One did not hear too much muttering about ‘psychological levels’ when the gold price fell below 1000-euro level last week. Often, some commentator or other will draw attention to the fact that a market has breached a major round number, but not this time. Perhaps it was the direction of the price move – from above to below – that discouraged them.
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.
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.
When the financial website “Business Insider” proposed a solution to the euro crisis I was all ears. But when the saviour turned out to be none other than the Saviour, one could forgive me for being a sceptical. Although I agree the euro mess could do with a little divine intervention, a transcript of a speech by Deutsche Bank’s head of FX strategy, Bilal Hafeez, was the last place I expected an appeal for it. The euro area, like any teenager needs a father figure to accompany it through its present pubescent throes and to guide it to adulthood. Its birth parents, Germany and France, are not up to the job, so a respected, sinless, external figure is necessary – Jesus.
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.
In a column for the online edition of a popular financial publication, I recently told the tale of my friend K. He is a very forward-looking kind of person. Since years, he has anticipated the imminent break-up of the eurozone and the social unrest that would invariably follow. In preparation, he stuffed his home safe with gold coins and Swiss francs, and stocked his cellar with canned foods. It seems, however, the eurozone has taken a little longer to disintegrate than he had expected as much of his canned food has already reached the end of its shelf life. In order to avoid waste, he is now obliged to sit down to rather more tinned Ravioli dinners than he would like.
‘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.
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.
The recent rise German Bund yields although moderate has garnered lot of attention because it seems to mark the end of a trend. So far, each escalation of the eurozone crisis has been accompanied by a widening spread between bund yields and those of peripheral EU countries. Breaking this trend does not mean that Germany is losing its cachet as a safe haven; the country’s fundamentals continue to be convincing. It is the Spanish bank bailout that has caused bond investors to extrapolate to an extreme situation where the core countries, principally Germany, are the only eurozone sovereigns still issuing bonds.
The Spanish government’s decision to seek EU help for its stricken banks should not have come as a surprise to anyone. The only eye-opener that there might have been was the amount of the proposed rescue sum: €100bn. This figure easily overtook earlier estimations which seemed to be in the order of €40bn to €80bn. Officials announced the higher figure without fanfare, but with the vaguely expressed desire to cover all imaginable risks. The decision to round the amount upwards is praiseworthy, given the history of the crisis. One still has to hope though that no black swans will be flying over the Bay of Biscay in the near future.
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.
My daughter’s class is doing a project on the European Monetary Union. Before you ask, the class is economics, not history. I briefly looked over some of the course material at the weekend. Naturally, everything had been published before the debt crisis and therefore spoke of the political and technical achievement of monetary union in what now looks like overly-glowing terms.
“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.
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.
“Whatever next?” I thought to myself when the New York Times reported that powerful hedge funds were planning to bring a case to the European Court of Human Rights if Greece changed the law to force private bondholders to take losses. Such a step, claim the funds’ lawyers would amount to an infringement of property rights, which is a human right in the EU. It cannot be, bemoaned one, that Angela Merkel decides who wins and who loses.
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.
Choice fatigue has been a theme that we have regularly visited on this blog – especially in the context of the eurozone debt crisis. The predictions of the decision-making research have proved very prescient: when people are tired, stressed, or simply have too many options to choose from, they tend to opt for the default alternative. But what happens when each decision-maker goes to a summit not knowing what the default actually is?
Who can seriously believe that the leader of a UK government, irrespective of its political colour would not have made the same decisions in Brussels on Friday as David Cameron? This is why it is almost impossible to believe that the whole thing was not planned by the other EU politicians from the outset; having Cameron at the table, goaded on by his euro-sceptic Conservative backbenchers, simply made the outcome more certain. Once the remaining EU26 is rallied to the cause, the next step is to request that one or other EU institution be tasked to perform duties to facilitate the operation of the new treaty-within-a-treaty, for instance the European court of Justice to adjudicate on the legality of national budgets. Again, no British prime minister will accept to fund an institution from whose work it cannot benefit. So we have to expect another ‘No’.
I have been repeatedly asked over the last few weeks what could be the worst-case scenario for the eurozone debt crisis. It is not a question I like to answer; there are large number of possible paths the crisis could take, which means that there is no single worst-case, but many. And this ignores the effect of the government policy responses those paths would undoubtedly encounter along the way. I do not attach any meaningful probability to it, but when one thinks about any worst-case, it is easy to conjure up images of a total collapse of the economic system as we know it – money, banks, financial markets, growth-based priorities – and some kind of new beginning.
A proposal for the introduction of an ‘elite’ bond – a joint euro sovereign debt backed only by the fiscally-prudent eurozone members – has reopened the discussion about a two-speed Europe. The idea is not new; we have heard politicians contrast the imperatives of the core, versus those of the periphery, before. The assumption is that even if the eurozone is changed in a fundamental way, people will just endorse the change and carry on. But why should they?
Do you remember green shoots? What about exit strategies, stress tests, ring-fencing? If you have a very good memory, you may even have a distant recollection of something called moral hazard. The whole history of the crisis, it seems, is one of woeful underestimation of its length, depth and, especially, its cost. Now, at the latest, it must be clear to even the lay observer that delaying a resolution (assuming that a solution exists) is only going to result in the costs going into the stratosphere.
History does repeat itself, at least in terms of German fiscal policy. The federal government is thinking about cutting taxes again, just as it was two years ago. At that time officials soon came to realize that there wasn’t enough money for the plan, but now the government is counting on €16 billion more in tax revenue than it had previously expected. The overall economic situation in Germany is still quite positive, but public opinion is certainly more downbeat now than in January 2010. Back then, a large majority of German citizens didn’t think that a tax cut in the middle of a European debt crisis was particularly bright idea.
As I recently viewed one of the many political talk shows on the euro crisis, it occurred to me that good television should be uncomplicated. The EU summit had just concluded, so a few simple words of explanation for the TV audience would have been so welcome. A few well-known politicians had been invited, but I’d already learned not to expect too much from them in such a debate. Also on the set were the ‘experts’, who tried with difficulty to explain the complex issues in plain terms. Making puree out of solid food in order to spoon-feed it to unsophisticated diners avoids indigestion, but the individual tastes and textures are invariably lost in the process.
UK politicians are scrambling over each other to avoid what could be a catastrophic own goal: a referendum on the UK’s membership of the EU. One of the tragic truths of the crisis on the continent is that, on the whole, the economic fundamentals of the eurozone – outstanding debt, budget deficits, trade balances, growth, inflation, etc. – are better than the UK’s.