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Latest euro developments
Jun. 5th, 2012 02:55 pmThere were some interesting comments by Wolfgang Schaeuble this morning in Handelsblatt the German business paper. He said that "the (German) government has always said that, before we start talking about debt management, we need real fiscal union".
Schaeuble, of course, is talking for what he imagines is a German audience, but the readership of Handelsblatt is not the same as the readership of Die Welt. They might be Germans, but they are business Germans. And there's also a significant international readership. What's said in Handelsblatt will be repeated in the business papers worldwide.
But, as the various G7 finance ministers meet for "crisis" talks (all talks for the past four years have been "crisis" talks) there begins to be a glimmer of hope for a solution. Schaeuble doesn't spot it, or, if he does, he certainly doesn't mention it. Indeed, Schaeuble blathers on with this nonsense when he is put on the spot about the high interest rates Spain is having to pay at the moment.
So why do I think an avenue of solution has opened up? Because I can see an answer that fulfils the basic tenet of any eurozone agreement at the moment -- it's a fudge that kicks the can further down the road. And, more cleverly, it's a new can.
The current disagreement between Germany, Austria, Finland, the Netherlands and "the rest" now rests on a simple disagreement of timing. Germany won't accept eurobonds without being able to exhibit more fiscal control. France (and the others) wants the eurobonds without the fiscal control -- more of the "trust the individual governments to act sensibly". As Germany (correctly) observes, that didn't seem to work so well last time round, so why should the German taxpayer be more on the hook without any guarantee that it won't be more of the same? Or, more bluntly, "there's no way we can sell this to the electorate".
The fudge, therefore, just has to be somewhere in this "fiscal union" agreement. Some kind of eurobond is issued (the name will be fudged and the details will be fudged, but, at heart, eurobonds is what they will be) that entails some kind of mutual guarantee (i.e., some kind of German guarantee).
As part of this agreement, a new body will be created, in which Germany will, somehow, be the dominant player. This new body will have decision-making control over the financial decisions of other governments. It will have to be structured so that France and the rest can pretend that this does not entail any sacrifice of sovereignty, while Germany can pretend that the new mutual financial support mechanism does not entail the German taxpayer being on the hook for the more profligate peripherals.
And thus is the euro saved.
Well, except for Greece, of course. As part of this whole shebang, Germany will need something to show its voters, to show that it's not pissing around here. Greece will be the sacrifice. It will be out of the euro. The trick will be to announce the mutual agreement at the time of the greatest crisis - that being when Greece is chucked out of the euro. As we have seen, steps dforward to greater integration have usually been at times of crisis, scaring the governments and electorate into taking something they don't really like because the alternative is worse. If the eurozone governments can time it right, announcing the new bonds and the new "oversight" (German-dominated) body just as the markets are trying to work out what to do about Greece, then there is a way out.
++++++++++
I'd meant to write something else above about the nature of cash or, rather, the nature of means of exchange. As was shown by the Long-Term Refinancing Operation last December, "money" is not as clear-cut an object as we think.
Let's take two examples of "money", both theoretical. Suppose I am a sole trader. I have an important supplier. Over a typical year I might owe the supplier money at some times, while at others I owe him nothing. To "solve" this, I print my own banknotes. When I take delivery, I give my supplier the banknotes to the value of the goods he supplies. When I sell my goods, I swap my own banknotes for the banknotes I am paid by other people, at one-for-one.
What is the difference between the two? Well, in the first case, the supplier can only "spend" those banknotes with me (this, you might recall was one of the disgraceful distortions of money after the end of slavery, when ex-slaves were "paid" in "money" that could only be spent at the company store). In the second case, he can spend the money with many other people.
But not all other people. Suppose I am a sole trader in China, and the money is in Yuan. Even though the supplier can spend this anywhere else in China, he can't spend it elsewhere, because of currency controls. Or suppose we were in Zimbabwe. Here, there's not so much difference between the banknotes I print and Zimbabwe dollars.
At the other extreme, imagine "perfect" money, that being a means of exchange that everyone, everywhere, accepts. Some people might mention gold here. I recommend that you try buying a used car with 6oz of 24ct gold and see where it gets you.
"Perfect" money is perfectly fungible, whereas the banknotes that I print to deal with my supplier have zero fungibility.
What point am I moving towards here? It's that the legal restrictions imposed on the ECB rest on discrete definitions of items that are not actually discrete. In case one above, I might just as well write an IOU to my supplier. Or we might just keep the amount owed in the books as a "debt". Money merges into debt and vice-versa. You can obviously see where I'm going here. The ECB can print "money" denominated in euros, while the sovereign nations can't print "money", but can create euro-denominated debt.
But while euro-denominated money has a constant value throughout the eurozone, euro-denominated debt does not. It's a bit like Richard Dawson's ancestor paradox. Although the debt and the money cannot "interbreed" at 1-to-1, one can create a number of intermediaries that are close enough to the euro-debt to exchange at 1-to-1 or close enough to euro-cash to trade at 1-to-1.
The LTRO was an interesting example of creating something that wasn't cash and wasn't standard debt. And, for a few months, it did the job. Unfortunately the time that was bought was not used to solve the fundamental economic disconnects that are still operating. It doesn't matter how many eurobonds are issued that are mutually guaranteed if the eurozone continues to be in economic imbalance. The crisis will eventually re-emerge.
But, if you want to create a new can and you want to kick that can a long way down the road, the creation of a new governing body with a fudged governance, plus the creation of a new form of debt with some fudging in the definition, offers all eurozone governments an opportunity to claim that they have "won".
_______________
Schaeuble, of course, is talking for what he imagines is a German audience, but the readership of Handelsblatt is not the same as the readership of Die Welt. They might be Germans, but they are business Germans. And there's also a significant international readership. What's said in Handelsblatt will be repeated in the business papers worldwide.
But, as the various G7 finance ministers meet for "crisis" talks (all talks for the past four years have been "crisis" talks) there begins to be a glimmer of hope for a solution. Schaeuble doesn't spot it, or, if he does, he certainly doesn't mention it. Indeed, Schaeuble blathers on with this nonsense when he is put on the spot about the high interest rates Spain is having to pay at the moment.
"We need to manage this ... through close and trusting co-ordination"he said. Yeah, well, no shit Sherlock, but what does that mean when it's at home. "Close and trusting co-ordination" is the one thing that has been lacking. So in effect he's saying "we need to practise close and trusting co-ordination to get to close and trusting co-ordination". Meaningless.
So why do I think an avenue of solution has opened up? Because I can see an answer that fulfils the basic tenet of any eurozone agreement at the moment -- it's a fudge that kicks the can further down the road. And, more cleverly, it's a new can.
The current disagreement between Germany, Austria, Finland, the Netherlands and "the rest" now rests on a simple disagreement of timing. Germany won't accept eurobonds without being able to exhibit more fiscal control. France (and the others) wants the eurobonds without the fiscal control -- more of the "trust the individual governments to act sensibly". As Germany (correctly) observes, that didn't seem to work so well last time round, so why should the German taxpayer be more on the hook without any guarantee that it won't be more of the same? Or, more bluntly, "there's no way we can sell this to the electorate".
The fudge, therefore, just has to be somewhere in this "fiscal union" agreement. Some kind of eurobond is issued (the name will be fudged and the details will be fudged, but, at heart, eurobonds is what they will be) that entails some kind of mutual guarantee (i.e., some kind of German guarantee).
As part of this agreement, a new body will be created, in which Germany will, somehow, be the dominant player. This new body will have decision-making control over the financial decisions of other governments. It will have to be structured so that France and the rest can pretend that this does not entail any sacrifice of sovereignty, while Germany can pretend that the new mutual financial support mechanism does not entail the German taxpayer being on the hook for the more profligate peripherals.
And thus is the euro saved.
Well, except for Greece, of course. As part of this whole shebang, Germany will need something to show its voters, to show that it's not pissing around here. Greece will be the sacrifice. It will be out of the euro. The trick will be to announce the mutual agreement at the time of the greatest crisis - that being when Greece is chucked out of the euro. As we have seen, steps dforward to greater integration have usually been at times of crisis, scaring the governments and electorate into taking something they don't really like because the alternative is worse. If the eurozone governments can time it right, announcing the new bonds and the new "oversight" (German-dominated) body just as the markets are trying to work out what to do about Greece, then there is a way out.
++++++++++
I'd meant to write something else above about the nature of cash or, rather, the nature of means of exchange. As was shown by the Long-Term Refinancing Operation last December, "money" is not as clear-cut an object as we think.
Let's take two examples of "money", both theoretical. Suppose I am a sole trader. I have an important supplier. Over a typical year I might owe the supplier money at some times, while at others I owe him nothing. To "solve" this, I print my own banknotes. When I take delivery, I give my supplier the banknotes to the value of the goods he supplies. When I sell my goods, I swap my own banknotes for the banknotes I am paid by other people, at one-for-one.
What is the difference between the two? Well, in the first case, the supplier can only "spend" those banknotes with me (this, you might recall was one of the disgraceful distortions of money after the end of slavery, when ex-slaves were "paid" in "money" that could only be spent at the company store). In the second case, he can spend the money with many other people.
But not all other people. Suppose I am a sole trader in China, and the money is in Yuan. Even though the supplier can spend this anywhere else in China, he can't spend it elsewhere, because of currency controls. Or suppose we were in Zimbabwe. Here, there's not so much difference between the banknotes I print and Zimbabwe dollars.
At the other extreme, imagine "perfect" money, that being a means of exchange that everyone, everywhere, accepts. Some people might mention gold here. I recommend that you try buying a used car with 6oz of 24ct gold and see where it gets you.
"Perfect" money is perfectly fungible, whereas the banknotes that I print to deal with my supplier have zero fungibility.
What point am I moving towards here? It's that the legal restrictions imposed on the ECB rest on discrete definitions of items that are not actually discrete. In case one above, I might just as well write an IOU to my supplier. Or we might just keep the amount owed in the books as a "debt". Money merges into debt and vice-versa. You can obviously see where I'm going here. The ECB can print "money" denominated in euros, while the sovereign nations can't print "money", but can create euro-denominated debt.
But while euro-denominated money has a constant value throughout the eurozone, euro-denominated debt does not. It's a bit like Richard Dawson's ancestor paradox. Although the debt and the money cannot "interbreed" at 1-to-1, one can create a number of intermediaries that are close enough to the euro-debt to exchange at 1-to-1 or close enough to euro-cash to trade at 1-to-1.
The LTRO was an interesting example of creating something that wasn't cash and wasn't standard debt. And, for a few months, it did the job. Unfortunately the time that was bought was not used to solve the fundamental economic disconnects that are still operating. It doesn't matter how many eurobonds are issued that are mutually guaranteed if the eurozone continues to be in economic imbalance. The crisis will eventually re-emerge.
But, if you want to create a new can and you want to kick that can a long way down the road, the creation of a new governing body with a fudged governance, plus the creation of a new form of debt with some fudging in the definition, offers all eurozone governments an opportunity to claim that they have "won".
_______________
