Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Can't say I agree with a lot of this.
Yes the UK's mess is (nearly) entirely self-inflicted. That is just not true for the Eurozone.
For one, the idea of an optimal currency area is pretty specious. Would half the continent of North America be an optimal currency zone without a central budget?
The importance of the debt-to-gdp ratio is disputed by MMT, so at least not entirely uncontroversial.
Jumping to a parallel dimension that doesn't include the Euro will of course not magically solve all deep structural problems in the Italian economy. Even if you could actually do that instead of the incredible disruptive Euro withdrawal. But as far as insufficient demand is weighing the economy down, regaining monetary sovereignty would clearly help. The UK could have changed course at any time. Not so if you are under the sway of Frankfurt.
by generic on Tue Jun 5th, 2018 at 03:00:08 AM EST
[ Parent ]
I am aware mine is probably a minority view on ET and I don't disagree that some of the Mastricht rues are stupid and that the ECB response (under Trichet) to the great Recession was disastrous. In addition, Ireland suffered as much as anyone from inappropriate interest rates set to meet German needs in the early noughties.

That said, it was still up to the Irish central back to regulate excessive private lending and it spectacularly failed to do so. Now Melo is blaming Italian debt on "a generation of sleazy politicians wasted zillions on boondoggle vanity projects financed by cheaper interest rate loans than they were used to, indebting the country up to its eyeballs." Fair enough, but not the primary responsibility of the ECB to control and he and most Italians would be the first to shout foul if German politicians had sought to intervene.

My issue is more with timing. There is a general and widening Eurozone recovery underway aided by very progressive (and controversial) policies by Draghi. Now is not the time for Keynesian reflation and increasing debt levels still further. Italy has a problem with inequality and Billions being stashed by the rich outside the country, but again, that is primarily a matter for the Italian Government to deal with.

If I were an Italian policy maker, I would certainly fight for reform of Masstrict rules, oppose Jens Weidmann, and seek to reform the ECB to include formal employment targets in its mandate, give it a formal responsibility as "lender of last resort", strengthen bank resolution rules, and insist on the creation of a Eurozone Finance Minister with a significant budget to tackle regional and social inequalities.

None of this require leaving, (or threaten to leave) the Euro which is already increasing debt servicing costs and reducing investor confidence further. Brexit and Trump are making economic and political stability more important than ever, and you already have the UK doing the legwork on what leaving the EU might be like.

Now just strikes me as a particularly stupid time to make leaving the Euro a core part of your programme. It is damaging to what recovery there is and isn't addressing core problems. Plus it's cold outside. If you can't compete within the EU, I don't fancy your chances of competing outside.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jun 7th, 2018 at 11:32:15 AM EST
[ Parent ]
The ECB is under Draghi not actively sabotaging the member states (except Greece). But Draghi will be replaced next year, and who knows by whom? If you want to get out, now could be as good a time as any.

Regarding your last point, the EU countries that isn't euro countries has managed better. Yes, the commission has said that you can't leave the euro without leaving the EU, but it remains to be tested.

by fjallstrom on Mon Jun 11th, 2018 at 08:14:14 AM EST
[ Parent ]
I think buying well over a Trillion € in sovereign and corporate bonds to stabilise the market (when Private investors refuse to buy) and keep interest rates at record lows is more than just "not actively sabotaging". It provides highly indebted countries and companies with a time-limited opportunity to get out of a cycle of ever increasing debt. Of all the PIIGS, Italy is the only country which has not taken advantage of this opportunity to reduce its Dept/GDP ratio.

The only reason Brexit hasn't imploded the UK economy so far is the fact that Sterling has devalued sufficiently to offset the loss of competitiveness and investor confidence. Even so the UK economic growth has slowed to the lowest of EU countries. I shudder to think what impact Italexit would have on the Italian economy without the ability to devalue radically and probably default on its debts.

There is no separate process for exiting the Euro. A50 is the only game in town. In a few years time we will know how that has worked out for the UK. I don't expect the outcome to be encouraging.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Jun 11th, 2018 at 10:35:16 AM EST
[ Parent ]
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
[ Parent ]
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.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Jun 11th, 2018 at 09:29:42 PM EST
[ Parent ]
PS - latest EZ growth is 2.5% and EU 2.4%

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Jun 11th, 2018 at 10:39:48 AM EST
[ Parent ]
managed WHAT? better.

Diversity is the key to economic and political evolution.
by Cat on Mon Jun 11th, 2018 at 02:15:21 PM EST
[ Parent ]
immigration restriction!
Italy Closes Its Borders to Refugees, Turns Away 629 on Ship
"Everyone in Europe does their own thing, now Italy is raising its head up. STOP to the ugly business of clandestine immigration."

Diversity is the key to economic and political evolution.
by Cat on Mon Jun 11th, 2018 at 04:30:04 PM EST
[ Parent ]
Sure it is. Italy has an enormous output gap. The extent to which I am concerned about their economy overheating would require pretty fine instruments to measure, it is that small.
by Thomas on Sun Jun 17th, 2018 at 10:00:09 AM EST
[ Parent ]


Occasional Series