There is no doubt David Cameron dodged a bullet last month when the House of Commons was called to vote on the referendum on Britain’s membership of the European Union. The vote only concerned a belated expression of regret that a bill to make a referendum possible had not been included on the current parliamentary timetable. Yet, although he professed to be ‘profoundly relaxed’ over the vote, Cameron must be able to see himself being painted into a corner
The Occupy movement was out in full force in Frankfurt again last week. From an impromptu camp near the city‘s exhibition centre, a sizeable and surprisingly well-organised crowd embarked on two days of protest and disruption around Germany’s financial capital.
This is not the first time that central bank gold reserves have been evoked as a partial solution to public debt problems. In the depths of the Greek crisis, the sale of nation’s bullion reserves was briefly discussed as a means to bring down the debt burden, but the holdings were too small to make any difference. In Cyprus, a proposal to sell the bulk of the island’s gold reserves was endorsed, at least by EU finance ministers. So, it was not shocking to hear about a proposal to put Italy’s ample bullion holdings – the second highest in the EU after Germany’s – to use in tackling its massive debt overhang.
‘Cut one’s coat to suit one’s cloth’. This is the sort of kitchen-table budgetary advice that is often doled out to those who find themselves in a financial bind. When it comes to a debate about the wisdom or otherwise of austerity of the kind currently practised in peripheral Europe, it seems odd that serious economic commentators should propose such a prescription.
Some see it as an act of desperation. Following the tax evasion scandal involving his former Budget Minister, Jerome Cahuzac, French President Francois Hollande had to do something. Demanding that all ministers make public details of their financial assets is, if nothing else, something.
Given the number of prominent voices that have been raised against the controversial Cyprus bank levy, it was a wonder it found so much support among the troika – the ECB, EU and IMF. Dmitry Medvedev cried foul, Lawrence Summers saw it as an error, and even former Eurogroup chief Jean-Claude Juncker criticised it. With the exception of the Russian prime minister, however, the element that disturbed most commentators was the application of the levy to supposedly guaranteed bank deposits. The ‘little guy’, they implored, shouldn’t have to suffer in the restructuring of Cypriot bank debts.
Economists continue to rail against the kind of libertarian or ‘soft’ paternalism pioneered by Richard Thaler and Cass Sunstein in their 2008 book, ‘Nudge’. A nudge is essentially a method of persuading people to act in a given way by modifying the way the information on which the decisions are to be made, or the alternatives, are presented. The nudgers justify the manipulation with appeals to the individual’s ‘best interests’ or to the ‘greater good’.
It is amusing to see the US, a country that has railed for so many years against minting a one-dollar coin, petition its government to issue one worth one trillion dollars. The monster mintage is simply a ruse to avoid having to negotiate a higher debt ceiling. The idea of creating a platinum coin (the only kind the Treasury is permitted to mint) is not new; it was tossed around last year too. Back then though, it never went beyond an audience of investment professionals.
It is almost as is war had finally declared against unfair and anti-social tax avoidance in Europe. Germany policymakers, for example, have recently refused to sign a bi-lateral tax agreement with Switzerland because the new rules are not aggressive enough to curtail private tax dodging. In the UK, the heat has been turned up on multi-national firms like Google and Starbucks, who reduce their tax liability by cleverly shifting profits in low-tax jurisdictions. France’s taxmen have already demanded a €252 million back payment from Amazon related to this kind of ‘profit shifting’.
C-minus. This was the grade awarded by journalist Martin Grieve for the accomplishments of the ‘nudging’ techniques implemented over the last few years by the US and UK governments. Nudging is the policy approach that seeks to encourage people to behave in ways that enhance their health, wealth and wellbeing by tinkering with the way choices are presented to them.
In April 2010 intrade.com, the spread-betting website, launched a new contract that allowed punters and pundits to bet on the breakup of the eurozone. More precisely: “any country currently using the Euro to announce intention to drop it before midnight ET 31 Dec 2012.” It immediately changed hands at 27 (per cent probability) and scarcely ever saw any price below 20 in the subsequent two years. Last autumn it reached a peak of 60. Today, it trades at 10.
‘Draghi disappoints markets’ is the headline on many front pages today. Yet, if we were to go back one year – or even one month – we would recognise the ECB’s position today is light-years away from where it was then. The Bank has just announced its willingness to buy short-dated paper from crisis-struck countries in a volume adequate to achieve its goals (in other words, ‘unlimited’). It is the pre-conditions attached to this help that markets found so distasteful: the beneficiary countries must first apply for a formal bailout to the eurozone rescue vehicles, EFSF/ESM.
There is hardly anybody left who believes that savings achieved through austerity measures will not hinder growth in peripheral Europe. At the same time, high and rising debt burdens also have a negative impact on economic performance. Countries are stuck in a vicious circle. Yet, it is clear that somebody must bear the burden of sovereign and bank debts. The challenge here is to craft a version of this burden-sharing that isn’t totally self-defeating and that is as hedonically-favourable for those concerned.
There was an unexpected letter in the mail this morning: an open letter, signed by 172 economists, calling on all German-speaking citizens to make their opposition to the decisions taken at the recent EU summit known to their elected representatives.
“What are they going to force us to do next – eat broccoli?” raged one American TV commentator about the healthcare reform known as Obamacare. He considered it an impingement on his personal liberty to be obliged by law to buy health insurance. The decision by the US Supreme Court last Thursday to uphold the plan as constitutional has obviously ignited a wave a discontent across many parts of the country, not least in the campaign headquarters of Republican presidential candidate, Mitt Romney. He has already promised to repeal the law if he is elected in order to give the American people their freedom back.
One of the most commonly heard justifications for a break-up of the eurozone is that the ‘project’ was flawed from the outset. A currency union – or any union for that matter – that cannot countenance a situation where transfers would be necessary, or even bans them outright, has obviously been badly thought out. However, the euro-was-flawed argument is only valid if one assumes that its pre-crisis condition was ever intended to be the end state. If the currency union was only ever intended to be a stepping stone to a fiscal and then a political union, it is not the idea that was flawed, just the execution.
‘Nein’ still seems to be the favourite word of German politicians and central bankers. Angela Merkel says ‘No’ to a Debt Redemption Fund; ‘No’ to a European banking union; and ‘No’ to eurobonds. Bundesbank President Jens Weidmann is also very fond of the negative. He has chalked up an impressive string of ‘No’s’ concerning everything from large-scale sovereign bond purchases by the ECB and private sector participation in debt write-downs, to the use of Bundesbank gold as collateral for IMF loans.
Even beggars are getting wise to behavioural economics these days. Instead of asking whether you have any spare change, they ask instead for the time of day. Who can refuse a simple request for the time? However, once you have stopped and pushed back your cuff to look at your watch, it becomes more difficult to refuse a subsequent request for spare change.
To say that the political management of the Greek sovereign debt crisis has been an almost unmitigated disaster is no overstatement. Although it was apparent to all economists (and any schoolchild who gave it a moment’s thought) that the problem of over-indebtedness could not be resolved with even more loans, the EU finance ministers persisted. And because direct monetary transfers from the creditor states to the debtor states is supposedly forbidden, enormous amounts of time and energy were dedicated to bending the rules – dissimulating transfers so that political leaders could pretend they are not happening.
“Europe – Why our continent is worth fighting for.” This is the title of the book in which ex-Deutsche Bank chief economist, Norbert Walter, shares his optimism for the euro’s ultimate survival. I had the opportunity recently to hear the good doctor elaborate his arguments in the flesh.
In a country that prides itself on its green initiatives, it sounds almost odd that German personal tax law allows deductions for the costs associated with driving to work. This means the greater the distance between home and the workplace, i.e., the more a motorist chokes the roads and the air, the more he can deduct from his tax bill.
It seems the infant Pirate Party in Germany is emerging as a political influence to be reckoned with. Last week it managed to count its 25,000th registered members – that’s half the number of members as the Green Party, the youngest among the established parties. For the behaviourally-trained eye, however, the party’s rise is not surprising.
Does the copyright protection of ideas have to mean that freedoms are sacrificed in the internet? This is the rather disturbing thought I was left with recently after reading a newspaper editorial that discussed a proposal Germany’s increasingly notorious Pirate (political) Party to scrap intellectual property rights.
With the first round of presidential elections in France approaching, I have been forced into the realisation that my long-held belief in a Nicolas Sarkozy win seems stretched. Poll after poll in the past six months have favoured the socialist challenger, Francois Hollande, should it come to a second round run-off between him and the centre-right incumbent, Sarkozy. Yet, I held on strong despite the knowledge that these polls were conducted among representative samples of voters, and that second-round voting intentions remained stubborn. Couldn’t I detect a hint of irrationality in my own behaviour along the way?
In their 2008 book, Nudge, Richard Thaler and Cass Sunstein illustrated how policymakers could ‘encourage’ the public to make better decisions by giving them a behavioural push in the right direction. The reasoning behind
Things are starting to look very comfortable in the financial markets once again. In the US, the data has been encouraging and the equity markets have now climbed back to pre-crisis levels. In the eurozone, at least the German DAX index has clambered back to 7,200 and the often-feared slump in growth has apparently kept pessimists waiting. And Greece? For now, it has faded a little into the background; we can all catch our breath for a while.
“As soon as a nation decides to borrow money from foreigners, it loses its sovereignty. Curiously, when Francois Baroin, the French finance minister shared this sentiment during a TV interview, he was talking about his own country, not Greece. He is right, of course: in the very simplest terms, borrowing money means that one loses control over the part of one’s disposable income that has to be used to make the repayments. If the debt service costs are equivalent to one’s entire disposable income then the loss of control – or sovereignty – is also entire.
The International Monetary Fund established last Thursday that it is impossible to significantly reduce the Greek debt without the support of the ECB, whose president remained adamantly against it at the press conference following last week’s Governing Council meeting. Mario Draghi said the ECB cannot accept losses on their Greek holdings, rightly describing this type of monetary financing as legally incompatible with the EU Treaties.
Have you lied yet today? According to some studies we lie about three times in every ten minutes of conversation[i], which means that unless you just woke up you have already let a few lies slip. Perhaps you told your neighbour how good she looks this morning, even if that wasn’t strictly the case.
Some consider the eurozone debt crisis to be the result of a fundamental design flaw. They may be right. But then, when in political history has any project been done completely right from the outset. Political and financial frameworks have always had to be modified or adjusted as a function of new events or opinions. What marks out this particular crisis is that the decision-makers seem unable to make a single meaningful step further. Two years and 15 summits into the crisis and we are still engaged in fire-fighting.