European monetary union

The Franco-German contribution ahead of today's Brussels meeting contains little detail

When eurozone leaders decided last year it was time for another look at overhauling their common currency, the main driver was Mario Draghi, the European Central Bank chief who has been one of the main figures behind the push to make the eurozone a more fully integrated and centralised union.

But in the months since a Draghi-backed decision for the eurozone’s four presidents – the heads of the European Commission, European Council, eurogroup and ECB – to present another blueprint on the way forward at June’s EU summit, the appetite among political leaders for a step change, always lukewarm, has cooled even more.

If documents sent around to national capitals in recent days ahead of Tuesday’s Brussels meeting of EU “sherpas” – the top EU advisers to all 28 prime ministers – are any indication, the report being pulled together may propose little more than a bit of euro housekeeping in the near term. Although more ambitious plans could be included, the leaked documents show they will be relegated to the medium and long term – a tried and true EU tradition that is normally a recipe for bureaucratic burial.

Among the documents obtained by the Brussels Blog are a three-page summary of what the new report will look like (posted here) as well as a Franco-German contribution (the French version is here) and that of the Italian government (conveniently in English, here).

Although the Italians emerge as the most ambitious reformers of the lot, the “note for discussion by sherpas” makes pretty clear that the measures being contemplated for immediate action are the leftovers from recent reform efforts – streamlining and clarifying the EU’s crisis-era budget rules, for instance, and adding a bit more financial heft to the EU’s bank bailout fund. Read more

The euro will survive…for at least another year.

So proclaimed Jean-Claude Juncker, the Luxembourg prime minister and head of the euro group of countries, who announced Monday night that doubters of the currency’s future would be proven wrong in a year’s time. Read more

Reforming the management of economic policy, primarily in the eurozone but also in the European Union as a whole, is without question one of Europe’s highest priorities.  Few steps would do more to raise the EU’s credibility with the US, China and the rest of the world than concerted action to improve European economic performance and make the euro area function more efficiently as a unit.  Much of this comes under the heading of “economic governance”. But the difficulty is that it is not always easy to figure out which Europeans are in charge of the process.

On Monday Herman Van Rompuy, the EU’s full-time president, chaired the latest meeting of a task force on economic governance that he was chosen last March to lead.  The task force, consisting largely of EU finance ministers, came up with various sensible ideas on tightening sanctions (financial and non-financial) on countries that break European fiscal rules.  Task force members also want to strengthen the monitoring of macroeconomic imbalances, such as the gap between large current account surpluses in Germany and deficits in southern Europe. Read more

Financial commentators, like financial markets, move in herds.  Is the herd wrong about Greece?

The herd takes the view that Greece will sooner or later have to restructure its debt.  According to herd thinking, the €110bn rescue plan arranged for Greece by its eurozone partners and the International Monetary Fund merely buys some time for the Greek government – and for its European bank creditors.  The herd predicts a “haircut”, or loss, for Greek bondholders of 30 to 50 per cent of the face value of their bonds.  All this is likely to happen towards the end of 2011 or in early 2012, says the herd. Read more

The euro has fallen by almost 20 per cent against the dollar since last November, and the general view in Europe is that this is good news – indeed, one of the few pieces of good economic news to have come Europe’s way recently.  The argument goes as follows: euro weakness = more European exports = higher European economic growth.

Unfortunately, the real world is not as simple as that.  Inside the 16-nation eurozone, not every country benefits equally from the euro’s decline on foreign exchange markets.  As Carsten Brzeski of ING bank explains, what matters is not so much bilateral exchange rates as real effective exchange rates.  These take into account relative price developments and trade patterns, and their message for the eurozone is far from reassuring. Read more

There is a gulf separating Germany from France on how to cure the eurozone’s ills, and it does not bode well.

Germany identifies the eurozone’s chief problems as excessive budget deficits, weak fiscal rules and a general culture of over-spending in the region’s weaker countries.  The remedy, say the Germans, lies in austerity measures, tougher punishments for rule-breakers and better housekeeping.  Germany is so sure that it has got the answer right that it is introducing a €80bn programme of tax increases and spending cuts – not because the German economy desperately needs such measures, but because the government in Berlin wants to set an example to other eurozone states.

France knows the eurozone has a fiscal problem, but it disagrees with the German view that immediate and drastic austerity measures are essential.  The French contend that, if budget hawks win the day, Europe’s fragile economic recovery will fade away and there may even be another recession (as Paul Krugman notes, an example often cited in support of this argument is the “Roosevelt recession” of 1937, when President Franklin D. Roosevelt, having just about dragged the US economy out of the Great Depression, inadvertently caused another economic downturn with a premature attempt to balance the budget). Read more

The European Union is nothing if not addicted to targets.  Promises to achieve particular goals by specific dates are part and parcel of the EU’s daily business.  Sometimes the objectives are met, sometimes they are not met, and sometimes it’s hard to tell either way.  European monetary union, for example, was launched in 1999, but only after a two-year delay because a majority of member-states didn’t meet the criteria earlier in the decade (did Greece ever meet them?). Read more

The European Union’s fiscal rulebook, known as the stability and growth pact, has fallen into such discredit since the euro’s launch in 1999 that almost any change is likely to be an improvement.  But are the reforms that EU finance ministers agreed in Luxembourg on Monday good enough?  I have my doubts.

There are many flaws in the stability pact, but the essential problem is enforcement.  How can outsiders compel a government, with sovereign control of its budget, to observe fiscal discipline?  The pact contains a provision for imposing fines on countries that run up high budget deficits and ignore recommendations from other member-states and the European Commission to take corrective measures.  Predictably, however, no country has ever paid a fine or has even been asked to pay a fine throughout the euro’s 11-year history.  Governments have shrunk from punishing other governments because they know that the tables may one day be turned on themselves.

In any case, it has always seemed potty to slap fines on a country with a large deficit.  The penalties would simply exacerbate the country’s budgetary difficulties.  No wonder Romano Prodi, the former Commission president, once called the stability pact “stupid”. Read more

Speaking with one voice.  Singing from the same song sheet.  Communicating clearly with financial markets.  Avoiding needless disputes with governments.  These are essential attributes of high-level policymakers at a modern central bank.  So what are we to make of an extraordinary speech given last Friday in the Moroccan city of Rabat by Lorenzo Bini Smaghi, an executive board member of the European Central Bank?

To put it bluntly, Bini Smaghi told the German government that it had screwed up Europe’s response to the Greek debt crisis. Germany’s ineptitude meant that the final price of the emergency rescue package ended up being far higher than necessary, he complained. Read more

For anyone wondering why Europe’s leaders are so determined to avoid a restructuring of Greek sovereign debt, I recommend a remarkable piece of research published on Monday by Jacques Cailloux, the Royal Bank of Scotland’s chief European economist, and his colleagues.  (Unfortunately, it seems not to be easily available on the internet, so I’m providing links to news stories that refer to the report.)

The RBS economists estimate that the total amount of debt issued by public and private sector institutions in Greece, Portugal and Spain that is held by financial institutions outside these three countries is roughly €2,000bn.  This is a staggeringly large figure, equivalent to about 22 per cent of the eurozone’s gross domestic product.  It is far higher than previous published estimates.  It indicates that, if a Greek or Portuguese or Spanish debt default were allowed to take place, the global financial system could suffer terrible damage. Read more

I didn’t know whether to laugh or cry when I heard the news on Tuesday that the German authorities were to impose a temporary ban on certain types of transactions – known as “naked short-selling” – in eurozone government securities.  Laugh, because it seems more than a coincidence that the announcement was made just before parliament in Berlin was due to open a debate on authorising Germany’s contribution to the €750bn international rescue plan for the eurozone. The ban looks like a piece of raw meat thrown to legislators who labour under the delusion that the eurozone’s debt crisis is all the fault of “speculators” and are eager for revenge.

Cry, because the German announcement underlines how the eurozone’s leaders, after finally appearing to get on top of events with the financial stabilisation plan unveiled on May 10, are once again misjudging the dynamics of the crisis.  To cite another example, Italy’s central bank has just decreed that Italian banks will not be required to adjust their capital ratios if eurozone government bonds in their portfolios fall in value.  What this will mean in terms of the credibility of financial data published by the banks, I hate to think. Read more

Well, did he say it or didn’t he?  I am referring to President Nicolas Sarkozy of France.  According to El País, Spain’s most reputable newspaper, Sarkozy told his fellow eurozone leaders at a May 7 summit that France would “reconsider its situation in the euro” unless they took emergency collective measures to overcome Europe’s sovereign debt crisis.  The source?  Officials in Spain’s ruling socialist party, quoting remarks purportedly made after the summit by José Luis Rodríguez Zapatero, prime minister.

It would be extraordinary, if true – for two reasons.  First, if France were to leave the euro area, European monetary union would have no reason to continue.  It would collapse.  And that would be like dropping a financial nuclear bomb on Europe.  Secondly, it is inconceivable that France would consider it to be in its national interests to take such a drastic step.  We are left to conclude that if Sarkozy really did utter these words, it was just a bluff to get Chancellor Angela Merkel of Germany to sign up to the eurozone rescue plan that was ultimately agreed in the early hours of May 10. Read more

The €500bn eurozone stabilisation package agreed in the early hours of Monday, to be topped up by as much as €250bn from the International Monetary Fund, represents the first time since the Greek debt crisis erupted in October that European political leaders have moved decisively ”ahead of the curve”.  All along, the only way of calming financial markets was to produce an initiative that would exceed their expectations and convince them that Europe would do whatever was necessary to save its monetary union. Read more

One reason why the eurozone is sliding into ever deeper trouble is because its political and bureaucratic elites do not like, do not understand and have no wish to understand financial markets.  This is an attitude embedded in European history and culture.  Think of the 1793 Law of the General Maximum, an arbitrary attempt to fix prices at the height of the French Revolution.  Or think of the social status attached for the past 150 years to being a state-employed soldier, teacher, office clerk or railway worker rather than a banker in Germany. Read more

One frequently aired proposal for overcoming the ever more dangerous strains in European monetary union is to encourage Germany, which enjoys a large current account surplus, to buy more from Greece and other southern European countries struggling with large deficits.  This, so the argument goes, would rectify the imbalances that are destabilising the eurozone and would demonstrate Germany’s sense of responsibility and solidarity with its 15 euro area partners. Read more

The financial rescue plan devised by eurozone governments for Greece doesn’t look like a rescue plan in the classic sense.  Like a thermonuclear weapon, it appears intended never to be used at all.  The idea is that the Greek government itself, backed by calmer financial markets, will succeed in overcoming its debt crisis without ever drawing on assistance from its 15 euro area partners. Read more

I take it that everyone has seen the insulting picture on the cover of the February 22 edition of Focus, a lightweight German news magazine?  Under the headline ”Swindlers in the euro family”, it shows the Venus de Milo statue, a monument of ancient Greek civilisation, sticking up a middle finger at Germany.  In this way the magazine’s editors convey, as offensively as possible, the idea that debt-ridden Greece is robbing Germany blind by forcing it to come to Greece’s financial rescue.

The Greek response has been predictably furious.  The Greek consumers’ federation has called for a boycott of German goods, commenting that Greeks were creating timeless works of art like the Venus de Milo at a time when Germans were “eating bananas in the trees”. Read more

You know that the European Union is in trouble when Russia offers more intelligent advice on the eurozone’s debt crisis than Spain, the country that holds the EU’s rotating presidency.  Dmitry Medvedev, Russia’s president, disclosed the other day that he had recommended to George Papandreou, Greece’s prime minister, that the Greek government should request assistance from the International Monetary Fund to sort out its problems.

This is exactly the course of action advocated by several non-eurozone EU countries as well as a host of distinguished economists and, dare I say it, the editorial writers of the Financial Times.  As it happens, I don’t agree – if by IMF assistance we mean financial help.  The IMF will be involved, along with the European Central Bank, the European Commission and eurozone finance ministers, in monitoring Greece’s public finances and providing technical aid as required. Read more

An unambiguous message of solidarity among eurozone states will come from Thursday’s European Union summit in Brussels, but it is still unclear if this will translate into a specific financial rescue plan for Greece.  Debate among governments is continuing.  However, expectations in financial markets have been raised so high over the past 24 hours, what with European Central Bank president Jean-Claude Trichet flying in for the summit from Sydney and officials in Berlin hinting at a German-led rescue, that it would be risky for the EU leaders not to commit themselves to some sort of initiative.

There are various possibilities: bilateral loans from Germany and France, with perhaps Italy and the Netherlands chipping in; an International Monetary Fund-style standby facility, organised among the 16 eurozone countries; or an EU-wide loan, involving a show of support from all 27 member-states.  It is quite likely that the IMF will be asked to continue providing Greece with expert technical advice, but I don’t think the eurozone countries will go further and call on IMF financial resources.  Apart from anything else, there is a fear that the US may raise objections on the grounds that the IMF’s firepower should be reserved for fighting emergencies not in prosperous Europe but in other, more disadvantaged financial hotspots. Read more

Europe’s leaders are getting radical.  On Thursday the presidents, prime ministers and chancellors of the European Union will meet for a day of economic policy discussions in Brussels – but not in their normal location, the marble-and-glass Council of Ministers building, famous for its charmless, disinfected atmosphere and its 24km of headache-inducing corridors.  No, this time they will get together in a nearby building called the Bibliothèque Solvay, which is a pleasant old library rented out for dinners and receptions.

The switch of location was the brainwave of Herman Van Rompuy, the EU’s first full-time president, who thought it would encourage a more creative, informal exchange of views.  He has introduced another innovation: each leader is to be restricted to just one adviser at the talks.  This isn’t a problem for countries with leaders who are masters of economic policy detail.  But others are less happy about the arrangement.  It is whispered that the Italians are swallowing especially hard, wondering what on earth Prime Minister Silvio Berlusconi will say once he’s on his own. Read more