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And now for the inevitable: finance ministers to discuss raising of EFSF ceiling

Issing warns against political union through the back door

This is a news story about a comment - which is not yet published - so it may not contain all the relevant bits, but it is clear from the quotes published in, among others, the Financial Times that Otmar Issing is seriously concerned about the future of the euro. He warns against the adoption of a political union through the backdoor of a monetary union, and what he see a development towards a transfer union, in which governments remain independent, and able to conduct bad policies, while Germany would have to subsidise them on a quasi-automatic basis. It seemed he was reeling against the decision to make the implementation of the stability pact rules only semi-automatic.

Otmar Issing - Wikipedia, the free encyclopedia

Otmar Issing (b. 27 March 1936 in Würzburg) is a German economist, former member of the board of the Deutsche Bundesbank (1990-1998) and of the Executive Board of the European Central Bank (1998-2006). He developed the 'two pillar' approach to monetary policy decision making that the ECB has adopted.

Otmar Issing is advisor for Goldman Sachs.



Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 11:19:56 AM EST
FT.com / Brussels - Issing warns debt crisis threatens euro
Mr Issing, writing after last year's international financial rescue operations for Greece and Ireland, which amounted to almost €200bn, said: "The present seemingly unstoppable process towards further financial transfers will generate tensions of an economic and especially political kind. The longer this process is characterised by unsound conduct of individual member countries, the more these tensions will endanger the existence of Emu.

...

Mr Issing, 74, served for eight years as the ECB's chief economist, from 1998 - the year before the euro's birth - to 2006. He remains one of Germany's most respected economists, ensuring that his views on the euro carry weight with German policymakers and public opinion.

...

While he cautioned against simplistic predictions that "doomsday is inevitably approaching", Mr Issing said proposals that Emu should be expanded into a "transfer union" - the transfer of funds from Germany and other financially strong states to weaker, highly indebted states - were wrong.

"This would wholly change Emu's character," he said.

Is Issing answering kcurie's question for us?

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 11:22:33 AM EST
[ Parent ]
Evil crystal clear... or just pure egoism?

In any case, this sets Germany from 5 to 10.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Jan 12th, 2011 at 11:34:23 AM EST
[ Parent ]
He warns against the adoption of a political union through the backdoor of a monetary union, and what he see a development towards a transfer union, in which governments remain independent, and able to conduct bad policies, while Germany would have to subsidise them on a quasi-automatic basis.

Why, yes. That's the whole point.

If you don't want to subsidise deficit countries, don't run a mercantilist inflation policy.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 12th, 2011 at 11:43:29 AM EST
[ Parent ]
Don't set up a monetary union either.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 11:51:40 AM EST
[ Parent ]
No, you can set up a currency union just fine if you cease your mercantilist inflation policies.

Or you can insist on mercantilist inflation policies, in which case you can't have a functioning currency union.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 12th, 2011 at 12:04:44 PM EST
[ Parent ]
Or you can have a currency union and be as mercantilist as you want, as long as the currency union includes fiscal transfer mechanisms.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 12:06:25 PM EST
[ Parent ]
Currency union; no unilateral transfers to deficit countries; low inflation.

Pick any two.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 12th, 2011 at 12:12:36 PM EST
[ Parent ]
It's even worse than that: elsewhere in this thread:
Portugal had practically zero net foreign debt and a balanced current account in 1995 - when it started adapting its economy to the single currency. Convergence to the euro with a common monetary policy (meaning easy credit with low interest rates) completely transformed the situation in the following decade. Net Foreign debt is now about 100% of GDP and this is only the accumulated stock. In 2010 this stock has probably increased by some 10 to 12% of GDP, which is the estimated amount for Portugal's current account deficit last year.
The Euro Convergence Criteria and the Growth and Stability Pact have turned healthier economies into basket cases. This should rightly be laid at the feet of Germany since those institutional constraints were designed by them as the nonnegotiable price of their joining the Euro.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 12:02:17 PM EST
[ Parent ]
what is a mercantilist inflation policy?

You are joining two ideas that I have in two different compartments...

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Jan 12th, 2011 at 01:38:49 PM EST
[ Parent ]
Mercantilism is the strategic doctrine of maintaining a positive foreign balance in order to accumulate ForEx reserves. In a fixed-rate ForEx framework, you can improve your competitiveness by running lower inflation than the other participants in the framework. When a country with a persistent foreign surplus insists on running a lower inflation than its trading partners in a fixed-rate currency framework, it is hard to call it anything other than a mercantilist policy.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 12th, 2011 at 01:58:30 PM EST
[ Parent ]
But wouldn't that be a mercantilist deflation policy?
by gk (gk (gk quattro due due sette @gmail.com)) on Wed Jan 12th, 2011 at 02:05:58 PM EST
[ Parent ]
Yes, and the ECB, like the bundesbank it inherited its brain form, has a well-known deflationary bias.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 02:14:05 PM EST
[ Parent ]
Hey, at least it's in pristine condition. There's no evidence it's ever been used...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 12th, 2011 at 02:20:18 PM EST
[ Parent ]
The brain you mean, not the deflationary bias.
by Bernard on Wed Jan 12th, 2011 at 04:51:14 PM EST
[ Parent ]
Well, it's an inflation policy in the same way that unemployment policy is (hopefully) about preventing unemployment and the theory of relativity deals mostly with the things that aren't relative. English is funny that way.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 12th, 2011 at 02:25:24 PM EST
[ Parent ]
Don't blame the latter on English: Einstein wrote his papers in German....
by gk (gk (gk quattro due due sette @gmail.com)) on Wed Jan 12th, 2011 at 02:29:18 PM EST
[ Parent ]
It is a mercantilism that generates deflation and pain and destroy the framework or the countries in the framework. You can not have a single monetary unit when there are very different inflation structures.

A question: Can it destroy all the participants in the framework, including the one pursuing the mercantilist policy?

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Jan 12th, 2011 at 02:27:12 PM EST
[ Parent ]
I can't see why it shouldn't. Mercantilist deflation exports part of the pain of deflation to the deflating country's trading partners. When they can no longer absorb this pain, there's only one place for it to go.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 12th, 2011 at 02:40:11 PM EST
[ Parent ]
can they survive with exports to other developing countries, or not?

And I still do not get the flux identities....except one, a trade deficit between two countries using the same coin and with no creation of money must generate either public or private debt... simple balance of flux.

But.. the truth is that money is created by the banking system, which is also useful to start and increase the monetary mass in an expansion.. so, it is just a part of that debt which comes from trade deficits.. so it is:

trade imbalance= increase in the net private and public debt.

I think. So

Trade Imbalance= private+public debt is wrong, isn't it?

You can indeed have no trade imbalance and still create debt to finance some projects.. to generate money which will remain in circulation if the productivity or a new object is produced.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Jan 12th, 2011 at 04:09:31 PM EST
[ Parent ]

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