Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Missing an European Treasury | 13 comments (13 topical, editorial, 0 hidden)
Post Script (4.00 / 7)
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.

luis_de_sousa@mastodon.social
by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Thu Mar 25th, 2010 at 08:28:39 AM EST
The fundamental dilemma of the Eurozone ... (4.00 / 7)
... 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
Re: The fundamental dilemma of the Eurozone ... (none / 0)
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 ]
Re: The fundamental dilemma of the Eurozone ... (none / 0)
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.

luis_de_sousa@mastodon.social
by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Fri Mar 26th, 2010 at 04:25:57 AM EST
[ Parent ]
Re: The fundamental dilemma of the Eurozone ... (none / 1)
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 ]
Re: Missing an European Treasury (none / 1)
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
Precisely ... there is no need to ... (none / 1)
... 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 ]
Re: Missing an European Treasury (none / 0)
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.

luis_de_sousa@mastodon.social

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Fri Mar 26th, 2010 at 04:38:00 AM EST
[ Parent ]
Re: Missing an European Treasury (none / 1)
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 ]
Re: Missing an European Treasury (none / 0)
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 :)).

luis_de_sousa@mastodon.social

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Fri Mar 26th, 2010 at 04:41:54 PM EST
[ Parent ]
Re: Missing an European Treasury (4.00 / 3)
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 ]
German Credit Default Swap Exposure (none / 0)
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
German exposure to Greek debt (none / 0)
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

Missing an European Treasury | 13 comments (13 topical, 0 editorial, 0 hidden)