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Missing an European Treasury

by Luis de Sousa Fri Mar 26th, 2010 at 08:59:56 AM EST





AP Photo/Bernd Kammerer

Yesterday, as the first agreement between Germany and the remainder of Eurozone on helping Greece became known, and as the Socialists announced a proposal for a financial mechanism to deal with such cases, the rating agency Fitch downgraded Portugal's sovereign debt. A coincidence, certainly.

Today the local media is waking us with claims that Germany is acting concertedly to depress the €uro, fostering exports and local investor confidence. After all, when the trouble was with private banks there was no hesitation in putting on the table several times over the handful of thousand million euros Greece needs to refinance its budget.

Today it also emerged an article published by the Neuropeans magazine that puts it all into context with an interesting allegory: Let's transform the Greek tragedy into the first Eurozone epic! 

frontpaged - Nomad


Here's the intro to the article:


Eurozone needs a Economic Governance: Let's transform the Greek tragedy into the first Eurozone epic.

A tragedy requires the heroes to be aware that the gods are playing with their destinies but without being able to prevent disasters of unraveling. An epic requires wars and fights, adversaries, if not dark enemies, to be violently defeated. What looks like a tragedy from a Greek point of view is more and more resembling more and more an epic seen from a Eurozone perspective because it represents one of the beginning of a global war of currencies, involving the Dollar, the Yuan, the Yen, ...  and of course the Euro, the new comer in the game, and the most promising one which became in 10 years almost 35% of the world's reserve currencies. On the other hand, you find the Dollar fighting in a tragic attempt to preserve its dominant status and the British Pound holding its last fight for survival. In the middle, you have the Yuan, wondering how and when to establish its newly global status. All around you find scores of international medias serving mostly their Dollars-Pounds masters, hedge-funds and speculators of all sorts trying to make short term profits from every bit of chaos. Last but not least, at the very core of the epic, you have billions of small heroes, the citizens from Europe, America, China, ... trying to find out what will happen with their wealth, their economic sovereignty, their future.

If all that does not set the picture for an epic, then our era has lost the sense of grand historical upheavals.

Two things are certain though before getting into the details of the story :

. any epic needs heroes but very often they shape themselves to that status along the way when at first they look like anything but 'to be heroes', full of doubts and uncertainties ... no question that Eurozone leadership has lots of candidates of that kind;

. the very country whose epics have been the core exportation product for centuries is Iceland! That is undoubtedly a good sign from the Gods!

And some highlights of the main text:


First, these questions are typically the kind of issues which should be discussed within a Eurozone Economic Governance body, as proposed five years ago by Newropeans*, not when a crisis erupts, but rather on a regular basis; not in a non-Eurozone newspaper, but rather within specific Eurozone institutions.

[...]

it is absolutely ridiculous to imagine an exclusion of the Eurozone beyond pure psychological pressure's aims. A country faced with such a situation will see its currency and financial situation fall into pieces while it will generate a major political mess throughout the EU.

Meanwhile the global crisis is putting an end to what used to be the 'norm', such as Germany using its Eurozone partners as mere exports markets; or Eurozone leaders pretending that they still can act as if the Euro did not exist.

[...]

in the coming years the Eurozone needs to create a kind of 'Rapid Financial Deployment Force', such as a European Monetary Fund, dedicated to the sole Eurozone interests. One reason being that the Eurozone can no longer trust the IMF (in Washington's hands) to respect its own interests rather than those of the Dollar.

[...]

there is no doubt that the Greek case will be solved. Fifty billion Euros is little money compared to what the European banks have received last year.

PIIGS (five different ones) is an acronym that refers to the Atlantic (Portugal and Ireland) and Mediterranean (Italy, Greece and Spain) Eurozone states. These are states that didn't fare very well in the aftermath of the II World War, by not benefiting from the Marshall plan, by not sorting their internal political framework timely or both. These states pretty much missed the growth, development and social reform that took place in Europe during the 1950s and 1960s, up to the 1968 convulsion and the Nixon Shock. The symbolism of this acronym, reminiscent of Orwell's allegory "Animal Farm", is very ironic, in various ways.

PIIGS adopted an economic modus operandi based on lax budgetary execution, that was later corrected with currency depreciation. This avoided tax increases, kept money circulating and preserved employment (I remember 2 digit price inflation and salary increases still in the 1990s). It also avoided the sort of social cohesion central European states built up during that time.  

Then one day they all joined a monetary union. The next day borders where opened to the same products the PIIGS where manufacturing. The day after that there was an Oil Shock. I like Orwell's allegory, but the one about the cicada and the ant perhaps applies better.

Finally PIIGS are coming to grips with the simple fact that the old ways do not apply any more. Now they do not export cheap goods and can't depreciate the currency at their own will, and it hurts. Let's face it, 2 digit budget deficits are no longer viable, discipline is in order. Obviously, discipline would be much easier with unemployment at 5%, instead of the present 10% and tightening now the budget too fast might be a treacherous path.

But the problem the Council is facing these days is another: how to repell the speculators that have been feeding on the PIIGS. In timely fashion, the anglo-american financial giants have been degrading debt ratings and using the press, pushing up the interest on sovereign bonds and notes every time one of the PIIGS needs to refinance itself or roll-over debt. The fact that any single state of the Eurozone is facing a better budgetary setting than either the UK or the US seems to be irrelevant for the time being.

From my perspective, at the root of this problem is a deficient European Construction, so far leaded by men and women that have shied away from the inevitable federative structure that is the only framework on with such a wide union can operate. Whereas the ECB was set mainly as a centralized structure, with a sort of federative consultative body (the state central banks and the Eurogroup), the Treasury remained a loose and undefined con-federative institution. Clearly, an European Treasury is amiss.

Certainly the question could be posed on the need of such a Treasury, given the minuscule dimension of the European budget. But the Treasury can work as a reference in times of crisis like these. When haunted by foreign hawks, like Portugal and Greece today, member states could recur to the European Treasury to emit debt on their behalf. This would have two immediate effects: first it would provide instant liquidity to the recurrent state and second it would  scare the hawks away by showing the Eurozone's cohesion. Such an intervention would have, above all, a psychological effect. In the present day, an European Treasury wouldn't perhaps need to emit more than a thousand million euros on behalf of Greece to calm the speculation over this state's debt, opening the way for the 9 thousand million euros or so Greece has to emit itself.

There's obviously the danger of abuse of the European Treasury, with member states preferably recurring to this institution when issuing new debt. This Treasury should remain as a last resort intervenor, at least as long as the European budget remains this small. To ensure that, two basic rules can be proposed:


  • All debt emitted by the European Treasury can only be bought and claimed by European citizens (or European institutions acting on their behalf);

  • When receiving funds issued by the European Treasury, member states shall incur in a fixed interest premium (say 1%) over the marketed interest. This extra interest could either revert to bond holders, the European budget or both

The first rule aims at preventing the European Treasury from increasing sovereign foreign debt. The second rule tries to present a penalty to those recurring to the European Treasury, thus assuring that it would the exception rather than the rule.

An European Treasury could be run by a Treasury Commissioner, appointed together with the remainder of the Commission. And it should be respondent to state Treasuries, especially when acting beyond pre-established limits. In the future this could evolve to a better defined federative structure, if the powers of Commission evolve that way too.

There can be issues with the implementation of such institution, and there may be more clairvoyant ideas about its possible workings or even alternative institutions. But what it is certain is that, as they exist today, monetary institutions in the EU are not up to the job. May the Council be up to it.

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Much to my regret, Life just hasn't been leaving much time for blogging or to give the proper attention to the issues discussed here. I'd like to apologise to all the EuroTrib folk for not being a more regular contributor.

You might find me At The Edge Of Time.
by Luis de Sousa (luis[dot]a[dot]de[dot]sousa[at]gmail[dot]com) on Thu Mar 25th, 2010 at 08:28:39 AM EST
... at the moment is that the power to deficit spend as a sovereign economy resides at the level of the currency unit. A state within that unit must treat deficits as borrowing.

Now, the mainstream conventional foolishness obscures this, because it pretends that a sovereign economy must treat deficits as borrowing, which is ... well, foolish, hence the name. So under the mainstream conventional foolishness, there is no change of category for the individual states of a currency zone.

In reality (cf. billy blog, Clowns to the left, jokers to the right), a sovereign economy can deficit spend if it has sufficient domestic unemployed resources that the residual inflationary pressure from outbidding already employed resources is on the order of ongoing productivity growth. There is no finance constraint ... but a state within that sovereign economy does face a finance constraint.

So the flaw in the policies to agree to restrain government deficits of EU members to a certain level is not the agreement per se, but rather the lack of a facility at the Eurozone level to create deficits corresponding to the size of the unemployment gap to be transferred to the member states in the event of an economic downturn.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu Mar 25th, 2010 at 10:24:16 AM EST
Even with such a facility as you describe it would be necessary for those representing the preponderance of decision making power in the monetary union to understand and accept those necessities. To make this possible it will, (would?), probably be necessary to re-propagandize the populations of various countries along different lines from what has been the case for thirty or forty years.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Mar 25th, 2010 at 04:33:48 PM EST
[ Parent ]
In not so elaborate words, the European Treasury would work as a vehicle to invest unallocated resources at better off states into troubled states. It draws extra liquidity from one place to another with liquidity wanton.

You might find me At The Edge Of Time.
by Luis de Sousa (luis[dot]a[dot]de[dot]sousa[at]gmail[dot]com) on Fri Mar 26th, 2010 at 04:25:57 AM EST
[ Parent ]
No, it creates liquidity to mobilize unemployed resources. Indeed, the reaction to a downturn need not involve the transfer of resources ... it could be distributed on a per capita basis in response to the gap between potential output and actual output.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Fri Mar 26th, 2010 at 11:18:53 AM EST
[ Parent ]
European Tribune - Comments - Missing an European Treasury
  • When receiving funds issued by the European Treasury, member states shall incur in a fixed interest premium (say 1%) over the marketed interest. This extra interest could either revert to bond holders, the European budget or both

Doesn't that undermine the purpose of the exercise? The market could still extort ridiculous returns for holding bonds.

The easiest way to muddle through the crisis would be to order the ECB to enforce a maximal level of interest on Eurozone debt. But then the treaties explicitly forbid that.

by generic on Thu Mar 25th, 2010 at 12:42:08 PM EST
... market the bonds if the conditions when the bonds are required. The ECB should simply hold them and create corresponding Euro reserve accounts.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Thu Mar 25th, 2010 at 02:38:03 PM EST
[ Parent ]
Doesn't that undermine the purpose of the exercise? The market could still extort ridiculous returns for holding bonds.

The market would not exert the same sort of pressure on Euro-bonds, it is completely different to bid for a bond issued by a state with a GDP of 250 000 million € and a budget deficit of 12% from a bond issued by an union with a GDP of 8.4 billion €, a deficit of 6% and a trade surplus. The expectations are totally different and the demand for Euro-bonds should be rife.

The easiest way to muddle through the crisis would be to order the ECB to enforce a maximal level of interest on Eurozone debt.

That would also be the easiest way for a sovereign default within the Eurozone :) with an interest cap troubled states wouldn't find buyers for their bonds to roll-over debt and/or refinance their budgets. And remember that when a state emits debt the ECB does not intervene.

You might find me At The Edge Of Time.

by Luis de Sousa (luis[dot]a[dot]de[dot]sousa[at]gmail[dot]com) on Fri Mar 26th, 2010 at 04:38:00 AM EST
[ Parent ]
Luis de Sousa:
The market would not exert the same sort of pressure on Euro-bonds,

Ah. A percentage on the interest rate of the centrally emitted bonds.

Luis de Sousa:

That would also be the easiest way for a sovereign default within the Eurozone :) with an interest cap troubled states wouldn't find buyers for their bonds to roll-over debt and/or refinance their budgets.

By enforcing I meant something like this:

billy blog » Blog Archive » Why history matters

Prior to 1982, a tap system operated where the government would set the interest rate and then supply bonds to investors up to demand. Sometimes investors did not take up as much as the Government desired. The extra funds came from contra entries in the RBA-Treasury accounts (the government borrowing from itself!).

by generic on Fri Mar 26th, 2010 at 05:17:42 AM EST
[ Parent ]
Prior to 1982, a tap system operated where the government would set the interest rate and then supply bonds to investors up to demand. Sometimes investors did not take up as much as the Government desired. The extra funds came from contra entries in the RBA-Treasury accounts (the government borrowing from itself!).

That's kind of comical :). History is important, certainly, but in those days economies in Europe where much more isolated than today. Btw, that's more or less how the PIIGS operated prior to joining the EU.

Imagining such blatant printing today: the currency would naturally depreciate. With low interest rates and a depreciating currency a feedback would rapidly emerge, where ever fewer investors would bid for bonds denominated in ever less valuable currency.

Another option could be the emission of debt denominated in foreign currency to attract foreign investors. But if the local currency depreciated too fast, servicing that debt could become unbearable and a default would ensue.

I just don't see how could anyone use that strategy successfully in today's highly intertwined global economy (apart from the US of course :)).

You might find me At The Edge Of Time.

by Luis de Sousa (luis[dot]a[dot]de[dot]sousa[at]gmail[dot]com) on Fri Mar 26th, 2010 at 04:41:54 PM EST
[ Parent ]
This neoliberal story about the feedback loop is excellent, except for not being true.

Indeed, notice how in the following:

With low interest rates and a depreciating currency a feedback would rapidly emerge, where ever fewer investors would bid for bonds denominated in ever less valuable currency.
... there is no transactions demand for a currency in foreign exchange markets. All demand for a currency in that story is speculative game playing by people using financial markets as their casino.

(1) Yes, if the government engages in responsible monetary policy, the currency will naturally depreciate.

Does every currency go into a downward spiral meltdown every time it depreciates? Of course not ... if it did, every foreign exchange market would always be melting down.

Remember how Japan experience a currency meltdown when it put its cash rate at basically 0% ... going from a bit over 100 yen for a dollar or a euro to 1,000 yen for a euro then 10,000 yen for a euro then 100,000 yen for a euro, because setting the cash rate at 0% sets up a feedback loop?

No?

Oops ... an explanation that explains things clearly and simply is a fine thing ... but when it explains clearly and simply effects that do no happen in its cause and effect story ... that's not a real world explanation, its just faith-based bullshit used to justify the system by which the speculative class is allowed to parasite on the productive sectors of the economy.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Mar 26th, 2010 at 06:04:06 PM EST
[ Parent ]
I'm impressed that the Euro 1Billion insurance policy on Greek bonds that is now most likely an obligation of the German government, never gets mentioned.
by rootless2 on Sat Mar 27th, 2010 at 01:09:18 PM EST
Pardon me if I've missed it, but I have not seen much reference to the wrong end of the billion euro credit default swap on Greek debt which almost certainly now belongs to the German government. It's really amazing how self-righteous Merkel's team has been about good finance practices when, as a result of their spree of bank bailouts, they own an exposure to an astoundingly stupid bet that Goldman was able to sell to the brain trust of an Irish/German bank.
by rootless2 on Mon Mar 29th, 2010 at 04:22:12 AM EST


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