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Federalism
May. 11th, 2010 02:51 pmCurious goings-on in Euroland. The ECB "rescue" over the weekend garnered two interesting quotes on Newsnight last night (yes, I know that these interviews are worthless because they only fulfil the prejudices of the producer, but they were illuminating nevertheless).
One guy said, in his German accent "We are the paymasters now". This neatly reflected the producer's prejudice and deliberately evoked recollection of Germany trying to dominate Europe in another way in the not too distant past. But it was also true.
A representative of the Berlin Stock Exchange, talking of the bounce on Monday, said that it was all down to a perception that the ECB was serious. "And, as we all know, perception is reality", he added.
Well, forgive me for being picky, but we don't all know that, actually. Indeed, some of us might claim that perception and reality are two completely different things. And, in the case of the Eurozone €750bn bail-out, the difference is significant.
My question kept nagging at me yesterday. Where is this money coming from? So it was quite nice to open up City AM this morning, and to see a Q&A, "The Deal Explained". One of the questions was: "Where will the money come from it it's needed"? I began reading.
Now, the first £60bn comes from the EU. That's us. We, the UK, provide up to €8bn. Suppose it's needed. Where does that come from? Do we take €8bn out of the NHS budget? Out of education? Out of pensions? Do we hike income tax by a penny?
Then there is €440bn that comes from the eurozone. What do the City AM Q&A people have to say about this?
Hmm, perhaps I'm being picky again, but my immediate response was "that doesn't answer the fucking question". Indeed, why not announce a €1.5 trillion rescue package, if it's a big number that you want, rather than a realistic number, then, hell shoot for the moon.
More too, on the ECB's version of Quantitative Easing. Curiously, this actually is a €1.7trn package, except that it isn't. Or it might be. it's a bit hard to tell.
Put simply, the ECB could buy up to €1.7trn of shit sovereign debt. Hell, no-wonder the spreads on insuring Greek sovereign debt halved yesterday. The Eurozone's total debt is approaching €7trn.
If we look at what the US and the UK did last year in their (somewhat successful) attempts to stave off Armageddon until December 2010, we can see that the Fed bought $1.25trn (about €900m) of US mortgage-backed securities, about 25% of the outstanding stock. The UK put €200bn into the UK economy -- also, coincidentally, not far from 25% of total debt.
But Europe doesn't need to inject 25% of all eurozone debt -- just 25% of the PIIGS debt. That would be €420bn, according to Simon Ward of Henderson. The eurozone has a population of about 330m. If half of these are economically active, that works out at about €2,700 for every economically active person. That's a lot, but it's not end-of-democracy levels of money.
However, this kind of cash injection is anathema to the ECB. So it has to say that it will sterilise its bond-buying by selling other asets back into the secondary market to balance liquidity.
That seems to me to be the equivalent of swapping good debt for bad debt at an unfavourable exchange rate. The private sector will be buying the good debt and unloading the bad debt. It also temporarily solves the problem for the PIIGS (the ECB becomes the de facto lender to these governments because the private market doesn't want to touch them with a bargepole).
In a sense, this achieves what the ECB wants to achieve -- it stops Greece imploding without being inflationary. But the solution is not a real solution. The ECB just becomes the investor of last resort.
And that's where it becomes really interesting, because that is one big step to federalism on the economics side of things. No longer is a bank lending money to Greece. It is, in effect, lending money to the ECB. And Greece, therefore, has to obey the macroeconomic strategy of the ECB (for which, read, Germany) rather than march to its own drum. The same applies to Italy, Portugal, Spain and Ireland.
Ireland is already marching to a drum of its own making that has "ECB-compliant" stamped on the side. Portugal looks to be doing its best. But Spain and Italy are different beasts. They are bigger, and their problems are rather more intransigent, and peculiar to themselves.
For Spain, can it march to the ECB drum when there is 20% unemployment? The country desperately needs fiscal stimulus of some kind or another, even if it's just employing people to knock down half-finished projects that are never going to be completed.
Italy, meanwhile, has taken EU money to throw at the south to stop the north splitting off from the south. That rather artificial solution looks to be no longer viable.
It's ironic that it took a Greek crisis to accelerate the march towards federalism that the anti-Europeans in the UK warned about.
__________
One guy said, in his German accent "We are the paymasters now". This neatly reflected the producer's prejudice and deliberately evoked recollection of Germany trying to dominate Europe in another way in the not too distant past. But it was also true.
A representative of the Berlin Stock Exchange, talking of the bounce on Monday, said that it was all down to a perception that the ECB was serious. "And, as we all know, perception is reality", he added.
Well, forgive me for being picky, but we don't all know that, actually. Indeed, some of us might claim that perception and reality are two completely different things. And, in the case of the Eurozone €750bn bail-out, the difference is significant.
My question kept nagging at me yesterday. Where is this money coming from? So it was quite nice to open up City AM this morning, and to see a Q&A, "The Deal Explained". One of the questions was: "Where will the money come from it it's needed"? I began reading.
Now, the first £60bn comes from the EU. That's us. We, the UK, provide up to €8bn. Suppose it's needed. Where does that come from? Do we take €8bn out of the NHS budget? Out of education? Out of pensions? Do we hike income tax by a penny?
Then there is €440bn that comes from the eurozone. What do the City AM Q&A people have to say about this?
The headline figure is mammoth and designed to catch the attention of the markets. Policymakers hope the announcement will ease pressure on Greece and Spain so they do not need to call on the emergency aid".
Hmm, perhaps I'm being picky again, but my immediate response was "that doesn't answer the fucking question". Indeed, why not announce a €1.5 trillion rescue package, if it's a big number that you want, rather than a realistic number, then, hell shoot for the moon.
More too, on the ECB's version of Quantitative Easing. Curiously, this actually is a €1.7trn package, except that it isn't. Or it might be. it's a bit hard to tell.
Put simply, the ECB could buy up to €1.7trn of shit sovereign debt. Hell, no-wonder the spreads on insuring Greek sovereign debt halved yesterday. The Eurozone's total debt is approaching €7trn.
If we look at what the US and the UK did last year in their (somewhat successful) attempts to stave off Armageddon until December 2010, we can see that the Fed bought $1.25trn (about €900m) of US mortgage-backed securities, about 25% of the outstanding stock. The UK put €200bn into the UK economy -- also, coincidentally, not far from 25% of total debt.
But Europe doesn't need to inject 25% of all eurozone debt -- just 25% of the PIIGS debt. That would be €420bn, according to Simon Ward of Henderson. The eurozone has a population of about 330m. If half of these are economically active, that works out at about €2,700 for every economically active person. That's a lot, but it's not end-of-democracy levels of money.
However, this kind of cash injection is anathema to the ECB. So it has to say that it will sterilise its bond-buying by selling other asets back into the secondary market to balance liquidity.
That seems to me to be the equivalent of swapping good debt for bad debt at an unfavourable exchange rate. The private sector will be buying the good debt and unloading the bad debt. It also temporarily solves the problem for the PIIGS (the ECB becomes the de facto lender to these governments because the private market doesn't want to touch them with a bargepole).
In a sense, this achieves what the ECB wants to achieve -- it stops Greece imploding without being inflationary. But the solution is not a real solution. The ECB just becomes the investor of last resort.
And that's where it becomes really interesting, because that is one big step to federalism on the economics side of things. No longer is a bank lending money to Greece. It is, in effect, lending money to the ECB. And Greece, therefore, has to obey the macroeconomic strategy of the ECB (for which, read, Germany) rather than march to its own drum. The same applies to Italy, Portugal, Spain and Ireland.
Ireland is already marching to a drum of its own making that has "ECB-compliant" stamped on the side. Portugal looks to be doing its best. But Spain and Italy are different beasts. They are bigger, and their problems are rather more intransigent, and peculiar to themselves.
For Spain, can it march to the ECB drum when there is 20% unemployment? The country desperately needs fiscal stimulus of some kind or another, even if it's just employing people to knock down half-finished projects that are never going to be completed.
Italy, meanwhile, has taken EU money to throw at the south to stop the north splitting off from the south. That rather artificial solution looks to be no longer viable.
It's ironic that it took a Greek crisis to accelerate the march towards federalism that the anti-Europeans in the UK warned about.
__________
