The ECB’s New Role

I read the whole article linked to. What it made me think was:

The Eurozone is no longer, in any meaningful sense, a democracy. Discuss.

The ECB’s new role is to be a Central Bank for Europe. How did things go so badly wrong?

But the OMT “conditionality” is a bit of a dead letter. Everyone knows that the “program” for the Spanish government is identical to their last budget; see also the troika “program” Spain is currently drawing down for the bank recaps which has no macroeconomic conditionality at all. I don’t really see this enthusiasm on the part from the ECB for micro-managing people’s economies, only that (as wasn’t the case in the special situations of Ireland and Greece), the domestic policies have to be broadly consistent with the survival of the euro as a whole. As far as I can see, the ECB is at least as much acting in self-defence of its currency and only really demanding the powers that it needs to protect itself.

“Dan, think for a moment how the cuts program we’re all enjoying here in the UK would go over if it was under the direction of officials from Brussels/Frankfurt. The ongoing refusal of the Spanish government to request assistance would be hard to explain if it was no big deal. At the very least we can say that there is an alternative view of where eurozone imbalances come from and how adjustment to them ought to take place. Right now that view is being shut out of the discussions. The rulebook is being written so as to place the burden of adjustment on economies stuck with financing difficulties. It was the same story with the fiscal pact: very German-friendly.”

100% right.
0% wrong.

This might be a foolish question, but does this:

“The ECB has become more powerful than the Fed, but with even less democratic oversight.”

Mean more powerful within Europe than the Fed is in the US? Or more powerful in the global economy?
And related, how important was the Feds emergency funding to Euro banks and firms at the start of the crisis in preventing a Euro meltdown initially? (The questions get even more basic from here on, so I’ll stop at that)

dsq: “. . . only really demanding the powers that it needs to protect itself.”

for some reason, I just flashed on the Kaiser’s armies crossing Belgium, headed for Paris.

@Hidari 1

“The Eurozone is no longer, in any meaningful sense, a democracy. Discuss.”

The EZ is not a state, and as a consequence it cannot be a democracy: in order to be a democracy it should have much more political power vs. his members than it has now.
For example the EU (ok not really the same thing as the EZ) has a parliament that is democratically elected but it is quite powerless. As a consequence most power rest in the hands of single countries’s governments, that then legitimize their choices at an EU level through the various EU minister’s councils.
In other words, more democracy in the EU implies more accentration of power in the hands of the supposed sovereign (the EU) at the expense of the current ones (EU nation-states).
This accentration is necessarious for “more democracy” but is also obviously not sufficient, since it could lead to a non-democratic EU, but the alternative (dissolution of EZ and subsequently of the EU) is also a big democratic problem IMHO.
Speaking of the ECB: it seems to me that the simple way out of the crisis is for the ECB to print as hell, and to ask for inflationary policies in all member states. This policy would create many losers, and so has many opponents. But how could this be solved in a more “democratic” way? Can the Greeks democratically choose that the Germans have tho give them money?
Plus, the whole idea of an indipendent central bank is BS. Would you like an indipendent army? an indipendent police? The only reason we speak of indipendent central banks is that, since we live in a capitalist society, the correct functioning of financial markets is the only thing that is supposed to be above democratic government. However the idea that the central bank is indipendent is common to all countries that I know of. How is the ECB more independent than the fed? Or than the Banca d’Italia? Draghi was proposed by Berlusconi.
It is true that the ECB is acting beyond its scope when it sends “letters” to countries asking for this or that policy, but it is doing so only filling a power vacuum, that is caused by the unexistence of a real “european government”, that could be democratically elected (in facts, it would be cool to democratically elect the ECB itself).

From what I’ve read Rajoy is basically preempting the trioka’s economic plan so that when they do arrive he can say “they aren’t telling us what to do.”

Just to be clear, I completely agree that given a currency union and the imbalances within it – imbalances that are to some extent inevitable (they exist within any nationa economy) – there have to be monetary tranfers from richer areas to poorer ones. I also agree that insofar the debt crisis was caused by German banks financing an unsustainable building boom in Spain (say) the absolutely last solution to the resulting problems that could possibly be called just is for Spanish workers to pay for this – it should be the bankers, and the real estate moguls, and the building bosses who profited. What is not useful to achieving this is however when we twist this into a nationalist frame, create some alternate history in which Germany forced all the other coutries to join the Euro to bleed them dry or achieve by means of the ECB what it couldn’t be force of arms.

I wasn’t talking about arguments being made in Greece or Spain, rf. More about Bruce’s comment here (although I may have well misunderstood what he was getting at, I admit upon reconsidering the context of his remark) and other stuff I have read on (mostly American) blogs.

bert @ 20:
“But when Krugman calls for several years of above-average inflation in Germany he’s not merely challenging a blinkered orthodoxy. As a practical matter he’s also calling for the Germans to price themselves out of work, at least at the margin. Given the current state of the eurozone, there might be a limit to how keen should we be to weaken German export competitiveness in global markets.”
But surely the inflation Krugman’s advocating would depress the euro, increasing peripheral EZ competitiveness in the process? I would have expected the overall effect on EZ exports to be a wash.

But when Krugman calls for several years of above-average inflation in Germany he’s not merely challenging a blinkered orthodoxy. As a practical matter he’s also calling for the Germans to price themselves out of work

Krugman’s emphasis on inflation is unhelpful and wrong. German current account surpluses are the result of slower income growth, not more competitive prices. (Also here.) So there is no reason to think higher German inflation is needed to move Europe toward current account balance, or that it would even help. (Econometric estimates raise doubts about whether the Marshall-Lerner condition is satisfied for Germany; if it is not, higher inflation there would actually increase Germany’s surplus.) The necessary and sufficient condition for a movement toward current account balance in Europe is higher income and expenditure in Germany. Relative prices have nothing to do with it.

Thanks JW, exactly. Luckily unions in Germany have lately recovered a bit from their late-nineties defeats (which were an effect of reunification combined with globalization). Still there is a LOT of catching up to do and it won’t solve the very real short-term problems of the Euro zone.

My earlier remark was an impulsive response to dsquared’s usual minimizing.

christian_h: “This is part of a worldwide offensive by ruling classes. Making it into an issue of nationalism isn’t going to cut it if we want to fight back.”

Yes, it is a “worldwide offensive” by the “ruling classes” or Uber-Rich plus CEO-class.

Or, to put it another way, we are just beyond the end of the long-cycle that began at the end of the Second World War, watching the breakdown of the institutional order and vision put into motion, then. At the end of WWII, felt political solidarity was at a high, in a number of European countries traumatized by war and great and desperate national efforts; this felt solidarity was applied to the creation of social welfare states and “mixed economies” and foreign policies that married Wilsonian internationalist ideals to some resurrected and refurbished ideas of European Union.

That sense of solidarity has gradually faded away, although unevenly. The social contract is very much intact in Germany, renewed, perhaps, by the effort at reunification — I don’t know. In countries like Greece and Spain and Ireland, with their histories of civil war in the 20th century, solidarity was never all that strong, to begin with, and the social welfare state was weaker, or came with a fascist, corrupt authoritarian cast. The EU was popular, precisely because it promised a kind of relief from the most visible and embarassing short-comings of national government, in rational regulation, modernity and guarantees of civil rights, and the Euro just extended that promise. For Ireland, European integration was the foundation of the American corporate invasion that brought about national prosperity. For Spain, it was the bridge away from Franco. Etc. As I recall, Italy went to the Euro in a heady popular stampede, abandoning the lire as soon as it was legally permissable, and sometimes a few days sooner. The periodic inflations, which had been a safety valve for political impasse in Italy (and Greece), and which had left scars in the ridiculously low unit value of the lire, were forgotten.

People in the peripheral countries are fiercely hostile to the national politicians trying to negotiate a way out with the Troika. The sense of political solidarity, which would bind politicians to the interests of the mass of people, and create the trust necessary to the radical exercise of power, is missing. If you go to Germany, you hear just the opposite: people think that they have sacrificed a few months on the retirement age, on their pensions, for the sake of Europe, and it may be a long, hard slog, but institutions will be reformed in the South for the better.

Do you remember dsquared’s classic “Fifty Ways to Leave Your Lover Euro” post? Every regular, technical (and complex) path led to a dark, dead-end alley in The City, with a gang of banksters, ready to extract blood and a pound of flesh with dull pen-knives.

Solving the problems of the Euro in any finite period of time in favor of the mass of people requires the swinging of the sharp, long sword of raw political power on their behalf. I don’t see any model for organizing that kind of political power, other than nationalism.

From the mass suffering, particularly of the young, desperate to start lives and careers, we’re going to get some kind of eruption of political solidarity — probably a eruption of competing solidarities, as more and more people are pressed by their frightening experiences and prospects toward the political psychology of authoritarianism. They will be open to demagoguery, built on hostility to some out-group, and the promise of benefits from being part of an in-group, and an end to a politics of impotence amid impossible to understand technical complexity, born of the rank corruption and incompetence of the eurocrats.

No, this can’t end well. As Henry suggests, though, it may not end for quite a long while yet, depending on how the rest of the world’s economies — principally those of China and the U.S. — approach their own difficulties.

It certainly is painful to watch, though. It reminds me of the Peanuts comic strip episode in which Snoopy complains that everyone on Thanksgiving is getting turkey for dinner except him, then concludes that it could be worse — he could have come into the world as a turkey rather than a dog. Muddling through for the few has always been cold comfort for the many, and in times of crisis, not even that.

Look at the letter to Italy.

But (again, as widely known and reported in Italy at the time), the underlying message of that letter, the only one anyone cared about was “Time To Go, Silvio”. Which I agree with you was way outside the ECB’s mandate and profoundly antidemocratic, but when I said this at the time, everyone (even Phil Edwards who is my touchstone on this one) pointed out that “Procedural Democrats For Berlusconi” was likely to be a small club.

Bottom line here is that the European technostructure is a real thing, but the alternative is something like US legislative deadlock.

anyone who thinks the poor Italian or Spanish bosses are being forced by the modern equivalent of the imperial German army to do so are really deluded. This is part of a worldwide offensive by ruling classes. Making it into an issue of nationalism isn’t going to cut it if we want to fight back.

I agree with this. But it’s tricky. Because in fact, both democratic institutions and the capacity for solidarity and mass mobilization, seem to exist much more at the national than the European level. So while you’re completely right that this is not an issue of clashing national interests, I do think that there is a reason the ruling classes of Europe (and elsewhere, tho it hasn’t gone as far) have wanted to shift authority to supranational bodies, and that popular resistance will be strengthened to the extent authority shifts back toward national governments. In that sense, I think that nationalism can have progressive content.

Of course these are very old arguments…

JW (37.), I do agree with that. The EU as it actually is at this point in time is a ruling class construct, among other things an instrument to help national capitals impose neoliberal reform in their economies (Sweden is a good example, to get away from Southern Europe for a moment, of a country that had no need of any kind to join the EU but did so fairly clearly to overcome its domestic resistance to neoliberal reform). So I would argue to abolish the whole thing if the Euro had not made that a likely disastrous decision. What I am saying is merely that this is a joint project of the ruling classes of Europe, so resistance to it will also have to be europe-wide.

“What I am saying is merely that this is a joint project of the ruling classes of Europe, so resistance to it will also have to be europe-wide.”

There may be a kind rhetorical resonance there — Europe-wide ying meeting Europe-wide yang — but there’s no logical necessity.

How is this resistance to be organized? What will bind leaders to the led? And, what will bind the led to the leaders? Through what institutions will anyone act in resistance? In pursuit of what alternative? How will that alternative be conceived and advocated?

The “Procedural Democrats For David Cameron” is likely to be an even smaller club and yet I doubt that I doubt that the British would be sanguine about their Govt being overthrown by an unelected bureacracy.

I know plenty of Italians who adore Berlusconi incıdentally. It’s not true that the Italians were cryıng “oh pleace ECB overthrow our Government’! Install a Eurocrat who will haveexactly the same policies except with fewer sex parties!!”

for all I know you are right that the ecb people didn’t want this power

Well, everyone wants power – it’s fun to have power! But I think Henry is wrong to locate this centralising and anti-democratic impulse a) in the ECB specifically and b) as having all that much to do with neoliberalism specifically. The EU has always been an anti-democratic project, aimed at establishing a central United States of Europe that most of the population doesn’t want, on the basis of technocratic rule with minimal accountability. None of the people who have been its architects have ever made any effort to keep this secret.

Yes, Draghi-ECB is a totally different beast from Trichet-ECB which I think is Henry’s point.

On the other hand, your “Augustinian” joke is actually quite serious – Irish bankruptcy law is 100% broken from top to bottom, but it was the law of Ireland, and as a result of that, any attempt to write down the bondholders in 2010 would have had absolutely disastrous consequences. I don’t agree that there was willingness to change the law and even if there had been, an overnight change of the law specifically aimed at expropriating bondholders would have been straight off to the ECHR. I’m not saying it couldn’t have been done but the legal issues were serious (and the reason that the IMF was in favour was, AFAICT that they were simply ignorant of the law and thought everywhere worked just like the FDIC in America).

Straight off to the ECHR = disasterous consequences . (??)

AFAICR the Irish plan was to screw Anglo’s senior bondholders once the depositors had been paid off. Wouldn’t that, on the face of it, have been a straightforward liquidation?

Not really. The whole purpose of bankruptcy law is to prevent these kind of squirrelly deals whereby you pay off one class of creditors and leave another class twisting in the wind. Some countries have an exception in their bankruptcy code for compulsory restructurings of regulated financial institutions, but Ireland didn’t – the bonds, deposits and interbank obligations (including those to AIB and BoI) were all pari passu legally. There was nothing illegal about screwing the Anglo bondholders as long as you were prepared to screw the Irish banking system creditors too, but Ireland wasn’t for obvious reasons.

The Irish case has of course been painfully argued on various fora but I think our goose was cooked by the deservedly infamous September 2008 guarantee rather than bankruptcy law. Bankruptcy laws and pari passu clauses don’t preclude restructuring offers outside of bankruptcy; what you can get creditors to agree to is another question but Ireland never even tried. It didn’t help that the government had muddled objectives at the start (it seems likely that in September 2008, they thought they were saving Allied Irish rather than Anglo).

As for the ECB actions since the crisis, I don’t think it started out as the banking orthodoxy ogre that it is now. Instead, the ECB and a segment of the Brussels elite saw banking integration and the single currency as deep achievements of the EU which were under threat and thus became The Precious of the entire project for them. Pesky little countries seen as undermining cross-border financial flows therefore became part of the problem in their mind.

dsquared,
I get the pari-passu stuff, but I can’t see that a setup in which bondholders do no worse than they would in a liquidation, while depositors get a sweetheart deal of sorts, give the bondholders any legal comeback. Now I’m not certain that the scam Ireland was planning fits that description, but I understood that was the general idea.

Aside from the specifics of the Irish case, I can’t see that being in favour of bankruptcy reform, but only of a kind which injures no existing creditor, is very far from the Augustinian approach to chastity.

If they had acted in accord with the 1994 directive and bailed out only depositors of up to the limit set – which I believe was 20,000 Euros, senior bondholders would have been welcome to take what was left over.

If you don’t understand that banks have plenty of creditors who are not bondholders and not depositors, nor who those creditors might be, you might want to wind your neck in for a bit.

“(as we’ve discussed in the past, there is a certain element in the Irish commenteriat which regards the preservation of the French and German banking system to be a weaselly, immoral goal for the ECB, which ought to have been run wholly in the interests of Ireland)”

This is fair if you’re taking the Sunday Independent as the personification of the ‘Irish commenteriat’, if not then it’s a complete strawman. And I’m not saying that as someone challenging any of your expertise on this specific topic, but when it comes to Ireland you can have quite a blinkered position. (Is a lot of this hostility a reaction to being ‘right’, but relatively ignored, on the Irish economy throughout the 00s?)

“If you don’t understand that banks have plenty of creditors who are not bondholders and not depositors, nor who those creditors might be, you might want to wind your neck in for a bit.”

My original observation was that the EU had, as a ECB policy decision, protected bank bondholders from their poor investment decisions.

I should point out that “the chicken game” that D-squared finds so alarming is exactly what the US government did with US autos – with great success, to the chagrin of the bondholders who originally insisted on 100% payout. Fortunately, US policy was not run by hapless Irish politicians or Hayekian ECB bureaucrats.

rootless, if you would actually read the comments of dsquared you are pretending to address you might have saved yourself a couple comments.

Here is dsquared: “You’re forgetting that AIB and BoI were banks, not industrials.”

And you: “blah blah autos blah blah”

And also you: “EU workers, especially in Ireland are directly paying for the bad investment decisions of the investing class.”

Have you talked to UAW lately? No? Maybe you want to find out what happened to their contracts when your hero in DC bailed out Detroit. Hint: they were forced to accept cuts in total compensation worse than what has been imposed by the Troika on Greek workers. Your irrational love for the Obama administration really leads you to make absolutely absurd claims lately.

I completely agree it is outrageous that Irish workers were made to pay for the crisis that Irish and international banks, real estate speculators and investors had created. The same applies however for the policies of the US, that also made workers pay for this crisis that was created by the bosses, and certain bankers and investors.

Here is dsquared: “You’re forgetting that AIB and BoI were banks, not industrials.”

I’m not forgetting it, I’m ignoring an attempt at misdirection. WAMU and Wachovia were also banks. So were Lehman and Bear Stearns. There is nothing about the character of Irish banks that merited ECB’s stance that bondholder value was a holy fucking sacrament. And if we need to get into it, the ECB theory that all peripheral nations need to sacrifice to protect the banks of EU core states from the consequences of their risk avidity is really indefensible.

“Have you talked to UAW lately? No? Maybe you want to find out what happened to their contracts when your hero in DC bailed out Detroit. ”

“The bankruptcy restructuring General Motors and Chrysler in 2009 through the creation of new companies formed with assets purchased from those troubled companies was highly successful. Today GM and Chrysler are profitable, investing in America and creating jobs.

President Obama’s decision to act to save GM and Chrysler prevented an economic catastrophe that would have thrown the nation into a full-blown depression and resulted in dozens of additional bankruptcies in the auto industry and across industrial America. Instead, the auto industry today accounts for an outsized share of economic growth and is helping lead our nation’s economic recovery.”
Bob King

And because this obvious point is somehow elusive for so many, a critique of the ECB craven fealty to bond investors contrasted with the far superior US approach is not the same thing as a 100% endorsement of the US approach. The US was too generous to bondholders and did not require the union to take an active management role- although that is perhaps an unavoidable result of the crappy state of the union. Similarly for US bank resolution – not great even though much better than EU policy. But I do note that while the US has since strengthened laws for resolving illiquid financial firms in ways that make bondholders pay, the EU has just talked at cross purposes.

Well whatever it seems to you and whatever other issues you may want to bring up: in response to the financial crisis, US government has been far more willing to make bondholders pay than the ECB has. That’s simple fact, no matter how ideologically inconvenient or puzzling it may be.

There are two levels of response. The first is state action – and I have to admit that I am surprised by how weak EU anti-finance popular pressure has been. Nationalism wins again in Europe beating class solidarity for the 100000000th time: German workers are apparently still happy to be ripped off if they can be persuaded that it is in the cause of making lazy Greeks suffer. The second is the construction of alternate credit networks outside the bank/multi-national sphere. I am particularly thinking of credit institutions tied to the kind of coop/institution network that Alperovitz advocates.

“German workers are apparently still happy to be ripped off if they can be persuaded that it is in the cause of making lazy Greeks suffer.”

The considerable propaganda resources given over to these kinds of morality tales, “explaining” the origins of crisis, play a large part. I don’t sense that the Germans want the Greeks to suffer, particularly, but the flattering tale of German moral superiority, evidenced in economic performance of some vague kind, does seem to serve to make the German public blindly self-satisfied. As other commenters observed, previously, there’s no symmetry of national animosities; many Greeks and Italians share the German admiration for the Germans.

Market liberalism had a preachy moralism about it, in Turgot’s day, as well, and Necker flattered France and himself, claiming that he had run a surplus, while borrowing heavily. They still managed to stumble their way to the French Revolution.

German workers are apparently still happy to be ripped off if they can be persuaded that it is in the cause of making lazy Greeks suffer.

Twat.

“As other commenters observed, previously, there’s no symmetry of national animosities; many Greeks and Italians share the German admiration for the Germans. ”

Popular Greek joke
Schaeuble arrives at the airport in Athens
Passport officer looks at his passport and asks: Occupation?
Schauble: No, just a short visit.

Btw, I got myself on ‘police camera action’ tonight in Camden as a bystander chatting about racist policing with a bald copper – (applause) – although I feel that no one here bar MPA Vic will be amused by this

I should say btw that the general policies of dealing with the crisis have been handled considerably better in the US than in Europe, in my opinion. The difference just is not a function of how banks were bailed out or who had to take losses, as far as I can tell – rather it seems mostly a function of the austerity policies imposed in Europe (of course it is true that one mechanism by which austerity was imposed is by forcing each country to bail out their own banks withough inter-community monetary transfers to make this possible), that were not imposed to anything like the same degree in the US (and yes, Obama does deserve credit for this).

And now I’ll shut up after apologizing to Henry, I feel I contributed to derailing this thread.

Imagine what American policy would have looked like had this all taken place in 1812, in which year they couldn’t organize themselves to wage a victorious war against the miniscule remainder of British North America.

Using the US as a counterpoint to the EU looks a tad irrelevant.

Fascinating! Good news for Lehman, Bear-Stearns, Wamu, bondholders.

And compare to: “Not a single formal German bank insolvency during crisis (compare to
FDIC count)”

http://www.ceps.eu/system/files/Duebel1Pres.pdf
And the German bank regulator slowly begins to accept the advanced policies of Franklin Roosevelt
http://www.eurointelligence.com/eurointelligence-news/archive/single-view/article/germanys-painfully-slow-acceptance-of-bank-resolution.html
By 2010 they even passed a resolution law
http://www.efinancialnews.com/story/2010-12-13/haircuts-europe-bondholders

But EU generosity to bank investors continues

“European taxpayers are helping foot the bill for saving junior bondholders of Spain’s nationalized banks from being wiped out, an official at the country’s central bank said.”
http://www.bloomberg.com/news/2012-11-29/spanish-bank-junior-bondholders-rescued-by-taxpayer-cash-pledge.html

ECB policy has ben that bank bondholders must be paid in full – so it was shocking news last summer when they started to weaken this stance

http://www.bloomberg.com/news/2012-07-16/ecb-said-to-no-longer-oppose-imposing-losses-on-bank-bondholders.html

But, I know, all this must be false because (a) DD insists that bankruptcy law forbids deposit insurance and resolution and (b) Obama sucks.

@dsquared

I’d add (to my discussion with Henry) that an underappreciated positive point about the ECB in this crisis is that, unlike so many other European arrangements, it hasn’t collapsed.

An under appreciated positive point about Stalin’s dictatorship is that unlike a lot of other arrangements in Soviet Russia it actually worked. This should not be dismissed.

And indeed, although seemingly most Irish commentators would rather drink a pint of gall than admit it, however good or bad the deal the ECB was offering to Ireland in the crisis, they did not in fact have loads of really attractive alternative offers, and trying to manage the same property crash with an “independent”[1] currency would have been ten times as bad a mess.

On the first point I think most people would agree that the initial “offer”” Ireland got from the ECB was more on the lines of an “order” and that it was indeed exceedingly bad (terms have obviously improved since). That is what I thought this thread was about in general? The ECB’s assumption of political power.

On the second point of it being easier to deal with a banking crisis when the state engaging in the bailout is effectively borrowing in the currency of another country I think I heard the sound of a thousand coughed ‘bullsh*t’s.

On the first point I think most people would agree that the initial “offer”” Ireland got from the ECB was more on the lines of an “order” and that it was indeed exceedingly bad

Well not really, no. What do you think should have been done? Should the EU really have offered one of the richest countries in the Union a EUR100bn present, just for being so lovely? One of the very biggest problems with respect to Ireland’s relations with the rest of the EU is the seemingly complete inability to accept any responsibility for their own crisis (which as you tell it was all about German banks lending to commercial property in Letmetellyouaboutthatlaterland), and the consistent demand that the French and German governments ought to subsidise tax competition against themselves.

PS: In fact I’m not sure dsquared’s statement is true, even as far as it goes. If Irish house prices were denominated in IEP, most likely the ‘crash’ would have taken the form of a house worth IEP1m staying at that price, while the IEP crashed out of sight against the Euro. So the problem would be one of managing inflation (rather than a collapsed banking system). We’ve had lots of experience with that.

I’m coming in way late, and I haven’t read all the comments, but I’m with Niall @3. The import of this change is that the ECB is now a ‘normal’ central bank with unlimited capacity to intervene in bond markets. That was inevitable once it became clear that austerity wasn’t working.

The fact that the ECB is now like a normal central bank brings into sharper focus those aspects of the EU that are abnormal, in particular, the absence of a central government in general. Obviously the Parliament is irrelevant, but it’s far from clear whether actual power resides with the bureaucracy, the Council, the Commission or the dominant powers, formerly France-Germany and now it seems just Germany.

On the whole, the normalization of the ECB strengthens the position of national governments in the fight with the EU central structure over austerity, since it reduces the credibility of any ECB threat to let a national banking system go under.

A ‘normal’ central bank manages the marketable national debt, eliminating liquidity risk. For a central state, with a reasonably efficient fiscal capacity, this arrangement also effectively eliminates default risk, and the marketed securities of the state become a zer0-risk reference and general-purpose hedge security for the banking and financial system. From this foundation, the central bank can evolve its capacity as a lender-of-last-resort and supervisor of the banking and financial system.

The absence of a centralized fiscal capacity corresponding to the ECB is a glaring abnormality, and one with critically important consequences. A central state’s fiscal capacity is unaffected by the dynamics of internal financial flows. The Eurozone, as we have seen, runs aground on persistent imbalances of financial flows. And, the reason for this running aground: the individual states, and their marketed national debt, is, as a consequence, subject to default risk. The debts of Greece, or Ireland, or Spain, or France, or Italy are not zero-risk instruments, in the way that U.S. or U.K. sovereign debt is. These securities are not suitable as the foundation for a banking and financial system.

So, now the ECB, to try to make the national debts of various countries with varying prospects, into something like zero-risk bonds, suitable for the foundation of a banking system, has to leverage its discretion in funding national debt issuance in ways that, somehow, limits default risk (which arise from the combination of persistent financial flow imbalances and the vagaries of institutional fiscal capacity across nation-states), and doesn’t magnify liquidity risk.

Is that task do-able, even in theory, any theory?

I don’t think it is a question of negotiating a 3-way modus vivendi among the ECB, national governments, and the Eurozone financial sector. There are inherent contradictions and fracture lines that cut across those relationships.

Eurozone economic theory and practice:

If you just put out the cart, a horse will show up. We guarantee it.

Tick…tick…tick….

Well, okay, the cart’s been out there for a couple of years. How’re we doing?

Well, so far, we’ve got an elephant, a giraffe, three tortoises, two hares, a sheep in wolf’s clothing, and a half-dozen weasels. Just give us a little more time, okay? I mean, what’s the hurry, anyway?

“One of the very biggest problems with respect to Ireland’s relations with the rest of the EU is the seemingly complete inability to accept any responsibility for their own crisis (which as you tell it was all about German banks lending to commercial property in Letmetellyouaboutthatlaterland), and the consistent demand that the French and German governments ought to subsidise tax competition against themselves.”

This seems completely over the top. Anyone who has lived in Ireland for the past 4 years knows that the we have overwhelmingly ‘taken responsibility’ for the crisis, and the vast majority of criticsm has been directed at domestic actors. But if the crisis has EU wide beginnings, then it can only be resolved at that level.

Also on corporate tax rates, this was my understanding of the situation:

http://www.iiea.com/blogosphere/effective-eu-corporate-tax-rates

Right bang in the middle of EU averages on effective rates, above France. But once again, what’s an ‘insignificant backwater’ gonna do. Play the martyr..

rf 12.09.12 at 11:21 pm
you said «[….]

Also on corporate tax rates, this was my understanding of the situation:

http://www.iiea.com/blogosphere/effective-eu-corporate-tax-rates

Right bang in the middle of EU averages on effective rates, above France. But once again, what’s an ‘insignificant backwater’ gonna do. Play the martyr..»

So I looked at the link, and found the following commentary:

«Mike C, Belfast says: 31 May 2011 18:10

Very interesting data but I feel your map is highly misleading. Using your own data on ‘total tax rate as % profit’ (i.e. including labour and other taxes too) presents a very different ‘EU tax landscape’. For example: Ireland 26.5% UK 37.3% Germany 48.2% France 65.8% Italy 68.6% UK & Ireland among the ‘best’ locations in Europe and also very competitive against United States (46.8%), Japan (48.6%), etc.»

Or maybe its more of a red herring….?

Is today’s collapse of the Italian government (engineered by the man the ECB kicked out) an important data point for something?

The ECB is antifragile in the sense that anything with more effective power than effective responsibility is antifragile. If you have power, and don’t really answer to anyone, you’ll tend to enlarge your power in a situation when there is a power vacuum.

This isn’t necessarily a good thing, though.

“However nowadays corporations move most of the money, so their taxation is quite relevant to the budget of countries.”

Ah yeah of course, I’m not disagreeing and not a huge fan of the low tax rate, just don’t think it’s relevant to this case specifically (ie not a factor in the European response or an excuse for not dealing with the crisis. In fact it’s so irrelevant it can only be a diversion)

Kevin O Rourke makes the point that I was trying to get at earlier more clearly in the comments section of Irish economy.ie:

“I’m writing here as a European, and the policy implications are European. A failure to think systemically (i.e. a tendency to view this crisis as a series of country-specific crises, rather than as a Eurozone crisis, which is what it is) has been one of the key mistakes made by policy makers since 2008. Unless the eurozone gets its act together, then the sorts of drastic scenarios you mention are eventually going to get onto the agenda in lots of countries, including our own.”

It all seems very parochial, and pointless, to focus on things like Italian labour law, the Irish tax rate/culpability etc when the problems are, apparently, systemic

Perhaps you can make a case from the left that the emergency justifies anti-democratic means, given the alternative of collapse, but given all of the problems associated with this position, you’d want to be _very_ careful about figuring out the limits of your argument, to avoid succumbing to the inexorable gravitational pull of the Carl Schmitt warphole.

Yes, this is exactly the case I would make, and I don’t think that the gravitational pull is all that strong. I think this crisis is a genuine crisis, and the definition of a crisis is a time when you countenance things being done that you’d really rather didn’t happen, because all the alternatives are worse. Given the state of European institutions in 2005/6 (and I broadly agree with you on the development and the democratic deficit), it is much better that someone took hold of the reins than if nobody had.

I also think that people talking about the antidemocratic nature of the European institutions need to put up a little bit more in terms of what they actually want to see, because really quite often (this is a disagreement that I have with Niamh too), the concept of “democracy” seems to be couched in purely national terms; it’s antidemocratic for the Irish or Greek governments to be told what to do, democracy demands that large transfer payments be made by German voters, whether they want to or not. Any form of functional European federalism is going to involve a) a lot of power accruing at the federal level and b) large, populous and economically strong states having a lot more of a voice than small and structural-deficit states. If people are opposed to that then fair enough, but I think there is then an obligation to explain how this differs from what your average Eurosceptic believes.

(a subsidiary point I make in some contexts but not others is that there are cases where the ECB and ordoliberals are actually right. A lot of things that are advertised as “social protections” in Greece, in particular, are actually ye good old fashioned crony socialism and need to be got rid of).

(a subsidiary point I make in some contexts but not others is that there are cases where the ECB and ordoliberals are actually right. A lot of things that are advertised as “social protections” in Greece, in particular, are actually ye good old fashioned crony socialism and need to be got rid of).

We are all impressed by the effort that the Troika has put into combating corruption and tax avoidance in Greece and reducing the complexity of the bureaucratic system. Or actually the effort they will no doubt be exhibiting once they have completed the more urgent work of cutting salaries for nurses, seeing what hospitals do without drugs, and preventing the wild looting behavior of pensioners who earn princely sums rising into thousands of euros a year to support their lives of luxury.

“democracy demands that large transfer payments be made by German voters, whether they want to or not. ”

Actually that is correct: as long as the exporting nations of Europe want free access to the markets of the importing nations, arithmetic suggests they need transfer payments. of some kind. For example, it’s quite clear that if the German government had imposed a tax policy/wages policy that would have increased the wealth of German workers so they would have consumed more ( perhaps some more Spanish wine and more vacations in Greece and Portugal), that all EU nations would have benefited. However as this would have reduced the capital concentrations needed for Hypobank to speculate on Irish real-estate, DB to become the largest US issuer of bad mortgages, and IBK to make brilliant CDO deals with Goldman-Sachs, the economic flourishing due to right wing economics would have been missed and Europe would never have entered this Golden Age of Hayekian Prosperity.

“Crony socialism is very important in Greece (and crony capitalism in Ireland, still, apparently)”

I agree, but crony capitalism in Ireland is really just a long term annoyance that we’re never going to do anything about. Without access to endless streams of cheap money there’s only so much damage our delinquent class can do.
(Or shorter, as Dani Rodrik said on twitter – where I get all my economic ideas – As an empirical matter, corruption/cronyism in failures (e.g. Greece) is overdone. Almost any rapidly growing economy exhibits as much.)

Also just to be clear:

Just to be clear, I completely agree that given a currency union and the imbalances within it – imbalances that are to some extent inevitable (they exist within any nationa economy) – there have to be monetary tranfers from richer areas to poorer ones.

Ireland, Spain and Italy are richer countries, not poorer ones within the EU. Even Greece is really quite close to the median; even after the crisis, it’s got higher average income than all of the former Communist states except Slovenia.

“Or to put it differently, I suspect that when subsidized consumption goes away, the Germans and other surplus countries will simpli be forced to produce less or at lower prices (usually by lowering wages).”

Germany is the locality in EU that has found an innovative way to deal with crises: by cutting working hours, rather than individual employment. In this respect, and leaving aside monetary issues for the moment, the suggestion that Germany is benefiting from subsidizing others to be able to produce more, amounts to the view that German workers would benefit from working longer hours, to produce more gadgets, to send them, free of charge, to Greece. That sounds like a view that is going to be difficult to popularize among the workers in question; Germans or any other nationality.

@dsquared

I completely agree that given a currency union and the imbalances within it – imbalances that are to some extent inevitable (they exist within any national economy) – there have to be monetary transfers from richer areas to poorer ones.

Ireland, Spain and Italy are richer countries, not poorer ones within the EU

It does seem that the financial transfers at the moment are from rich countries to richer ones and large investors though:

Countries Listed by GNI

Anyway I suppose these debtor countries do deserve the neoliberal hawk treatment for being on the wrong end of Eurozone capital flows. Perhaps they will even thank Germany and the ECB for freeing them from the dictatorship of crony capitalism someday?

It is odd that the most enthusiastic proponents of the ECB approach in Ireland are the rich and the chronically rightist. They have long harboured a desire for “difficult decisions” to be made on Ireland’s unusually compassionate social welfare system, a la Gerhard Schröder’s beloved Hartz “reforms” and also a deep enthusiasm for the kind of privatization efforts the ECB and European Commission favour. Ironically it seems that it is the crony capitalists are most enthusiastic about the Troika program intended to save Ireland from their influence! Little do they know, eh?

There are obviously poorer countries in the EU than those currently enjoying the purgative benefits of Troika programs but that is not a justification for the actions or philosophy of the ECB. This is an institution whose interests are basically congruent with the malefactors of great wealth and whose anti-historical support for collective austerity has turned the European component of the global financial crisis from one of those occasional but manageable crises of capitalism into a threat to the democratic, political and economic stability of several European countries.

I suspect that “maintaining price stability” will come to be seen as the “making the trains run on time” of the European project.

dsquared
I’m really still not getting this hostility to the periphery. From your, what I thought reasonable enough, defence of bankers, you made these points:

“First, as I said three years ago, macroeconomic events have macroeconomic causes, not microeconomic ones….
…..There’s also an economic version of the same argument. The answer to the question “Hospitals, or bank bailouts?” is “deficit spending, you ass!”. Money for the banking sector bailouts hasn’t come out of the mouths of babes and Sure Start centres; the austerity measures were a specific and separable decision, made by people who ought to be held accountable for it……
…..So my basic message here is that economics isn’t a morality play, even in the face of a depression.”

But when it comes to Ireland it most certainly is a morality play, austerity has to be endured and those implementing it pitied for the difficult job they have to do (in good faith), and macroeconomic events don’t have macroeconomic causes but can, apparently, be blamed on small time Irish property hustlers.

This idea that the citizens in the periphery are primarily culpable seems to simplistic. As you highlighted in your review of Fintan O Tooles book people in the City were well aware they were selling overpriced rubbish to idiots, and that it would all end badly:

“For another, though, there was never any real threat to us from the Vikings. Broadly speaking, the financial community knew what they were up to. They were a bunch of foreigners with seemingly no clue what they were doing, more or less unlimited amounts of money borrowed from their local banks, a burning ambition to pick up iconic and prestigious business assets, and seemingly no concept at all of a fair or even reasonable valuation. People like that, one finds, are generally well liked in Throgmorton Street; you might have to put up with the odd economics lecture, but usually they’ll make it worth your while to hang on. Generations of such ambitious foreigners have breezed through the City, usually leaving with armfuls of previously unshiftable dogs and sans wallet. Come one come all, as long as you pay cash etc.”

So sure, macroeconomic events have macroeconomic causes, there’s a lot of blame go around, economics isn’t a morality tale so on and so forth. But if we have to pay, then so does everyone else. Simple as.

(segue from 124)

Just to be clear, it’s not that I like parasitic or crooked behaviours (socialistic or not), but those situations are just the flip side of the coin of the existence of “structural surplus” economies somewhere else.
If, for whathever the reason, Germany “has” to export more than it imports, somewhere else this surplus has to be recycled, though political cronysm, asset bubbles, whatever.
The problem is, “why does Germany (or other surplus nation) need to be a surplus economy?”, not “why does Greece (or other debtor economy) have umproductive sectors that eat more than they produce?” because the second point is just a consequence of the first.
On the first question, I would point to this very interesting paper that shows that in the whole EZ (excluding Greece) the labor share of income has been falling for 30 years.
Unit Labor Costs in the Eurozone: The Competitiveness Debate Again (2011)
http://www.google.it/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CDYQFjAA&url=http%3A%2F%2Fwww.levyinstitute.org%2Fpubs%2Fwp_651.pdf&ei=-j3HUK-nGInLsgb5xoC4BA&usg=AFQjCNF17fClc3qO7zyPrUpK34KJftsgBQ&cad=rja

(I realize this is very OT but I think it is very interesting).

Incidentally, why call this ‘socialistic’? I see all this as a crisis of capitalist welfare state. Real socialist government would simply move industrial production from Germany to Greece and Spain, executed a few hundred tax cheats, declared every able-bodied citizen unemployed for more than 6 months a criminal. Austerity, big fucking deal.

The “capitalistic welfare state” we had in Spain, with all his defects (which are mostly localized in the inept, venal and corrupt political class) was working more or less well, with for example a healthcare public system that was much cheaper AND had higher rates of satisfaction than other countries.

And that we are in the process of dismantling it because public deficit is verboten except for propping up zombie banks. And because the politicans dismantling it are either pals, or in fact actual partners, of firms that will make money out of its privatization.

So yes, the plan it is working wonders all in all in creating greating demand of goods. Like, private insurance where you didnt need one before.

dsquared @ 111: “Any form of functional European federalism is going to involve a) a lot of power accruing at the federal level and b) large, populous and economically strong states having a lot more of a voice than small and structural-deficit states. If people are opposed to that then fair enough, but I think there is then an obligation to explain how this differs from what your average Eurosceptic believes.”

I don’t see how this is even an open question, from a progressive point of view. Of course the Euroskeptics were right. The EU has become a deadly enemy of the welfare state. And it has carried out this war on progressive civilization through the grossly undemocratic mechanism of an “independent” central bank.

“D-squared, if you’re going to make the evil but necessary argument, it would be nice to know when the necessary bit stops. Do you see the need for the ECB to keep/keep growing its new powers until…. Spanish youth unemployment gets below 20% so they have a hope of sustainable recovery? Greece gets trade surpluses? What specific recovery markers would cause you to believe that it is time to back down? Or on the flip side, how long does the ECB get to operate in emergency mode before you begin to suspect failure? At what point does the collateral damage (to democracy, to youth workers, to non german economies, become too big?)”

Quite. It has been four years since the start of the Great Recession. How long do we wait? Is this like the War on Terror that never ends?

politicalfootball@126

The deal seems to me to have to sacrifice (well, make illegal) European social democracy and nationalize the losses of the international financial sector to save the current flavour of EMU which, as you say, has inherent contradictions.

I understand that this is one of at least two evils but given that the developed world outside the Eurozone appears to be coping better with the aftermath of the global financial crisis it is not easy to argue it is the lesser one.

Something will show up, from sustaining this painful mess indefinitely, but it seems unlikely to be a democratically elected government.

@Josh G: The problem with this analysis is that the war on the welfare state has been at least as vigorous in the UK as anywhere else in Europe. Obviously that’s not the ECB. And the UK has repeatedly sought to avoid EU mandates so it can have lower social protections.

If I were to use the term, “democracy” without prejudging the particularities of a constitution or the content of an ideological spectrum, I would mean a government, which was responsive to the felt, experienced concerns and common problems of the governed, because of the political dependence of the governors on the governed.

The present policy of torturing a nation-state, until it coughs up the desired “reforms”, while holding the continent hostage to the uncertainty of an outcome that recedes with the horizon, doesn’t seem very democratic, and that’s not a statement about institutional form. It may be a statement akin to christian_h’s assertion @ 16: This is part of a worldwide offensive by ruling classes. Certainly, it’s a view that is easier to reconcile with Quiggin’s observation that the UK is carrying on a parallel war on the welfare state.

Contra Josh G. @133, it is not the institution of a central bank, which is per se antidemocratic, but the front of rank incompetence presented by economists and the Media. Just consider the IMF’s record of forecasts on the effect of policy on the Greek economy.
http://www.marctomarket.com/2012/11/great-graphic-imf-forecasts-of-greek.html
These are people, who simply do not know what they are doing. And, yet, they are the “experts”, whose solemn and earnest pronouncements we are expected to accept, as there is no “responsible” or “serious” alternative. And, the popular narrative blames the Greeks in a moral analysis completely untethered to the economic dynamics.

The age-old question — are they evil? or, are they stupid? — is just an argument for stupid as an effective front for evil.

But when it comes to Ireland it most certainly is a morality play

No, I’ve never said that. The reasons why Ireland shouldn’t have been allowed to blow up the European financial system are technical, not moral. My critique is entirely that the people pushing magic bullet solutions whereby “bondholders” paid for all of Ireland’s problems are in cloud cuckoo land, and their proposed policy wouldn’t have worked and would have caused massive and disastrous side-effects.

D-squared, if you’re going to make the evil but necessary argument, it would be nice to know when the necessary bit stops. Do you see the need for the ECB to keep/keep growing its new powers until…. Spanish youth unemployment gets below 20% so they have a hope of sustainable recovery? Greece gets trade surpluses? What specific recovery markers would cause you to believe that it is time to back down? Or on the flip side, how long does the ECB get to operate in emergency mode before you begin to suspect failure?

There is actually a roadmap document, written by Barroso, Van Rompuy and Juncker (and Draghi, but he got his name taken off the final draft). The ECB is the only game in town pending a proper fiscal union (with proper governance). There’s a straightforward agenda and set of proposals here, so I’ll judge progress against that.

Sure they could. By general euro-zone inflation.

“The ECB is the only game in town pending a proper fiscal union (with proper governance). There’s a straightforward agenda and set of proposals here, so I’ll judge progress against that.”

Pending proper fiscal union OR dissolution of part or all of the euro monetary unit?

But even barring that, how are they doing? How many sort-of-milestones get missed before it counts as a failure worth reconsidering? You *seem* to be acting as if the euro/increased fiscal union is the important end in and of itself. But that can’t be right. The euro has a purpose with something like stabilizing and facilitating growth. It isn’t super clear that it is fulfilling that purpose (or with comments upthread, some people are suspecting that its stated purpose is at odd with the purpose being transacted).

I also wonder about your comments about anti-fragility. They seem similar to discussions about the ‘great moderation’. It is beginning to look like the ‘great moderation’ let things get bigger and bigger until a truly awful depression busted out, rather than representing a real change in financial/economic understanding. The ECB moves strike me as much more in that vein, rather than real reductions in systemic fragility.

everyone (even Phil Edwards who is my touchstone on this one) pointed out that “Procedural Democrats For Berlusconi” was likely to be a small club

Slap my face and call me orientalist, but I do there’s a real clannishness about the Berlusconi circle (such as it is these days). If you hear somebody expressing doubts about blanket condemnations of Berlusconi or denials of due process or whatever – with however much much-as-it-pains-me throat-clearing – you can generally write them off at once and forever (or at least until they break with him). B & his circle want allies who raise points of principle, but they don’t want allies on points of principle.

Compare to today’s Fed statement. The willingness to allow 2.5% is probably still too tight, but it *finally* admits that a good monetary policy can’t just let unemployment hover at ridiculously high rates. The ECB doesn’t seem willing to admit that Spanish unemployment above 25% and youth unemployment over 50% is a problem that the ECB has anything to do with.

How would inflation make the euro radically different than it actually is? “Oops, our inflation target should have been 3% all along to best support price stability. Now we have to catch up,” is a smaller deviation from existing practice than “Let’s dictate terms for when we’ll bailout member governments.”

Anyway, there were many steps that the ECB could have taken short of that. They could have cut rates faster. They could have not raised rates in response to a short-term commodity price spike. They could have announced that their inflation target was symmetric, and if they undershot they would deliberately overshoot later.

This isn’t a politically realistic outcome, but that’s because policy makers decided that Greece had to suffer. It was a political question, and it had a political answer. Not a technocratic result of impersonal forces. I think you can even make a good case that Greece didn’t deserve much sympathy (you make a good case for Ireland, for example). But if you took determined technocrats, and gave them the job of minimizing the suffering of Greece within the existing treaty obligations, and promised them the necessary political cover, they certainly could do much more than they have.