Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Being a back-stop for the national debt is one of the core functions of a central bank. That ECB thinks this function is something that is optional and something it should be applauded for is like having a fire department that first refuses to put out fires, and then expects applause for not intentionally letting anything burn down in years. That is a reason to leave before it gets worse.

As far as reform goes, the structure of the eurogroup meetings (as described by Varoufakis and he has been in the room) is Germany decides. And the structure of the ECB meetings are secret as far as I can tell, but ECB gets their political cover from the eurogroup. So there will be no reform that doesn't fit Germany and Germany will decide if and when there is a reform. Non-germans has no vote on that. And no amount of Italian pressure is likely to create that will in Germany. Nor will threats to leave (sorry melo).

There is no process for exiting the euro but neither is there any process for kicking a country out of the EU. Countries can be fined and lose voting rights when in violation of treaties, but that is rarely applied. The only reason the EU has such power over Italy is the ECB in combination with Italy's current account deficit. If Italy de facto leaves the euro (say capital controls and parallell currency) or even de jure, the ECB stick is already removed (but can and will hit hard on the way out) and the rest is up to politics and the courts. Unless the other EU states follows up ECBs financial blockade that we saw with Greece with physical blockades, of course. Then things would get really interesting.

However, I think this is academic as judging by their deal with Lega, I don't think M5* has the skills or the will to leave the euro.

by fjallstrom on Mon Jun 11th, 2018 at 09:00:56 PM EST
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Agreed, and Draghi has said the ECB will do "whatever it takes" to safeguard the integrity of the system  - admittedly somewhat belatedly following the Greek debacle. In fairness the ECB will probably respond that it will act as a backstop on condition the relevant member countries stay within the budget rules. You could hardly expect the ECB to underwrite massive and uncontrolled borrowing by a member state increasing its debt GDP ratio to unsustainable levels and then threatening to default if even more borrowing isn't allowed.

The difference between the ECB and a national central bank is that the ECB has to be concerned with 19 distinct national debts and has to "police" the system to ensure one or more of the 19 don't game the system at everybody else's expense. If a national government with it's own currency allows borrowing to become unsustainable, the national central bank can adjust interest rates, the money supply or devalue to recover competitiveness. Either way the impact is primarily on that countries economy and citizenry unless it defaults on external debts.

In the case of a common currency, all the other member states are impacted, and possibly quite adversely. You can argue that there isn't enough economic convergence to justify a common currency, or that it cannot be stable absent countervailing fiscal capacities and policies to deal with structural and regional imbalances, or that there simply isn't enough flexibility to deal with asymmetric shocks or sudden downturns. All true.

But there doesn't seem to be a huge divergence in economic performance between EZ and other EU countries, so the advantages and disadvantages of the Euro may be currently reasonably balanced. If a trend were to emerge whereby non-EZ members did consistently better on a number of key metrics then I'm sure there would be a move to either exit or reform. I don't think the case is currently clear cut either way.

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by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Jun 11th, 2018 at 09:29:42 PM EST
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