Spain has a new Government since this week. The investiture vote was on Monday and Tuesday, Wednesday and Thursday the Cabinet swore their positions, and yesterday there was a first Council of Ministers.

The government is relatively small, with only 13 ministers and only one vice-president. Prime Minister Mariano Rajoy hasn't felt the need to pay back favours or accommodate political families within his party and so the government is composed of faithful, technocrats and safe hands. Rajoy has separated the Finance and Economy ministries and will take for himself the Economic vice-presidency to mediate between the two ministers. In this area, he has brought the traditional Ministry for Public Administrations under Finance, and Research and Development (dropping the old Science label) under Economy. However, what's become clear is who the real person to watch is in this government, and it's not Rajoy but Soraya Sáenz de Santamaría. Here's her with a look on her face like she's just stolen her portfolio:

The markets were up today on the following news: Markets surge as Fed and central banks step in to try to prevent credit crunch (the Guardian)

The European Central Bank, which has come under intense pressure over its role in the eurozone crisis, said it would now be able to provide liquidity to struggling banks in yen, sterling, Swiss francs and Canadian dollars if necessary.

...

Sir Mervyn King, governor of the Bank of England, chaired the teleconference involving six central banks at which the measures were agreed in his capacity as chairman of the economic consultative committee of the Bank of International Settlements - the club of international central bankers.

The Bank joined the Federal Reserve, the Bank of Japan, the ECB, the Bank of Canada and the Swiss National Bank in making the announcement.

Something is fishy, though.

Eurointelligence has published a new article of mine: The role of ideology in this crisis

The eurozone has a pervasive bias against the public sector, from the level of policy down to its institutional makeup. If it does not allow itself common action in the public interest, then crisis resolution efforts are either wasted or a cover for national goals or special interests.

You can read the full article there, and comment here.

Consider the following account of the Bretton Woods summit towards the end of WWII:

When Keynes began to explain his idea, in papers published in 1942 and 1943, it detonated in the minds of all who read it. The British economist Lionel Robbins reported that "it would be difficult to exaggerate the electrifying effect on thought throughout the whole relevant apparatus of government ... nothing so imaginative and so ambitious had ever been discussed"(5). Economists all over the world saw that Keynes had cracked it. As the Allies prepared for the Bretton Woods conference, Britain adopted Keynes's solution as its official negotiating position.

But there was one country - at the time the world's biggest creditor - in which his proposal was less welcome. The head of the US delegation at Bretton Woods, Harry Dexter White, responded to Lord Keynes's idea thus: "We have been perfectly adamant on that point. We have taken the position of absolutely no"(6). Instead he proposed an International Stabilisation Fund, which would place the entire burden of maintaining the balance of trade on the deficit nations. It would place no limits on the surplus that successful exporters could accumulate. He also suggested an International Bank for Reconstruction and Development, which would provide capital for economic reconstruction after the war. White, backed by the financial clout of the US Treasury, prevailed. The International Stabilisation Fund became the International Monetary Fund. The International Bank for Reconstruction and Development remains the principal lending arm of the World Bank.

The consequences, especially for the poorest indebted countries, have been catastrophic. Acting on behalf of the rich world, imposing conditions which no free country would tolerate, the IMF has bled them dry. As Joseph Stiglitz has shown, the Fund compounds existing economic crises and creates crises where none existed before. It has destabilised exchange rates, exacerbated balance of payments problems, forced countries into debt and recession, wrecked public services and destroyed the jobs and incomes of tens of millions of people(7).

(Clearing Up This Mess , George Monbiot, November 18, 2008)

ElPais.com in English: Spain's main parties agree constitutional amendment capping public deficit

The draft law was filed with Congress on Friday and is due to be approved on September 2 without recourse to a referendum, allowing it to be in place before general elections called for November 20 in which Prime Minister José Luis Rodríguez will not be standing, and which are expected to be won by the PP.

The government's latest effort to ward off attacks on its sovereign debt also affords a de[g]ree of flexibility in cases of "natural disasters, economic recession and situations of exceptional emergency out [of] the control of the government that considerably prejudice the economic or social sustainability of the state."

At a news conference after the regular Friday Cabinet meeting, government spokesman José Blanco "categorically" denied that reform had been carried out under heavy pressure from the European Central Bank. "The ECB never brought up the reform of the Constitution," he said. "You can't respond to a demand that never existed."

ElPais.com in English: Regions' unpaid bills reach the 50-billion-euro mark (14/08/2011)

The total sum of bills unpaid by regional and local governments has hit the 50-billion-euro mark, five percent of GDP and four times more than two years ago, according to EL PAÍS' calculations.

...

The non-payments most affect construction companies working on public projects - which are owed a collective 15.05 billion euros, according to industry employers' organization Seopan - and freelancers - 14.983 billion - as well as the pharmaceutical, waste collection and cleaning industries, 5.450 billion and four billion and one billion, respectively.

...

Municipal administrations are those that delay the longest in handing out the checks, according to all the business leaders consulted by this newspaper. They take an average of 238 days to pay construction companies, for instance, more than three times what it takes a company to repay its loans to a bank (75 days), according to the Platform against Late Payments. Central government takes an average of 140 days to pay and the regions 155 days, says Seopan.

According to EUObserver.com: Merkel and Sarkozy plan 'true economic government'

Following the two-hour talks in Paris, President Nicolas Sarkozy and Chancellor Angela Merkel said they would work towards a common corporation tax by 2013 and to co-ordinate their annual national budgets.

More generally, they suggested eurozone leaders should meet twice a year and that all single currency countries should enact constitutional changes requiring balanced budgets.

...

The two leaders pledged to revive the idea of a financial transaction tax - a proposal that has been regularly mentioned in Brussels in recent months but has failed to get traction among member states.

...

The two measures that many analysts believe will help ease the eurozone's debt crisis - the issuance of eurobonds and increasing the size of the eurozone's €440 billion rescue fund - were not on the table, however.

Update [2011-8-18 4:21:25 by Migeru]: The letter from Markel and Sarkozy to van Rompuy has now been made public. here [PDF] is the copy hosted by ElPais.com

For some weeks now I had been mulling a diary about the inevitable market attack on France, but today's events force me to write now or forever hold my peace. Things are happening so fast, today's planned diary may be tomorrow's outdated analysis.

The news today was a spectacular market crash. From Bloomberg: Societe Generale Leads Fall in French Banks as Credit-Default Swaps Climb

Societe Generale shares slumped as much as 23 percent and were down 16 percent at 21.89 euros at 4:27 p.m. in Paris. Credit-default swaps on the bank rose 29 basis points to a record 299 basis points.

...

Bank shares lost 5.3 percent, for the biggest decline among the 19 industry groups in the Stoxx Europe 600 Index and the steepest drop since May 2009. French and Italian banks led the retreat. BNP Paribas (BNP) SA shed 11 percent to 35.06 euros and Credit Agricole SA (ACA) sank 15 percent to 5.82 euros.

"If credit default swaps on France are under attack, that's not a good sign," said Yves Marcais, a sales trader at Global Equities in Paris. "That means that France is under attack and that's worrisome. French banks hold a lot of French bonds."

It's unclear what exactly caused the crash. What's ironic is that the attack on the French banks appeared to get under way a couple of hours after Sarkozy rode into Paris in his shining armor to reassure the markets:

Telegraph: Sarkozy abandons holiday as downgrade fears rock France

French President Nicolas Sarkozy cut short his vacation and promised to pare down huge debts after growing fears it could be the next triple A-rated economy to suffer a downgrade sent bank shares tumbling.

I seem to recall it was before and not after but that's not too important now.

Societe Generale shares dropped as mush as 20pc, leading credit ratings agencies Fitch and Moody's to reiterate the eurozone nation's top rating, a day after Standard & Poor's had done the same.

...

Mr Sarkozy, who along with other European leaders has come under criticism for staying on holiday as the markets were gripped by fear, cut short his vacation on the French Riviera to summon key government ministers for an emergency meeting on the financial crisis.

No new measures were announced, but Mr Sarkozy insisted that "commitments to reducing the deficit are inviolable and will be maintained".

Meanwhile, we are informed (h/t afew) that

"There is only one sovereign in Europe, and that is Germany," said Stuart Thomson, who helps oversee about $120 billion as a portfolio manager at Ignis Asset Management in Glasgow. "Everything else is a credit and trades like a credit, even France."

Below the fold, the reasons why a market attack was entirely foreseeable, even if I doubt anyone expected it to happen so soon.

As Drew put it

The whole idea of "TEA Party" rallies does have roots in the hard money movement, but most of those people view the Teabaggers as hypocrites who stole their schtick.

Some ways to thwart the hard money movement's threat to cause the US government to default include (via Krugman)

A little-known statute gives the secretary of the Treasury the authority to issue platinum coins in any denomination. So some commentators have suggested that the Treasury create two $1 trillion coins, deposit them in its account in the Federal Reserve and write checks on the proceeds.

Fortunately for us, none of the loopholes available to the crassly Keynesian spendthrifts at the US Treasury is available in the Eurozone, because the Fathers of the Continent, in their infinite wisdom, hardwired basic tenets of the hard money movement into the Maastricht Treaty so, thankfully, it's all deflation for us. Indeed [PDF],

Article 128
(ex Article 106 TEC)
1.    The European Central Bank shall have the exclusive right to authorise the issue of euro banknotes within the Union. The European Central Bank and the national central banks may issue such notes. The banknotes issued by the European Central Bank and the national central banks shall be the only such notes to have the status of legal tender within the Union.
2.    Member States may issue euro coins subject to approval by the European Central Bank of the volume of the issue. The Council, on a proposal from the Commission and after consulting the European Parliament and the European Central Bank, may adopt measures to harmonise the denominations and technical specifications of all coins intended for circulation to the extent necessary to permit their smooth circulation within the Union.

And we all know what happens to people who, in the throes of a Great Depression, decide to reinvigorate the economy of their municipality  by issuing local money thereby infringing on the Central Bank's monopoly on money issue: they get slapped back into Depression.

Despite attracting great interest at the time, including from French Premier Edouard Daladier and the economist Irving Fisher, the "experiment" was terminated by the Austrian National Bank on the 1st September 1933 on the basis of the "Certified Compensation Bills" being a threat to the Bank's monopoly on printing money.

It is perhaps appropriate that the Central Bank involved in 1933 was literally Austrian while in 2011 they're all figuratively so.

I have had a piece on the Euro crisis published in Eurointelligence: THE FLAWS OF THE EU'S ASYMMETRIC APPROACH TO IMBALANCES

The EU is pursuing a lopsided approach to resolving the eurozone's internal imbalances. If all the adjustment were to take place among deficit countries, one of the consequences would be a situation under which the capital investment to improve productivity can hardly take place.

With thanks to afew, JakeS and kcurie who helped edit the draft, and to Wolfgang Münchau of Eurointelligence for the final tweaks and the choice of title and blurb. Negative thanks to the spellchecker of Münchau's copy of Microsoft Word for introducing typos in the final draft.

Please read the piece over there and comment over here.

front-paged by afew

Spain's PSOE has suffered a rout of historic proportions in the municipal elections held last weekend. To see the scale of the defeat, consider this exercise from El Pais: The data would leave the PP 12 seats short of an absolute majority

The results from March 22 appear to foreshadow a PP victory in the general election of 2012. It's not a foregone conclusion. 4 years ago, the PP exceeded the PSOE vote in the municipal elections and when on to lose the general. This time, however, the distance is much larger. With the results of these municipal elections, the PP would stop 12 seats short of an absolute majority in the Congress, with 164 MPs, according to an extrapolation carried out by El Pais, which shows a collapse of the PSOE and a more pluralistic seat distribution away from bipartisanship.

In the exercise the d'Hondt law was applied to [Sunday's] results by province, as is done in a General election. To extrapolate the results from one election to another is an adventurous exercise of politics-fiction. The differences in time, scope, candidates, electoral roster, and rules, demand that any conclusion be taken with caution. The result of the exercise is an upturning of the composition of the Congress of Deputies. The PP would be the plurality group with 164 seats, 10 more than it obtained in 2008 (including two from [Navarran right-wing] UPN which broke away from the PP). The PSOE, meanwhile, would lose 53 of its current 169 seats, remaining with 116, the worst result in its history below the figures of 1977, 1979, or the 125 seats obtained by Joaquín Almunia in 2000, when the PP obtained an absolute majority. If the regional election results are used in the regions where they were held - in order to elimiate the distortion introduced by certain independent local lists - the difference would be even wider: 166 PP seats to 114 PSOE.

[Catalan right-wing] CiU would be the 3rd political force in the Congress with 16 seats, 6 more than in 2008, but the biggest leap would be that of [United Left] IU, who would go from 2 to 25 seats. The other great leap would be by [Basque independentist left] Bildu, which would get 7 seats, the same as [Basque right-wing] PNV, as it would be represented in all three Basque provinces and Navarra with better results than [ETA's political arm] Batasuna ever got.

It is hard to imagine that the PSOE will manage to turn this around by next year, but it also seems that the PP will fall short of an absolute majority, which would be good news.

Update [2011-5-26 8:53:35 by Migeru]: From ElPais.com: Chacón will not contest the primary to avoid risks to the PSOE and the government. Reportedly, Rubalcaba didn't want primaries and preferred a Congress. So, now, ZP will have his primary without candidates.

Update [2011-5-27 6:25:20 by Migeru]: Now in ElPais.com in English: Chacón withdraws from Socialist leadership race to avoid party split

Move paves way for Rubalcaba to be anointed PM candidate

This afternoon I was giving a lecture on Financial Risk Management for a masters' programme in mathematics at my alma mater in Madrid. After contaminating my students with subversive truths or, as Chris Cook would put it, financial pornography, I decided to go to Sol where young and not-so-young have been camping all week, the last couple of days in defiance of the provincial electoral board which argued that the protest unduly interferes with the electoral campaign. In particular the gathering would interfere with tomorrow's day of reflection (the 24 hours before an election day - and the election day itself) when Spanish electoral law prohibits electioneering. The protesters are unfazed:

We [hereby] inform politicians that the people declare the electoral board illegal.

May 1968 - May 2011
The fight goes on

front-paged with an edit to place the fold by afew

Last week, the think-tank Bruegel published an article entitled ESRB should act on sovereign risk containing an extremely important idea:

The ESRB is the institution uniquely placed to make such an assessment [of the systemic implications of a Greek debt restructuring]. First, it has probably the best access to the kind of data needed to make such an assessment. The ECB - providing a large part of the infrastructure of the ESRB - knows which banks use Greek bonds as collateral for the open market operations and should therefore have a good picture of exposure to Greek bonds. The ECB should also have fairly detailed information on the interbank market, from which contagion across banks can be assessed. Last but not least, the ESRB has the legal authority to request data from the national and European supervisors needed for such an assessment.  The assessment would obviously have to take into account the possible contagion effects.

Leaving aside the perhaps understandable (given the state of economic conventional wisdom) but still inexcusable (especially in an economist) confusion between open market operations (what the article says) and main refinancing operations (what the article should say, as open market operations are both anonymous and uncollaterallised), here we have a restatement of a truth which is central to Hyman Minsky's book Stabilizing and Unstable Economy. Namely, that the Central Bank should emphasize refinancing operations (i.e., collateralised lending) through the discount window (a term more familiar to the general public than main refinancing operations) over open market operations as a way to foster greater financial stability. I'll explain in detail why this is so after the fold, with quotes from Minsky. In any case, it's a good thing that, 25 years after Minsky wrote his book and 4 years into the biggest financial instability crisis since the Great Depression, somebody is finally thinking along these lines.

Incidentally, the credentials of the author of that Bruegel piece are perhaps good news:

Guntram Wolff has joined Bruegel from the European Commission's DG for Economic and Financial Affairs. In this position, Guntram worked on the macroeconomics of the euro area and the reform of euro area governance, drafting and coordinating reports to the Eurogroup, the EFC and the Hermann van Rompuy task force on the reform of the governance of the EA and the EU.

Prior to joining the Commission he was an economist in the economics and research departments of the Deutsche Bundesbank focusing on German and EU public finances, sovereign bond markets and macroeconomics of EMU.In the Bundesbank, he coordinated the research team on fiscal policy. Currently he is also an adviser to the International Monetary Fund.

See? German economists associated with the Bundesbank, EU Commission, and IMF are not all insane.

Last week, an interview with Spanish Prime Minister Zapatero was released by YouTube, in which ZP spoke mainly but not exclusively about economics. The headline chosen by El Pais says it all.

Zapatero: "Para que te presten dinero hay que hacer recortes" · ELPAÍS.com		Zapatero: "To be lent money one has to make cuts" - ElPais.com
"12 de octubre de 2008. París. Sede de la Presidencia de la República Francesa. Todos los líderes europeos viendo cómo se hundía el sistema financiero y la economía mundial". Esta es, para el presidente del Gobierno, José Luis Rodríguez Zapatero, la experiencia que hizo que cambiara su forma de ver el mundo, según ha revelado en una entrevista concedida a YouTube en la que las preguntas las han formulado internautas de todo el mundo. La crisis financiera y la economía han centrado el 50% de las cuestiones recibidas, aunque la educación, el futuro nuclear y el sistema democrático también han estado sobre la mesa.		"12 October 2008, Paris, site of the Presidency of the French Republic. All the European leaders watching the world financial and aconomic system founder". This is, for the [Spanish] Prime Minister, Jose Luis Rodriguez Zapatero, the experience that made him change his view of the world, as he has revealed in an interview given to YouTube in which netizens from around the worl have made the questions. The financial crisis and the economy have concentrated 50% of the questions, though education, the future of nukes, or the democratic system have also been on the table.
...		...
El jefe del Ejecutivo ha defendido también el fondo de rescate de la UE que ya ha sido concedido a Grecia, Irlanda y Portugal. El presidente ha asegurado que es un mecanismo solidario "con quien pasa momentos difíciles". Y ha recuperado uno de sus momentos más difíciles al frente del Gobierno: "Sé que es muy duro porque para que te presten dinero hay que hacer recortes", ha asegurado Zapatero, que en mayo del año pasado defendió en el Congreso las medidas de ajuste aprobadas por el Consejo de Ministros.		The [Spanish] chief executive has also defended the EU's rescue fund which has already been awarded to Greece, Ireland and Portugal. The President assured that this is a mechanism of solidarity "with those goung through hard times". And has recalled one of his hardest moments at the Government's helm: "I know it is very tough because to be lent to one has to make cuts", assured Zapatero, who in may last year defended before the [Spanish] Congress the adjustment measures approved by the Council of Ministerd.

After recently announcing he would not run for reelection in 2012, Zapatero has gone on a media blitz, coinciding with the campaign for the upcoming local and regional elections in Spain, in which he intends to explain the decisions that have been taken by his government on the economy. The most important sitting Social Democratic leader in the EU becomes an evangelist for Aust[e]rian economics.

Bumped, essential discussions - afew

Portugal's blood was not yet dry on the maws of the hyena pack when our old friends the economy editors of the Frankfurter Allgemeine Zeitung announced that Spain would be next.

Eurointelligence Daily Briefing: "We will continue to monitor very closely" (8 April 2011)

After Portugal, who is next?

Frankfurter Allgemeine Zeitung's Werner Mussler has an interesting comment on the consequences of Portugal's rescue demand. According to the Brussels correspondent the next in line is the first really big Euro economy: Spain. Economically the country is in better shape than Portugal, he concedes. But unemployment is rising, growth perspectives are bad and the Spanish banks are heavily engaged in neighbouring Portugal. "The risk of contagion has not diminished with the Portuguese appeal for help", Mussler concludes. "And the EFSF is not sufficient to satisfy a potential Spanish request".

(link to FAZ, in German, added)

The signs for Spain are ominous. Not only are Spanish politicians and commentators (see El Pais calling Portugal's defeat The Final Rescue) publicly reassuring themselves that Spain is Not Portugal (have I not heard that one twice before?) but during the last week the Financial Times, Trichet, Merkel and the European Commission have all praised Spain's policy adjustments over the past 9 months. But most serious of all is the open consensus that Spain is too big to fail as the European Financial Stability Fund is too small for a possible "rescue" of Spain.

There is nothing more dangerous in financial markets than the belief that something cannot happen. To illustrate this, here's a battle story recounted by Nassim Taleb in his 1996 technical book Dynamic Hedging

A trader who survived the EMS (European Monetary System) breakup of 1992 recounts the following. In the events leading up to the turmoil of September 1992, he had to execute a large option order in Sterling versus German marks for a customer. He needed to buy quantities of out-of-the-money puts on the sterling, calls on the mark, struck 10% outside the official government band. The customer was a conspiracy theorist fund manager who believed in the imminent breakup of the monetary order. He belonged to the small coterie of traders who took on the Bank of England later that month.

The trader, being risk-averse, decided to do what most of his headache-free peers do: call a large market-maker, add on a margin, and earn the difference. He called two of the largest option dealers in the world asking for their selling price and received the following answers:

1. W, based in the United States, and a former CME pit trader, told him that they were reluctant to show a price "because the strike is outside the band" and the options were "too risky". They would accommodate him if necessary, but at a very expensive implied volatility and only for a moderate amount.
   
2. B, based in Europe, literally laughed at him. "But Zey are outside the band, if I am not mistaken," he was told. "How many do you vant? I can sell you all you need. You should give your money to charity instead".
   

W was a former pit trader surrounded by pit traders. He is now the head of worldwide foreign exchange for a large bank. The second dealer, B, was a graduate of a prestigious European school of Engineering. He is now back to Engineering and other precise activities after his desk was decimated by disastrous losses in September 1992. After all, in the physical world, barriers are barriers, bridges are bridges, and horses are horses.

frongpaged - Nomad

What level the accident at Fukushima is given on the INES scale does not change the actual environmental or human impact or the radiation released, but on that score it appears that the Japanese government is capitulating to the evidence and admitting it's as bad as it gets.

Kyodo: Japan may raise nuke accident severity level to highest 7 from 5 (12 April 2011)

The Nuclear Safety Commission of Japan released a preliminary calculation Monday saying that the crippled Fukushima Daiichi nuclear plant had been releasing up to 10,000 terabecquerels of radioactive materials per hour at some point after a massive quake and tsunami hit northeastern Japan on March 11.

The disclosure prompted the government to consider raising the accident's severity level to 7, the worst on an international scale, from the current 5, government sources said. The level 7 on the International Nuclear Event Scale has only been applied to the 1986 Chernobyl catastrophe.

The current provisional evaluation of 5 is at the same level as the Three Mile Island accident in the United States in 1979.

Use this thread as an open thread to discuss the aftermath of the Japanese earthquake and tsunami of March 11.

Action needed to address nuclear fears: IAEA chief | Reuters

The head of the U.N. nuclear agency called on Monday for international action to prevent a repetition of Japan's nuclear disaster, saying the operator of the crippled plant failed to take sufficient safety measures.

Yukiya Amano, director general of the International Atomic Energy Agency (IAEA), told a nuclear safety forum stricter standards and full transparency were vital to restoring public confidence in nuclear energy.

...

"The worries of millions of people throughout the world about whether nuclear energy is safe must be taken seriously."

Use this as an open thread on the ongoing Japan disaster.

Update [2011-4-4 18:53:7 by Migeru]: For a successful technology, reality must take precedence over public relations, for nature cannot be fooled. — Richard Feynman.

The 21st century is getting off to a rocking start. Let's recap the first decade and a bit...

I'm reading Reinhart's and Rogoff's This Time is Different, which is jam-packed with information about the economic history of defaults.

In it, there's a neat little box documenting the fact that no, countries don't actually grow out of debt.

To identify episodes of large debt reversals for middle- and low-income countries over the period 1970-2000, Reinhart, Rogoff, and Savastano selected all episodes in which the ratio of external debt to GNP fell 25 percentage points or more within any three-year period, then ascertained whether the decline in the ratio was caused by a decrease in the numerator, an increase in the denominator, or some combination of the two.

In other words, either Reinhart and Rogoff talk of themselves in the third person, like Julius Caesar, or Savastano did all the work. Jokes aside, they found all the successful debt reversals in the past 40 years and asked whether the reversal was due to default, restructuring or inflation; or to economic growth.

The algorithm they used yielded a total of fifty-three debt reversal episodes for the period 1970-2000, twenty-six of them corresponding to middle-income countries and another twenty-seven to low-income countries.

for your weekend reading - Nomad

The reaction to my recent column on ECB liquidity management was generally one of puzzlement as the topic appears quite arcane, and due to its venue and audience the piece didn't lend itself to being particularly pedagogical though I did try to at least expand all acronyms once and to explain as much as possible.

Because I still think the issue is important (basically, exposing the mismanagement of Europe's economic affairs), and because I don't think it's that difficult either (if people don't get what I'm saying it, it has to be my fault), I have decided to start a series of pedagogical diaries on banking. And why would people want to learn about banking anyway? (other than how to burn one, that is) It so happens that banking is central to the Second Great Contraction (to borrow a term from Reinhart and Rogoff) that started in the summer of 2007 and still hasn't run its course, and which threatens to take no less than the Euro with it.

In this first instalment, I'll discuss bank reserves in the Eurosystem, which are intimately linked to the argument of my column last week.