In a pre-summit article, German finance and foreign ministers Olaf Scholz and Heiko Maas suggest flexible ESM adjustments to provide “quick and targeted relief… (and) … a pan-European guarantee fund to secure loans … (so) the European Investment Bank (EIB) would ensure liquidity for small and medium-sized enterprises in the EU countries.” read the whole article here
They seem to promise the “possible complex compromise” Adam Tooze envisaged a few days earlier. This would “… allow the common rescue fund, the ESM, to serve as the basis for borrowing. It is also possible that the European Commission may gain acceptance for its proposal of a joint fund to support unemployment and short-time payments across the continent.”
On Good Friday the emergency summit delivered a bazooka of a missed opportunity. Creditors are relieved. “Good news for European citizens who now know that countries are acting together.” Only Olaf Scholz could pitch a fishy dish like this. Most would hold their noses.
“The European Union has scraped through its latest crisis by the skin of its teeth.” Writes Simon Jenkins in The Guardian. “The past week has been a disgrace. When ministerial talks collapsed on Thursday over the plan for a “coronabond”, the reaction seemed terminal. Germans and Dutch insulted Italians and Spaniards. Italy’s prime minister, Giuseppe Conte, said his country faced an “economic and social emergency”, and the EU appeared not to care. The Danes spoke of “a financial crisis on steroids”. The European commission’s vice-president, Frans Timmermans, predicted “the EU as we know it will not survive this.”
Finally, a last-minute package was agreed, for about €500bn of emergency loan finance. This was little more than an extension of the existing European stability mechanism, designed to help individual countries in short-term emergencies. Even then, it was a mere third of what the European Central Bank had said was needed, €1.5tn euros. What was specifically not agreed was any sharing of the economic burden of the pandemic across European treasuries in general. It was mostly more loans.” read the whole Guardian article here
As Adam Tooze predicted pre-summit: Yet again, too little, too late: “… the moment for an impressive display of common resolve has passed. Faced with the urgency of the crisis, the eurozone can offer nothing like an adequate programme of common public spending. … Northern European countries continue to block proposals for shared Eurobonds, pushing grieving Spain and Italy into a new era of depression and austerity. Donations of protective kits, and Germany treating a few French and Italian patients, can’t disguise that failure. ” read Adam Tooze article here or here
The pandemic emergency should be the time to do “whatever it takes”. Not just to deal with the virus but to re-establish European solidarity. Nice would be a package crafted with a smidgen of imagination (1) rather than dollops of dogmatism. Show Europe is working rather than failing. Stop fretting over debt. Or Inflation. Or just issue Central Bank cash directly EU to citizens.
But no.
“Germany continues to rule out coronabonds”, writes The Economist , “and the Dutch appear even more immovable (although Mr Hoekstra eventually apologised for his tone). The sceptics’ old arguments about moral hazard and the risks of common borrowing without centralised supervision have been supplemented with new ones: a coronabond would take too long to establish, and institutions like the esm and eib involve some mutualisation anyway. And like their southern counterparts, northern governments must also deal with restive parliaments and troublemaking populists.
Countless proposals aim to square the difference.”There is talk of turning the EU’s small seven-year budget into a new “Marshall Plan”. The Dutch have proposed a small fund that would dispense no-strings aid. Perhaps most prominent is a plan of Bruno Le Maire, France’s finance minister, to establish a temporary post-crisis rescue fund that would issue common bonds worth several billion euros, perhaps to be repaid by a European “solidarity tax”. Mr Le Maire carefully avoids the word “coronabond” while echoing Mr Sánchez’s apocalyptic talk about the risks of failure. But so far he has failed to win over Germany.
Even Angela Merkel, Germany’s chancellor, calls the corona crisis the biggest test the eu has ever faced. Yet her government’s diagnosis of the problem remains fundamentally at odds with much of the rest of the euro zone. The debate is not over, but Costa-style optimism is thin on the ground. “Whatever they do magic up is unlikely to meet the scale of the need,” says Mr Rahman. “Something may break.” read whole article here
Meanwhile Europe has been breaking up into each nation to their own. Even neighbourly aid has been denied at times. Instead of swiftly pushing a Euro package the creditors were counting their ventilators and pensions. The creditors’ distrust of debtors continues to run as deep as their metallist faith.
The Economist puts it like this: “Northerners have long resisted mutualisation for fear of underwriting laxity in the south. But without it Italy and Spain will face either a savage crisis now or a lengthy debt crisis in the future.”
This time the (intellectual) insult of monetary mismanagement is added to by the (diplomatic) injury of a geopolitical Kunstfehler : Peking looking more helpful than Brussels.
Many southern Europeans will find themselves in agreement with the Serbian leader, Aleksandar Vucic: “European solidarity does not exist. That was a fairy tale on paper. ” Though maybe not with the second part: “I believe in my brother and friend Xi Jinping, and I believe in Chinese help.”
In a Spiegel interview Heiko Maas apparently forgot his diplomatic mask. Instead of emphatic apologies, he serves Trumpian doubling down. He plays defense minister and pretends that Europe is flying in the same plane. “The order in which we did things was correct.”
Catastrophic solidarity diplomacy aside, it is the same old structural problems of the Euro combined with the creditors’ short sighted dogmatism that threatens the European Project.
For a recent insider’s reading of these problems try Marco Buti’s “European Journey”.
“Whatever one thinks about the detail of Buti’s analysis” writes Adam Tooze in his review, “this is certainly the most sustained and cogent narrative of recent history and its implications to come out of the Brussels machine. …
How to balance risk-reduction with risk-sharing remains the fundamental obstacle to further movement on eurozone reform. … And in this respect Buti argues that Europe took a fatefully wrong turn when conservative fiscal hawks such as Germany backed the austerity agenda of the G20 meeting at Toronto in the summer of 2010. Given the fragility of the recovery, the withdrawal of stimulus was premature. As Buti laconically remarks, ‘In the aftermath of crises, early withdrawal of fiscal support can be very damaging …’ Millions of unemployed paid the price. …
The turn to austerity resulted in a dislocation of the policy-making mechanism. Whereas in the 1970s economists worried about fiscal looseness forcing the hands of central bankers in printing money, now central bankers were forced to expand credit to offset the refusal of politicians to act—‘quantitative easing’ became the counterpart to fiscal austerity, enabling it by offsetting its worst effects. As Buti comments, ‘Today, we face the opposite dynamics: … excessive fiscal prudence is a form of fiscal dominance hampering the effort of the central bank to fulfil its mandate.’
The failure to take advantage of low interest rates to carry out a much-needed surge in public investment is a deep political puzzle. But in the eurozone it has an added constitutional dimension. If, as Buti insists, the complement to monetary union must be risk-sharing, the paralysis of fiscal policy has shifted the burden to the balance sheet of the central bank: ‘The limits of this choice, however, are evident today as the ECB is overburdened in fulfilling its mandate.’ ….
The combination of intergovernmentalism in European politics with stealth federalism by way of the ECB is unsustainable in the long run. It is fragile as a mechanism for managing future crises. And it lacks legitimacy. Instead, Buti argues for the development of the EU’s federal institutions, backed by political legitimacy by way of the European Parliament.
In keeping with the ominous note of his opening, Buti invokes the open letter which Keynes addressed to the US president, Franklin D Roosevelt, in 1933: ‘I do not blame Mr Ickes [US secretary of the interior] for being cautious and careful. But the risks of less speed must be weighed against those of more haste. He must get across the crevasses before it is dark.’ read the whole review here
Or watch Tooze talking to Buti
Keynes warning Roosevelt transports us to another relevant moment from economic history: “In a speech during a celebration of Milton Friedman’s 90th birthday in late 2002, then-Fed governor Ben S. Bernanke, who would become chairman four years later, said, “I would like to say to Milton and Anna [Schwartz]: Regarding the Great Depression, you’re right. We [the Fed] did it. We’re very sorry. But thanks to you, we won’t do it again.” Fed Chairman Bernanke mentioned the work of Friedman and Schwartz in his decision to lower interest rates and increase money supply to stimulate the economy during the global recession that began in 2007 in the United States. Prominent monetarists (including Schwartz) argued that the Fed stimulus would lead to extremely high inflation. Instead, velocity dropped sharply and deflation is seen as a much more serious risk.”
This is from an instructive “Back to Basics” IMF paper on monetarism by Sarwat Jahan and Chris Papageorgiou. It concludes : “Although most economists today reject the slavish attention to money growth that is at the heart of monetarist analysis, some important tenets of monetarism have found their way into modern non-monetarist analysis, muddying the distinction between monetarism and Keynesianism that seemed so clear three decades ago.” read the whole paper here
The theoretical elephant in the room of the Euro project is monetarism. Both as inscribed into the Euro’s construction and in its latest QEazy reincarnations (see previous posts).
What seems hard to grasp for sound money dogmatists is that “… since the financial crisis, the boundary between monetary and fiscal policy has become so blurred that the limits of central bank responsibility are no longer clear.” Says Frances Coppola, author of “The Case for People’s Quantitative Easing”. Arguably this has been obvious ever since Bernanke assured US taxpayers it was not their money he had used to bail out AIG in 2008. (watch video below)
In theory this should never have happened. Just like 2007 crisis shouldn’t have. In practice it is the indebted Anglos who have lately lost all doctrinal qualms. They have practised amnesia about austerity and engaged in de facto MMT. Albeit behind a veil of obfuscation and affirmative denials . The new Boris Brits turn out to be exemplary at such mixed messaging. The Bank of England’s Andrew Bailey rejects direct financing same day The Spectator spots the helicopter (2). Other can smell Mugabe economics. Meanwhile the new chancellor Rishi Sunak smiles a lot.
MMT doesn’t fuss about the arcane distinction between monetary and fiscal. Germany’s solitary MMT advocat Dirk Ehnts probably doesn’t care either if it’s monetary helicopters or fiscal handouts. He is rejoicing at the temporary suspension of the 3% :
“Government spending will rise, due to rescue packages, unemployment insurance and other social programmes … and tax revenues will fall significantly as a result of the collapse of economic activity. But all of this is now unproblematic because the Eurozone’s3% limit has been deferred for this year.”
Ehnts may not agree that the Black Zero has resurrected already. But he accepts it is not dead, either.
“The real battle for the euro will follow in 2021, when, when the ECB and the EU Commission will want to withdraw their “emergency measures”. A withdrawal of the PEPP by the ECB would cause the interest rate premiums of some euro countries to shoot up and would trigger a euro crisis. It is hardly conceivable that this could happen. The ECB has no mandate to force countries out of the euro. “
Like many (4) Ehnts hopes that after this crisis there can be no return to the Status Quo Ante.
“We can be cautiously optimistic that … von der Leyen and Lagarde … will go down in history as the Euro saviours of 2020. As of today, the national governments have regained their sovereignty. Now they have to prove that they can solve the problems of their citizens. If they manage to do so, it will be difficult to take the steering wheel away from them again in 2021. Once the first two teething troubles of the euro have been eradicated, we can then think about a European Finance Ministry that issues (risk-free) Eurobonds and spends – for a European Parliament converted to a more democratic Parliament – with a view to full employment, price stability and sustainable resource management. But that remains a beautiful utopia for now.” read the whole Ehnts article here
More than cautious MMT optimism might be required to resurrect the European Project.
Just follow the money …
(1) Note that beyond the infamous rule against mutual liabilities, there is always the option of a “joint undertaking of a specific project” which “may include mutual financial guarantees.” Might Saving Europe not be such a project?
(2) The Spectator Matthew Lynn : The Bank of England’s big coronavirus gamble
“Ten billion here. Twenty billion there. At least we now know where Rishi Sunak is getting all the money from. As of today, the Bank of England has quietly started directly financing the government. Instead of selling gilts to fund the difference between what it raises in taxes and what it spends the Bank is simply going to increase the government’s account, normally a relatively trivial £370 million, to what it discreetly describes as an ‘unlimited amount’. How much might that be? No one knows, but the final number could easily have ten zeros at the end of it.
What is known in the economics textbooks by the rather dramatic name of ‘helicopter money’ – where the government simply prints lots of cash and chucks it out of helicopters onto grateful citizens – has begun. Can that possibly work? Just possibly, but it is going to be a high-wire act, and the risk of catastrophe if either the Bank or the Chancellor lose their balance is very high.
On the plus side, it is a lot more honest. It is not as if any governments in the developed world have exactly been living within their means for a while now. For the last decade, the government issued gilts, and then through quantitative easing the Bank bought them. It still has more than £400 billion of them on its books, with no plans to ever sell them back into the market. So in effect it was financing the government in a roundabout way. This way, it cuts out the bond market as a middle man, and simply creates the cash itself and the government gets to spend it. It is more efficient, and we can see what is happening.
The downside is that printing money has always in the past led to inflation, often of the hyper variety, and an eventual collapse of the currency. We all know what happened to the Weimar Republic, or Zimbabwe, or Venezuela, or any other country where governments resorted to the printing press. Will that happen again? In truth, it doesn’t have to. Temporary ‘helicopter money’ can fix a collapse in demand, and prevent a catastrophic recession caused by an extraordinary situation. If the pandemic is relatively short, it will enable a rapid recovery. Businesses will remain in place, and their customers will have money to spend once they re-open.
The trouble is, if it goes on for a long time, it will fuel a rapid rise in prices. If production has collapsed, but there is the same amount of money in circulation, then inflation is the inevitable outcome. It is a bold risk.
There is nothing necessarily wrong with that. In an emergency, it better to take a risk on something that might work than do nothing. The euro-zone is about to give us a lesson in the consequences of paralysis and inertia, and the outcome in Italy and Spain is not going to be pretty. But if it goes wrong, it is going to be very scary indeed – and if you happen to own any gold, already up to all-time highs when measured in sterling, then hang onto it.”
(3) Both the mainstream IMF and Dirk Ehnts’ MMT article barely mention that most money is not issued by central banks but privately created credit money. The role of credit creation and allocation continues to be regarded as marginal.
Like why velocity became volatile apparently remains a mystery. Add in an M2 curve, let alone M3+++ for even more money, and it might provide a clue: “financial re-regulation?”
(4) Apropo post crisis
As mentioned previously even the The FT argues that “Radical reforms – reversing the prevailing policy direction of the last four decades – will need to be put on the table.”
unherd.com Could Covid19 Vanquish Neoliberalism?
irishtimes.com T Piketty Covid 19 Crisis Shows Drastic Economic Policy Changes Possible
More articles on euro finance :
Pandemic bond buying opens up new trade for investors
Could Lombardy bonds be the answer to the eurozone debt puzzle?
Christine Lagarde: Interview in Le Parisien
Covid-19 crisis will cause ‘lasting damage’ to eurozone’s battered banks
