Master Werenfrid’s Challenge

I’ve said this before, but I think that the oppressed states of the EU need to call the ECB’s bluff by simply running their own monetary policy. According to Wikipedia, there are Euro printing presses located in most EU countries, including Greece, Italy, Spain, and Ireland. The governments of these countries should simply order that the printing presses be cranked up. This would violate treaties, but so what? The spirit of the treaties has already been broken by ECB/Fourth Reich dictatorship.

Rather than doubling down on the policy of ruining the peripheral countries—intensifying the threats made to Spain, I think the dissent of the Bundesbank might be a first signal of another feasible path emerging. De-coupling Germany would give the ECB a great deal more freedom to solve the problem it created.

This is a political no-go. Having Germany in the Euro is the point of having the Euro from the perspective of its creators. You can see this current crisis as (partly) the Germans having successfully fought back against attempts to make Germany more like the rest of Europe. When it looked like convergence was happening (Germany started running Maastricht-violating deficits), the SPD pulled out Agenda 2010.

“A logical path out, at the beginning of the crisis, was for the peripheral countries to default and resume the use of national currencies, but that wasn’t a path national leaders seemed to have the credibility or intelligence (or simply integrity?) to carry off”

Could you elaborate on how the second part of this could actually have been achieved? Just saying something doesn’t make it feasible

Fair enough. Although as an addendum, the Euro is still quite popular in peripheral countries (polling says 70% Greeks; a recent Irish referendum on Europe passed comfortably) so there was never any real popular support to leave voluntary

x.trapnel @8: also, if my memory of that excellent book is accurate, the narrator is likewise a member of the guild of torturers and executioners, and finally – not as a guildsman but as his intended fate throughout – a wholesale cannibal.

The comparison with the EU is not without merit.

Bruce Wilder@2: “An ECB, which isn’t operating as a clone of the Bundesbank, might be quite effective at bringing the economies of the peripheral countries back from the precipice.”

Problem: an ECB not operating as a clone of the Bundesbank is unlikely to be able to compel the Bundesbank (and central banks of likeminded nations: Finland, Estonia, Austria, Slovakia, Netherlands?) to go along with its operations; or to insist that the taxpayers of those nations provide funding.

Of the other Euronations: Greece, Cyprus, Slovenia, Italy, Spain, Portugal, Ireland have or may shortly have nothing significant to contribute to the non-Bundesbank operations of the ECB, being insolvent recipients rather than contributors.

Non-Euro EU governments are likely to have the following alternatives: EITHER provide more than one bent hapenny to supporting the dying Euro OR be re-elected.

That leaves the taxpayers of the solvent non-Bundesband-like Euro members of the ECB to contribute to operations of the peripheral countries: as far as I can see, France, Belgium (but I may be wrong about their solvency), Luxembourg, Malta, Monaco, San Marino, Andorra and the Vatican City.

I can see a small problem there also; unless massive inflation, rather than provision of actual money, is the way out. But there is a problem there also, as perceived by the Bundesbank.

rf @ 7: The public doesn’t know anything about macroeconomics or monetary policy. So I wouldn’t interpret public support for the Euro as a genuine democratic desire to maintain a monetary union that doesn’t contain a dual central bank mandate. Mostly the public is just interested in low unemployment, strong wages and reliable pensions and if you can deliver that, all is well. But the strong polling in favor of the Euro probably had some part in tieing the hands of policymakers in peripheral countries.

Stephen@9: Certainly different people have a different take on monetary and macroeconomic matters, but it certainly seems as if there is a chasm of difference in the perception of this issue from one side of the Atlantic to the other. The ECB doesn’t operate with a dual mandate. In some ways, the issue is really as simple as that. As far as I’m concerned it’s not a question of financial support, outside of probably Greece. It’s a matter of marrying appropriate monetary policy to macroeconomic conditions. And the Euro region has been laboring under tighter monetary conditions than the United States while experiencing a vastly more severe contraction in the periphery. In Spain, unemployment is riding at 25%. Unless that is all structural it seems that you could dramatically expand demand through either monetary or monetary backed financial stimulus and the most significant impact would be to start utilizing those idle resources, not inflation. That somebody would look at the problems of a country that had gone from <10% to 25% unemployment in short order without having recently experienced a natural disaster or civil war and conclude that monetary expansion can ahead of time be ruled out as beneficial is simply bizarre to me.

Which brings us to the Bundesbank’s public opposition to the deal – it describes the purchases as “tantamount to financing governments by printing banknotes.”

In normal circumstances, this is a bad way to finance governments.

But sometimes the alternatives are worse…

Does anyone share my impression that both Merkel and Schäuble know very well what must be done in the end, but also believe that they must appear to be dragged into it, kicking and screaming, in order to come away from the domestic political consequences with their credibility more or less intact? If so, would this not make Draghi, in addition to being one very concerned Italian, something of a catspaw for those Germans who are a little less stubborn than they’d have us believe in the face of a general Armageddon?

From over here, on the other side of the Atlantic, it’s hard not to believe that at least some prominent Germans are bluffing about this eat-dirt-if-you-want-another-Euro-from-us stuff, but then again, being brash Americans, maybe we’re just deaf to the subtleties.

Stephen @9 ” Problem: an ECB not operating as a clone of the Bundesbank is unlikely to be able to compel the Bundesbank (and central banks of likeminded nations: Finland, Estonia, Austria, Slovakia, Netherlands?) to go along with its operations; or to insist that the taxpayers of those nations provide funding.”

Central banks in fiat currency systems do not need to be funded by tax payers! This whole debate is incredibly frustrating because the ECB system was set up by people who lacked basic knowledge of how monetary systems work. Paul De Grauwe explains the problem clearly,

“The deeper reason for the ECB’s reluctance to be a lender of last resort in the government bond market has to with its business model. This is a model whereby one of the ECB’s main concerns is the defence of its balance-sheet quality. That is, a concern about avoiding losses and showing positive equity – even if that leads to financial instability.

When the ECB was instituted, it was deemed necessary for that institution to issue equity to be held by the EU-governments. Thus the idea was created that in order to sustain its activities the ECB needed to obtain the capital of the member countries. This idea was reinforced in 2010 when a decision was taken by the Governing Council to raise the amount of capital by €5 billion. It is useful to read the justification of this decision: “Taking into account the increase of the ECB’s balance sheet total over the last years, it is considered necessary to increase the ECB’s capital by €5,000 million in order to sustain the adequacy of the capital base needed to support the operations of the ECB” (ECB 2010).

It is surprising that the ECB attaches such an importance to having sufficient equity. In fact, this insistence is based on a fundamental misunderstanding of the nature of central banking. The central bank creates its own IOUs. As a result it does not need equity at all to support its activities. Central banks can live without equity because they cannot default. The only support a central bank needs is the political support of the sovereign that guarantees the legal tender nature of the money issued by the central bank. This political support does not need any equity stake of the sovereign. In fact it is quite ludicrous to believe that governments that can, and sometimes do, default are needed to provide the capital of an institution that cannot default. Yet, this is what the ECB seems to have convinced the outside world.”

http://www.voxeu.org/article/why-eu-summit-decisions-may-destabilise-government-bond-markets

“

According to Wikipedia, there are Euro printing presses located in most EU countries, including Greece, Italy, Spain, and Ireland.

However, there are only a few paper-mills which make blank euro note stock and only two factories which make the particular banknote ink used for Euro notes. None of them are in peripheral countries iirc, and none of them are going to supply to a note-printer that is, effectively, counterfeiting.

I think the big issue I have with Henry’s post is that “The Bundesbank”, “The CDU coalition government” and “Germany” are three entities[1] that can’t be assumed to speak for each other. It’s not at all obvious to me that the German political authorities agree with the Bundesbank’s opposition to the bond-buying scheme.

What we’re actually seeing here IMO is a re-setting of the status of the Bundesbank (as someone said on Twitter yesterday, “Hey Jens, how does it feel to have the same number of votes as the central bank f Cyprus?”). It ought to be, and increasingly is, the Eurosystem’s equivalent of the New York Fed – primus inter pares, but not having a veto or anything daft like that. Adjusting to having this status, and realising that the non-German population of Europe don’t regard it as somewhere between the Turkish Army and the Queen Mother, is a bit tough for them, and perhaps not enough effort has been spent on cooling out the mark.

[1] At minimum; assuming that Merkel and Schauble are on the same page also risky

The James book sounds interesting.
Surely the main point to take from the Helmut Schmidt quote is not that there is an unstated principle of ultra posse in operation, which may lead to Germany pulling the plug. (After all, the same principle would presumably encourage a less hardline interpretation of conditionality as far as the peripheral members’ reform efforts are concerned.)
Rather, it’s that in the 1970s “one cannot write such a thing down”, whereas in 2012 Bundesbankers not only write it down, but also read out the statement for the television cameras. Schmidt is upholding constructive ambiguity as a tool of European statesmanship. By contrast, Weidmann, in insisting on his right to be explicit, is spreading uncertainty in a very different and possible very contentious way.

dsquared @ 19

You may very well have more insight into the conditions in Greece, and what Greeks themselves think about them than I do, but I’m not so sure that I trust your interpretation of the attitudes of people who appear to be voting with a gun to their heads. No doubt they are hoping that something can still be worked out, but it seems to me that this is more a prayer than a vote of confidence, much as is the case with people in the U.S. who cross their fingers and keep voting for Democrats.

By the way, that’s not to say anything about the level of trust in EU institutions

http://www.irisheconomy.ie/index.php/2012/07/31/the-collapse-in-trust-in-the-eu-and-its-institutions/

Or to sign up to the scorched earth policy in the periphery. Just to note that there is no real public desire to exit the Euro, that I am aware of, in any peripheral country.

I don’t think the anger of the Bundesbank is part of some plot, I think its very genuine. The ‘bluff’ is the ECB’s threat to the peripheral countries, they have no real mechanism to ensure weaker countries keep to any agreements on austerity, they know this full well. I think this threat is nothing more than an attempt to make it seem like they are still bullying those countries, while in reality they know that the debtor countries have all the cards (even if those countries, in particular Greece and Ireland don’t seem to realise this themselves). The Germans know full well that any attempt to pull the plug is a suicide option – their banks are in far too deep. I think Draghi has successfully outmanoevered the Bundesbank and the hard money crew, he is doing what is necessary. He learned something in his Goldman Sachs days, thats for sure.

“while in reality they know that the debtor countries have all the cards (even if those countries, in particular Greece and Ireland don’t seem to realise this themselves). The Germans know full well that any attempt to pull the plug is a suicide option – their banks are in far too deep.”

Is this still true? I thought most of that debt has been repayed/restructured /taken over by the ECB? (Genuine question, I don’t know)

Historically, people do seem to muddle through great economic crises, . . . or not.

It’s the or not part that none of Krugman’s Very Serious People, or, in fact Krugman himself, not to mention his many admirers, seem willing to credit. Of course, we’re all heavily invested in not having the-world-as-we-know-it end while we’re still around to be inconvenienced, and the higher up the food chain we are, the more heavily invested we tend to be. Human nature, I guess, but I still find it galling. Every time I hear people winding themselves up to argue a la Steven Pinker that the Twentieth Century only killed x million people for no respectable reason rather than the x-squared million killed in previous, unenlightened centuries, so we’re doing just fine, thank you, I want to put my fingers in my ears and run away. There just ain’t no point….

I think that many governments and many citizens of peripheral EU are pro euro because they think as creditors: for example many italians own Italian bonds, and people on fixed retirement might fear that if we go back to the lira their retirement will be redenominated in lire and they will lose big from it, same goes for the many savers. For this reason I don’t think that there is a show off between Germany and other countries, I think that governments of peripheral countries are mostly on the same page of Germany and the ECB.
I think that, at least here in Italy but also in the rest of the EU, politicians will try to make the minimum concessions possible to avoid a real breakdown, while pursuing the usual antilabor pro competitiveness policies, because every EU country is quite export dependent (in fact the whole EU project was born as an antimercantilism project).
People like “structural” reforms because the term structural is misleading: for example a politician says “We have to make structural reforms or we won’t have money to pay retirements.” People believe that he wants to cut some inefficiencies (never specified and usually mithical) and vote for him. Then he comes to power and cuts their retirement. They say “what a corrupt guy! If only we could get some politician who can really make some structural reform!”
Thei don’t realize that cutting their retirement IS the “structural” reform, and that their retirement is what those economists see as an inefficiency .
Unfortunately this kind of neoliberal thinking is rooted very deep in the mind.of most people, including many supposedly center left guys.

@Adrian Kelleher “German commentators like to mention ECB-mediated obligations to the German banks via the Target 2 system and the competition for German credit this creates. Peripheral commentators like to mention the fact that Germany has in actuality benefited hugely from ECB policies, as have its banks, enjoying even lower interest rates than it might otherwise do, official support for its banks’ foreign bond holdings and commercially attractive investment opportunities at the ECB. In the end each perspective is about equally self-serving.”

I’m not seeing the symmetry here. The peripheral complaint seems to be a conventional (and correct) argument that Germany benefits from low interest rates. The German argument about Target 2 is much more radical. If obligations between regional branches of the central bank are not trustworthy, the entire monetary system is on the brink of collapse. This should NEVER happen. Since the system has only one central bank, there should be no such thing as Spanish or German Euros. If the Target 2 system is truly in danger of breaking down like the German’s claim it is, they should be more outraged, more panicked and should be calling for fundamental reorganization of the Euro system. Instead they focus all their energies on calling for reforms to the fiscal systems of peripheral countries which are only tangentially related to Euro system itself.

The most useful way I have found to think about the euro crisis is that the euro system is a 90’s Washington consensus style fixed exchange rate system on steroids. These systems, from Mexico to South East Asia to Argentina, tended to end badly, and were made worse by insistence from the IMF that austerity and structural reforms were all that was needed. The really galling thing is that even the IMF now seems to recognize that this was a mistake. They don’t believe in the Washington consensus in Washington anymore, but somehow it persists in Brussels.

@afu, there might be similarities to the washington consensus, but there are huge differences as well. The eurozone is much closer entwined than those cases, and there really is much more mutual goodwill and trust involved. The current discussions and negotiations already involve long term permanent transfers of power and money through European institutions, in a way that would be unthinkable for IMF cases.

The worry is that this is still not enough to keep the Euro stable, and that the actually required level of centralization goes beyond the acceptable. But that’s a very different issue than in those 90s cases.

I view the Eurozone and Washington Consensus neo-liberal ideology as similar, because both resemble the self-justifying hypocrisy of a sadistically abusive parent, who claims to administer “discipline” only for the child’s own good, while looting the child’s trustfund.

Zamfir talks of “long term permanent transfers of power and money through European institutions” and I smell b.s.: transfers from whom to whom. What’s the net, here? Do we count firesales of public assets? Do we worry about the destruction of 25% unemployment?

There’ a fantastic conflict between manifest function and latent function, here. The shortcomings in the institutional design could manifest the hope and expectation of European leaders that they would fashion closer integration in the future. That’s a lovely story. Or, the shortcomings in the institutional design could be a way to facilitate looting by banksters and to destroy the welfare state and drive down wages.

Barry: “It’s clearly thinkable . . . ”

Maybe, “think” is the wrong verb, since much of this neoliberal policy is rationalized and legitimized by the useful idiocy of neoclassical economics, and the politics proceeds in a fog of deranged moral narratives, which allow empty poses of “seriousness”, coupled with the “technical” distraction of trying to solve an unsolveable Rubik’s Cube of jumbled policy instruments and options, most of them ill-named, beginning with the appellation, “rescue”.

We might want to consider the possibility that many of the principal players are incompetent and thoroughly confused, themselves, having lost track of what’s real and what’s possible, as well as what is just.

Bruce: “We might want to consider the possibility that many of the principal players are incompetent and thoroughly confused, themselves, having lost track of what’s real and what’s possible, as well as what is just.”

Except that they never lose track of what benefits them (at least in the short and medium run). They make sure that the elites are bailed out.