, I doubt even that personally.
What else then? The Pirates of course in a number of Länder and the Free Voters in Bavaria had impressive showings in regional elections that would pose a significant problem to Merkel if it were repeated by a party chipping away at CDU/CSU votes nationally. How realistic is that in the case of the Alternative though? The fundamental problem for this top-down party is that successful protest parties – and this includes Beppo Grillo also, or the American Tea Party – are built bottom-up. Without a broad grassroots net of supporters willing to go out – online arguably in the case of the Pirates – and campaign, no significant electoral support can be achieved. Evans-Pritchard even admits this himself when he cites “Michael Wohlgemuth from Open Europe” in saying that the new party “lack[s] the organization for a quick break-through.”
A few more general remarks then, Merkel is not “already in trouble,” “the Left is [not] slightly ahead” and she is thus not “on course to lose office.” This simply as the SPD, especially under its principal candidate Peer Steinbrück, is very unlikely to look to govern in a SPD-Left-Green coalition making the most likely outcome of the elections either a Grand Coalition or a groundbreaking CDU/CSU-Green one.
Finally, if the history of anti-euro German parties is any indication, the Alternative will face an uphill battle. The Initiative Pro D-Mark, during the decade (1998-2007) it survived more than it flourished, had its biggest success on a regional scale with a measly 2.1% in Saxony in 1999. Note that the domestic economic conditions were much harsher than the situation in Germany today and thus in theory much more conducive to the emergence of radical opposition parties – and indeed the Left arose during exactly this period.
Much ado about nothing then.
It has become a commonplace assesment in public debate to blame the German aversion to inflationary tendencies on the country’s hyperinflation of the 1920s, which in turn are believed to have led to the rise to power of Hitler. Even economists have taken to advancing this simplistic essentially cultural theory of historical continuity based on an intergenerational common memory. Yet, not only is this argument inherently flawed, it also replaces sound economic logic with an arbitrarily chosen historical event.
It’s not just that the historical memory argument is inherently faulty though, it also fails to address similar inflationary preferences in, say, Finland and the Netherlands, neither of which went through a comparable period of hyperinflation.
Germany effectively suffered through a period of high inflation beginning in 1914 as the government financed its war effort through a combination of inflationary and debt-based mechanisms. This debt, coupled with the reparations demanded in the Treaty of Versailles and the financial help promised by the government to the strikers in the Ruhr protesting against the Franco-Belgian occupation, enticed the Reichsbank to follow a permissive monetary expansionary course, which led to the 1922/1923 hyperinflation period.
The problem is that it is extremely difficult to find the link between this period and the Nazi Party’s popularity surge and Hitler’s rise to power, which really only set in with the 1930s. As late as 1928, the NSDAP won only 2.6% in national parliamentary elections. The party’s electoral success instead coincided with the contractionary fiscal and monetary policies pursued by German authorities in the face of the Great Depression and of course the resulting exploding unemployment figures (link). If monetary policy is to be blamed for Hitler’s rise to power it should be deflation not the hyperinflation that had occurred ten years earlier.
This especially as the country over the course of its history since has repeatedly allowed for higher inflation rates for political means. The labor market successes of the mid-30s of course were essentially built on an inflationary Ponzi Scheme (link). But the preeminence of political goals over a supposedly inherent and insurmountable inflation aversion may also be seen reflected in the Bundesbank’s attempts to prop up the Dollar at the US government’s pressing in the early 1970s. More recently, the inflationary spike caused by the politically-imposed conditions of the reunified Germanies’ monetary union provides another example.
What low inflation preference countries such as Germany, Finland, or the Netherlands have in common are higher savings and less debt in the private sector. This can indicatively be seen reflected in their international investment positions amongst others.
Now, evidently, higher inflation rates deteriorate savings and benefit debtors at the cost of creditors. In other words Finnish, Dutch, and German – whether household or commercial – investments will lose some of its value if the ECB were to follow a more expansionary monetary policy. Creditors in Southern countries such as Spain or Greece in turn would see their debt load ease to some extent.
There really is no need for ghosts from Germany’s difficult past to explain an inherently quite sensible – if egoistical, if you may – national position.
Günther Nonnenmacher befasst sich für die FAZ mit der Anschlagsserie in Frankreichs Südwesten. Sein Kommentar vermischt in typisch konservatives – aus meiner in Tunesien lebenden Perspektive bin ich sogar versucht zu sagen typisch westlicher – Manier antimuslimische Positionen mit analytischen Schnellschüssen und kommt zu der Schlussfolgerung, dass es jetzt endlich genug sei mit diesem islamistischen Milieu.
“Unverkennbar haben die Taten ein Muster: einmal geht es gegen das Engagement der französischen Armee in Afghanistan (oder in Libyen), das andere Mal ist Antisemitismus das Motiv. […] Das alles weist auf (islamistischen) Terrorismus hin, und so sieht es inzwischen auch die Staatsanwaltschaft.”
So weit so gut. Die französischen Zeitungen, welche ich gelesen habe, erwähnen dieses Wissen der Staatsanwaltschaft zwar nicht, aber die FAZ wird es schon besser wissen. Oder? Dass die drei erschossenen Soldaten nordafrikanischen Ursprungs waren bzw von den französischen Antillen stammten, tant pis, die islamistischen Terroristen werden schon wissen warum sie sich nicht auf Français de souche (im Prinzip weiße, katholische Franzosen) konzentrieren.
Die Frage, welche sich noch zusätzlich stellt ist natürlich woher Herr Nonnenmacher eigentlich weiß, was die Motive des Täters – oder der Täter – sind. Auch hier scheint die FAZ besser informiert als die französischen Medien es sind. Während der Anschlag auf jüdische Schulkinder noch relativ offenkundig als Antisemitismus auf spekulativer Basis durchgehen mag, fragt man sich in Bezug auf den Mord der drei Soldaten worauf, wenn nicht auf einen reflexartigen Antimuslimismus, Nonnenmacher seine Motivtheorie eigentlich basiert.
Aber es geht ja weiter.
“Vor allem was den Antisemitismus angeht, hat es in den vergangenen Jahren eine traurige Kontinuität von Vorfällen gegeben, die von Friedhofsschändungen (auch im Süden Frankreichs) bis zu Quälereien jüdischer Schüler und Studenten reicht – von früheren, tödlichen Anschlägen nicht zu reden. Es ist an der Zeit, dass die Politik aufhört, solche Vorfälle zu verharmlosen und die Ermittlungsbehörden diesen Sumpf austrocknen. Denn auch wenn es um politisierte Einzeltäter gehen sollte, steht dahinter doch ein „Milieu“.”
Diesem Absatz kann ich natürlich so nur zustimmen. Vor allem wenn wir uns den Gedanken aneignen, dass Herr Nonnenmacher sich hier auf den omnipräsenten europäischen Rechtsextremismus bezieht der in Deutschland (NSU), Norwegen (Breivik) und Italien (Florenz) seine Kreise zieht. Ich befürchte bloß dass uns die FAZ in diesem Fall weismachen wollen würde, dass es sich hier um politisierte Einzeltäter handelt, von der Gesellschaft verstoßen, in ihrem Diskurs in keinster Weise dem gesellschaftlichen Rahmen verbunden und maximal von einigen wenigen Verbündeten unterstützt. Ein rechtsextremes Milieu von konservativen Politikern und Antiimmigrationsdemagogen aufgeheizt und mit einem gehörigen Gewaltpotential ausgestattet?
Schade, dass die FAZ als angebliche Qualitätszeitung ihren Herausgeber in ähnlich polemisierender Weise grundlos über ein angeblich gefährliches islamistische Milieu herziehen lässt, wenn sie das gleiche nie für den gerade 2011/2012 viel mehr Opfer fordernden Rechtsextremismus zulassen würde. Die konservativen ideologischen Scheuklappen haben mal wieder ihre Wirkung getan.
PS: Während die französische Polizei einen sich selbst als Al-Qaida Mitglied bezeichnenden Franzosen algerischen Ursprungs in seinem Haus umstellt hat, will ich nur kurz klarstellen, dass ich zu diesem Text auch weiterhin stehe. Auch wenn die Spekulation der FAZ sich im Nachhinein als richtig erwiesen hat, so bleibt dennoch festzuhalten, dass sie kaum auf Fakten basiert war, der Tatsache, dass rechtsextreme Gewalt in Europa weit mehr Opfer verursacht als islamistischer Terror, widersprach und schließlich auf einem bedauernswerten reflexartigen Antimuslimismus aufbaute, den ich nur verdammen kann.
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.