Sic et Non

Uncertainty, perplexity, ambivalence. I'm pretty sure this is where it's at.

Archive for the category “Politics/Political Economy”

Recommendations to the New Commissioner-designate for Economic and Monetary Affairs

Pierre Moscovici

Bruegel, the Brussels-based think tank and one of the most influential European institutions in economic policy matters, has issued a series of Memos to the President and key economic policy Commissioners of the new European Commission, announced on 10 September. The new Commissioner-designate for Economic and Financial Affairs, Taxation and Customs, under the new Commission structure, is Pierre Moscovici, a French socialist and Minister of Finance, 2012-2014.

In the memo to the new Commissioner, Bruegel points out the need to “move ahead relentlessly with structural reforms”, specifically mentioning “regulations [which] inhibit the growth of firms … administrative requirements… protectionist regulations… labour market regulations [which] do not encourage workers towards higher performance… public institutions [which] work ineffectively and various kinds of public spending [which] are used wastefully and need to be financed by distorting taxes.”

Although it stresses the need to vigourous implementation of fiscal rules, the Memo also recognizes the imperative of demand management, stating that “relying predominantly on supply-side oriented structural reform and a tough adherence to current fiscal rules is not enough for growth.” An investment programme is recommended, of “at least 1 percent of EU GDP in addition to investments currently planned… financed by the European Investment Bank, project bonds and an increase and improvement in the EU budget.” It adds that countries with weaker economies and higher unemployment should “benefit disproportionately” from the programme. (Compare with economist Yianis Varoufakis’ Modest Proposal, Policy 3.) Sectors to be thus targeted would include the European energy and telecommunications networks.

As regards inflation, Bruegel suggests supporting an expansionary policy and insists it “is essential that demand increase, in particular in countries with large account surpluses… Public and private investment and wages will have to rise”.
A warning is issued about the possible re-emergence of the crisis. Bruegel’s position is that if “inflation and growth remain subdued and debt dynamics remain unfavourable, it will be only a matter of time until the next financial attack against member states”. In this context, they warn against a repetition of “the Greek debacle – the pretence that a non-sustainable fiscal position is sustainable”, and they go on to propose “re-profiling or even restructuring if debt is unsustainable”.

Finally, the Memo outlines the key elements of any new programme of financial assistance, which pertain to the Commission’s and the ESM’s role (with the recommendation that the latter be strengthened and transformed into a “true European Monetary Fund”), as well as that of the ECB (it should be reduced to “silent participant” and “should not define conditionality”); a third element concerns the “strengthening of ex-post democratic control” with the involvement of national parliaments and the European Parliament.

Read the Memo here.
Jean-Claude Juncker’s 10 priorities as Commission President.
Juncker’s Mission Letters to the new Commissioners.

Eurozone Crisis Monitor: Update on the Debate

On September 6, Mr. Mario Draghi, President of the European Central Bank, announced an Outright Monetary Transaction programme (involving potentially unlimited bond purchases), in order to “address severe distortions in government bond markets” and to provide “a fully effective backstop to avoid destructive scenarios”. He stressed, by the way, that “the euro is irreversible”. [Press Conference Statement]

At about the same time, the Commission issued a proposal for a European banking union and the German Constitutional Court upheld the European Stability Mechanism, Europe’s bailout fund. To many, these developments signalled a turn in the right direction in the management of the euro-crisis. They also seemed to pacify financial markets, as Spanish and Italian bond yields fell.

Kemal Derviş, Vice President and Director of the Global Economy and Development program at the Brookings Institution, had already pointed out that for such a program to succeed “a decisive change in the macroeconomic policy mix throughout the eurozone” would be required. More recently, in an article entitled “Back to the Brink for the Eurozone?” (10/10/12), Derviş stressed that although “there has been some progress, albeit slow, toward agreement on the institutional architecture of a more integrated eurozone … there has been virtually no progress at all … in the recalibration of the macroeconomic policy mix”: Europe insists on a pro-cyclical strategy of excessive austerity and internal devaluation that is producing a “deflationary spiral”, thwarting the efforts to curb deficits and the debt/GDP ratio. He points out that the enormous combined current-account surplus that northern European countries are running at the same time “subtracts net demand from the rest of Europe and the world economy”. He warns against the fallacy of the rationale behind this (increased competitiveness in the global market), arguing that “surplus countries must contribute no less than deficit countries to global and regional rebalancing, because the world economy cannot export to outer space”. Insisting on such policies, he fears, could “bring about the end of the eurozone”.

Yanis Varoufakis, a Professor of Economics and one of the most vocal and eloquent critics of the Eurozone’s crisis management policies, has tried to assess the credibility and viability of the OMT scheme in a series of three brilliant posts on his blog under the general title “Europe’s Modern Titanomachy” (Part A, Part B, Part C). His view is that “all depends on whether bond market participants take a look at it and decide that it will not pay them to bet against its integrity”. His conclusion is that “the OMT conditionality constraints, if imposed, guarantee that the Eurozone’s Periphery will continue along its present path toward” catastrophe, because “Italy and Spain … will apply for an ESM-EFSF-OMT program only when their situation is so desperate that their commitment to deficit reduction … lacks credibility, in turn wrecking the ECB’s own credibility regarding the threat to discontinue an OMT program when deficit reduction falls through” (as a decision to withdraw OMT support might well be tantamount to suicide for the eurozone and “no ECB President can convince politicians that he will prefer to pull the plug on an OMT program, rather than find a rationale to continue with it, if their fiscal targets are continually missed and they relent in their implementation of increasingly harsh austerity”).

Wolfgang Munchau, the Financial Times columnist and associate editor, agrees that “trouble is already building that may soon destroy the OMT’s credibility”. (“QE would be right for Europe, too”, FT, 16/09/12). Is it just a “confidence trick”? Munchau thinks that “there are good political reasons that stop elected politicians from applying for the OMT”. And even if current leaders do apply, what happens if a newly elected government tries to “tweak the reform process”? Will the ECB be willing to withdraw its support? As Varoufakis says, “when I threaten my daughter that I shall stop breathing till I die unless she does her homework, she has every reason to ignore me, knowing that, if she does not do her homework, I will be far worse off if I carry out my threat”. Hence, Munchau worries that “we might be damned if the OMT works and damned if it does not”. He urges quantitative easing, as a monetary stimulus, to counteract the effects of pro-cyclical austerity policies and “halt a self-reinforcing crisis”.

Voices in the EuroWilderness, Pre-Crisis

John Gillingham, professor of history at the University of Missouri (he teaches Modern European Economic History and The History of European Integration, inter alia, and has written extensively on EU matters) published Design for a New Europe in 2006 (Cambridge University Press), which includes a scathing critique of EU institutions and practices and some proposals for reform. This is what the book said then about the Eurozone:

The EMU … is intrinsically unstable. The burning question of the hour is, What will happen once bondholders start worrying about the “full faith and credit” of a state that has never existed and likely never will? The threat of financial panic must be dealt with immediately. (…)
The euro need not be taken out of circulation but can instead be allowed to find its value in competition with restored national currencies. Individual countries should have the choice of opting into or out of Euroland or of using both domestic and European currencies concurrently. (…)
Adoption of [a one-size-fits-all monetary] policy was like using a single thermostat to regulate temperatures at the same time in both Lisbon and Helsinki. … The euro is also of particular benefit to ill-managed member economies, whose credit ratings it artificially boosts. (…)
The credibility of the euro depends on little more than the self-restraint of the national governments. In other words, there is good reason to worry about currency instability. (…)
In early 2004, financial experts from Goldman Sachs and Morgan Stanley started recommending that buyers take heed of the “country factor” when purchasing Eurobonds. (…)
No provision was made for exit from the EMU on the theory that it should more painful to leave than to stay in, even if a bailout of some kind should become necessary. If such a rescue operation should fail, a distressed country could leave the EMU and simply remonetize back into a reissued national currency. This action would almost surely entail a partial de facto default, because the new issue would necessarily be weaker than the euro. … If several economically ailing countries should have to leave the EMU at the same time, the big G-8 powers would, however, have to rescue and reform or – in a crushing blow to “Europe’s great experiment in transnational governance” – liquidate it.

Then, in May 2009, exactly one year before the first Greek bailout, the Economist Intelligence Unit published a brief on Greece, stating:

We expect the deficit to rise further to 5% of GDP in 2009, before easing moderately to 4.8% of GDP in 2010 and 3.3% of GDP by 2013. Greece’s high deficit and public debt will adversely affect international confidence in the Greek economy. Although not our central scenario, there is a risk of Greece defaulting on its long-term bonds during the forecast period. If this happens, Greece would seek support from the IMF and the EU, both of which would force tough austerity measures.

[Note that the deficit turned out to be more than 3 times higher than expected, which is probably why that was not their “central scenario”.]

Retrospectively, it is very interesting to see how much of what has transpired in the last couple of years was actually predictable. None of this just fell out of the sky, but the public was unaware of the situation and the potential risks. This is, I think, one of the reasons we’ve been having unrealistic, quasi-metaphysical debates about things that have very concrete historical roots and causes. It is always very difficult to understand what’s happening if you don’t understand what’s happened.

Greece: Reality Check

The political debate in Greece seems to be taking place in a common sense vacuum. The centre-right ND party insisted for almost two years that the austerity programme was a result of the PASOK government’s lack of negotiating skills and asked for elections so they could renegotiate it. All this despite the fact that it was more than obvious that Greece’s creditors would not, at the time, listen to anyone on this – and there was hardly anyone else who thought the programme had any chance: world renowned economists and analysts left and right, the markets, think tanks, almost unanimously warned that it was flawed, but they just refused to listen. Mr. Samaras would have us believe that he could single-handedly talk some sense into the troika, as if that was just a matter of lack of economic expertise on their part and not a conscious policy decision. This lasted until George Papandreou proposed a referendum and Merkel and Sarkozy run amok, showing plainly what room for negotiation there was. Afterwards, the anti-austerity camp started to claim they had won, since the troika was revising the programme(!), when it was clear from the beginning that their strategy (if you can call it that) was to stick to their programme until forced by hard realities to modify it, as few reluctant little steps as possible at a time.

Meanwhile, the Left and the far-Right was assuring everyone that we needn’t fear an exit from the Eurozone because there was no such provision in the treaties (as if that has ever stopped anyone who was in a position to enforce his will in international relations), plus it would be irrational for the Eurozone to choose to expel Greece – too costly/risky for itself. Is it too much to ask that people who aspire to be leaders don’t forget that rationality is perspectival, determined by subjective priorities or perceived self-interest, and all too often overruled by prejudice, misjudgment and miscalculation? Wasn’t it in this very continent that the two World Wars of the previous century begun?

The outcome has been that Greece was left divided at a time when some of the hardest and most critical policy decisions of its modern history had to be made, its negotiating power was crippled, its public life dominated by non-issues, democracy threatened by extremists, and its future hanging in the balance – just at the time when European leaders seem to be running out of delusions at last.

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