Transcript 4 Lectures on the €uropean crisis

The €uropean crisis and monetary policy
Sergio Cesaratto
Dipartimento di economia politica e statistica
[email protected]
http://politicaeconomiablog.blogspot.it/
Index
• I) Origin of the crisis
• II) Monetary policy in the crisis
I) Origin of the crisis
Optimal currency areas
• Should the EMU be created?
• OCA (e.g. Meade 1957, Mundell 1961, Fleming 1971) generally
said no.
• Mundell 1961: economically dishomogeneous regions contitute an
OCA if there is labour mobility. Otherwise:
• either the C/A surplus/full employment/low inflation region accepts to
sustain domestic AD and accepts higher inflation,
• or C/A deficit/less-than-full-employment/inflation-prone regions
accept deflation
• But in the second hypothesis there will be a deflationary bias in the
global economy.
• Other alternative: inter-regional transfers
• Final alternative (that justified the EMU): endogenous OCA
Barba De Vivo: federal budget irrelevant in the Eurozone
(EZ)
Is a federal Europe possible?
• What is the next question?
• Hayek 1939  only a minimum-State/federal State is possible
amongst regions that are culturally and economically
dishomogeneous
• Hayek was therefore in favour of a federal State
• 5 Presidents report: no federal budget but central controll of
nacional finances
• The actual Europe is precisely what «they» wanted: «federal»
monetary policy in controll of inflation; no federal fiscal policy and
national balanced budgets; full employment to be ursued through
«competitive deflation»
• Influence of the long-period consuensus on the ineffectiveness of
monetary policy (not to speak of fiscal policy)
• «tie your hands» argument
The influence of standard theory (Barro § Gordon, Kydland and
Prescot, Giavazzi and Pagano)
• Monetary theory ineffectual in the long run
• Governments not credible in promising of not using monetary policy
etc.
• The promise to keep the exchange rate fixed (and so inflation at the
level of the virtuous countries) is not credible
• With a currency union monetary policy is transferred to foreign
hands for good.
• In more practical terms: France was fed up to let Germany (the
leading country in the EMS) to fix the interest rate only looking at its
own interests; in the EMS Germany decided monetary policy,
perhaps with a currency union the other countries would have a say.
• Italy and others would have liked to import the German labour
market discipline.
• Political reasons (German unification)
Prescent analyses
• The American economists warned that the EZ was not an “optimal
currency union” (they were accused of conspiracy against the
European challenge to the US $).
• Kaldor and Godley warned that you must have a political union
ahead of a monetary union
• “Functionalism”, the Monnet method, prevailed
• As we said, however, a real, solidaristic political union is impossible
in Europe
What happened? There is a consuensus view now (although
in my opinion some economists like DE Grauwe create confusion)
• Spain, Ireland, Greece: Frenkel’s cycle (or This time is different or
An unfortunate sequence of events…)
• Portugal: it had it earlier
• Italy (and France): slow erosion of competitiveness
• Outside the EMU the Baltic countries, Hungary and perhaps others
that pegged their currency to the Euro had their unfortunate
sequence of events
disappearance of devalution risk + financial liberalisation. Interest rates
on long-term treasuries affect also credit conditions
Source: http://www.voxeu.org/content/eurozone-crisis-consensus-view-causes-and-few-possiblesolutions
Source: http://www.voxeu.org/content/eurozone-crisis-consensus-view-causes-and-few-possiblesolutions
First explanation: diverging REERs
Second explanation: diverging ADs
Housing bubble
Sudden stop of capital flows
http://www.economonitor.com/blog/2011/12/which-graph-best-summarizes-the-eurozone-crisis/
An ECB fault?
• The ECB monetary policy (one fist all, or what fits the core fits all) is
often blamed for the crisis:
German mercantilism
• Germany since Bretton Woods has always found fixed exchange
rate arrangements perfectly suited to her mercantilist stance: since
the time of Erhard the German strategy was to maintain the inflation
rate a little below that of competitors to sustain exports while
enjoying a strong currency, what has been named ‘Monetary
Mercantilism’ (Holtfrerich)
Criticism to German (presumed) mercantilism is not new . Few
examples*
- The German stabilisation policies of the late 1940s/early 1950s
were criticised by the American economists.
- Also in the 1950s Germany preferred to blame the others:
‘inflationary policies’ abroad led to the German export upsurge and
obliged her to ‘sterilise ‘imported inflation’ by pursuing a fiscal
surplus. The surging of the German trade surplus led, after the
American and French criticism, to the DM revaluation in 1961
- The case of the ‘locomotive theory’ is well-known: in the late 1970s
chancellor Schmidt reluctantly accepted the idea that Germany had
to pull the world economy along the US and Japan. The 2° oil shock
came: he swore that never again Germany would have played the
domestic expansion game.
At the origins of the German policy stance: monetary mercantilism?*
• The pre-miracle German policy choices that shaped post-war
Germany, in oarticular the centrality of price stability, have been
denominated ‘monetary mercantilism’ by the historian Carl-Ludwig
Holtfrerich.
• Holtfrerich, as others (e.g. Bibow), denies that the obsessive
objective of price stability by the Buba is due to the memory of the
great hyperinflation of 1922.
• Indeed, some economists maintain that this “memory” is a well
fabricated invention by the Buba (memories are a social construct).
An independent central bank is not even a German tradition (the
opposite is true), and indeed Adenauer opposed it (he thought that a
CB should be accountable!)
• Why price stability then? Holtfrerich: “found the clue” in the early
German policy decisions.
Monetary mercantilism (cont)*
In the early 1950s “As protectionist tools could not be used…a
different way of achieving mercantilism, namely export surpluses,
had to be found. The solution was to keep domestic demand
restrained by monetary and fiscal policies, thus keeping imports and
domestic inflation low and freeing production resources for more
exports. This strategy was contingent on a system of fixed exchange
rates…The early Bretton Woods system…left countries the
opportunity to gain in international competitiveness by realising
relatively more price stability than abroad”.
(The main Holtfrerich’s paper is published in a book edited by the
Buba celebrating the 50° DM anniversary!)
• Observe the combination of lower domestic inflation and fixed
exchange rates! The same combination Germany obtained later
through the EMS and the EMU!
Monetary mercantilism (cont)*
• Monetary mercantilism was “conceived and planned” particularly by
the president of the Bank deutsche Lander (the Buba was created in
1957) Wilhelm Vocke “as a long-term strategy for German monetary
policy” : “keeping domestic affairs tight in order to strengthen
exports”. Vocke was lucky:
• 1) the Allies forced for an independent CB in 1949 when a Federal
gvt was not existing yet; 2) Erhard endorsed Vocke’s policy; 3) the
Korean war gave a big push to German exports and the opportunity
to keep inflation lower than the competitors.
• Erhard: “A great opportunity for the future of German exports has
arisen out of the current situation. If, namely, through internal
discipline we are able to maintain the price level to a greater extent
than other countries, our exports strength will increase in the long
run and our currency will become stronger and more healthy, both
internally and with respect to the dollar”
Monetary mercantilism and Ordoliberismus*
Price stability was also the obsessive policy target of Ordoliberismus (or Freiburg school or social market economy), the
dominant economic school in the reconstruction and miracle period.
Price stability was associated by the ordo-liberals to the smooth
functioning of the price mechanism. In practice, price stability is
synonymous of wage and social discipline.
• Wage and social order imply that exports, rather than wage
consumption, become the natural debouche of the surplus (in the
classical-marxian sense). Indeed, income distribution has never
been particularly favourable to labour in Germany.
• An export-oriented economy becomes in turn a powerful political
instrument to obtain labour consent and discipline (reinforced by the
German trade unions pursue of co-determination rather than strong
wage claims why German trade unions have been so docile in the
post-WW period is not clear to me yet).
The German model*
• The success of the model in leading to improved standards of life
(although income distribution, not surprisingly, has never been
particularly fair in Germany) and the traditional paternalist
Bismarkian welfare state did the rest.
• Erhard, declared in 1953: “Foreign trade is quite simply the core and
premise of our economic and social order”.
• This declaration seems to allude to an export-led model as a way to
enforce social order, and to social order as a way to sustain exportled growth:
Social order
export led growth
Price stability
Economic surplus and aggregate demand (AD) in
capitalism
• From a theoretical point of view we may now vindicate the
mercantilist obsession with a trade surplus.
• They (albeit imperfectly) grasped the idea that net exports might
render a low N and a high S sustainable from the point of view of
aggregate demand.
• S = P – N; P = C + (X – M) = N + X; S = X - M
• The German model has a strong ideological content by making the
obsession of a trade surplus the “sacred cow” of German politics.
• The Buba was the watch-dog of the model.
• The government has trade policy as the highest priority (as one
German President confessed, “we are in Afghanistan for commercial
reasons”).
The pillars of the German model and why they do not
want to give it up
• The three institutions pillars of “monetary mercantilism”: neocorporativism, mercantilist micro, meso and macro institutions and
policies, and …the Bundesbank.
• The former implied a direct involvement of the labour movement both
at the micro and the macro level in the maintenance of a competitive
system, particularly in the export sector.
• At the micro-level Germany has a excellent training, educational and
R&D system; at the meso-level the reliance on export-led growth
creates an ideological climate that induce cooperation and discipline
(Crouch 2008); at the macro level the system keep wage-growth
below or in line with productivity growth. The government domestic
and foreign policies have the promotion of German export as the
priority. Paternalism is a traditional attitude of the German
government; the sense of the national community, traditions and
nature (heimat) is the main component of the “German ideology”.
This perfectly suit the mercantilist tradition (Heckscher), particularly in
its German version (Cameralism, Historical School)
• This model has brought welfare and order in Germany: would you
easiliy give it up?
Arsenic and Buba
• But, of course, as Voltaire said: “Incantations will destroy a flock of
sheep if administered with a certain quantity of arsenic”
• Just in case, the watchdog role of the model was assumed by the
Bundesbank in a unique wage bargaining process directly involving
the central bank and the leading trade union IG-metall (Franzese
and Hall 2000: 182-83).
• This role of the Bundesbank as the watchdog of the German
mercantilist model is very important to understand the German
opposition to the reform of the ECB from its present “monetarist”
constitution.
The Buba and the labour market*
• A ‘credible’ CB was a central element of the German economic
policy, where by credibility is meant that the trade unions considered
the German CB commitment to fight inflation at any cost as
convincing.
• According to Franzese and Hall the centralised wage bargaining in
Germany, led by the IG-Metall, made a peculiar interaction between
the German CB and the trade unions possible: “The highly public pas
de deux between the Bundesbank and the principal wage bargainers,
which occurs at the time of every wage round in Germany, is a
prominent feature of politics. The bank often issues pointed
comments on the initial wage demands made by the union involved in
the leading settlement, accompanied by detailed commentary about
the state of the economy and warnings about the policy
consequences of overly inflationary wage settlements. ... this kind of
dialogue between wage bargainers and the central bank is
completely absent from U.S. economic politics. … The Federal
Reserve and the Bundesbank speak differently because they have
audiences with different institutional structures”. …
Corporative social-democracy and mercantilism
• Interestingly, the Bundesbank’s credibility was reinforced by the
export-led model, given the concentration of the strongest trade union
in the export sectors: “The German case also suggests that the
effectiveness of such signalling mechanisms may be enhanced when
the export sector is large and plays a pivotal role in wage bargaining
(…). The metalworking sector, which produces the lead bargain in
most years, has a high export concentration. In itself, this induces
lower settlements because wage bargainers in export sectors are
especially concerned to maintain unit labor costs at internationally
competitive levels. Actors in such sectors are also especially sensitive
to signals from the central bank, however, because the restrictive
monetary policies that the bank wields not only depress the level of
economic activity but also tend to appreciate the exchange rate,
thereby threatening export sectors especially severely by rendering
their products more expensive in world markets.” The direct
involvement of the German CB in wage bargaining has been inherited
by the ECB. Just recall again the two infamous rate increases in July
2008 and April 2011.
• Is it a case that most (all?) northern corporative social-democracies
are export-led economies (Colin Crouch)? This might be due to the
smallness of those countries, but this is not the case of Germany.
Corporative social-democracy and mercantilism
• Interestingly, the Bundesbank’s credibility was reinforced by the
export-led model, given the concentration of the strongest trade union
in the export sectors: “The German case also suggests that the
effectiveness of such signalling mechanisms may be enhanced when
the export sector is large and plays a pivotal role in wage bargaining
(…). The metalworking sector, which produces the lead bargain in
most years, has a high export concentration. In itself, this induces
lower settlements because wage bargainers in export sectors are
especially concerned to maintain unit labor costs at internationally
competitive levels. Actors in such sectors are also especially sensitive
to signals from the central bank, however, because the restrictive
monetary policies that the bank wields not only depress the level of
economic activity but also tend to appreciate the exchange rate,
thereby threatening export sectors especially severely by rendering
their products more expensive in world markets.” The direct
involvement of the German CB in wage bargaining has been inherited
by the ECB. Just recall again the two infamous rate increases in July
2008 and April 2011.
• Is it a case that most (all?) northern corporative social-democracies
are export-led economies (Colin Crouch)? This might be due to the
smallness of those countries, but this is not the case of Germany.
Social-democratic mercantilism*
• As seen, export led-growth is also functional to secure labour
acquiescence and discipline, solving therefore the second Kaleckian
concern about the inconsistency of full employment and capitalism.
• Germany appears as a high-productivity/low wage economy. This is
a classic definition of a mercantile country.
• The model, in the German case, is self sustained in the sense that it
brings about social and distribution discipline (associated to decent
standards of living), that in turn supports the model.
• The question is the international sustainability of the model, but
perhaps Germans see themselves as a small player at the global
level so that they expect the world to tolerate this policy. But they
have to solve the European situation first.
• There is no reason why Germans (of any social class) would like to
abandon the model, so be politically realist and do not talk of
European solidarity.*
•
*See my The European crisis: political and institutional failures or method in
the madness? In www.networkideas.org, re-published by www.irishleftreview.org
Rigid fixed exchange rate are inconsistent with national
independent full-emplyment policy…
…with democracy and even with financial stability
Rigid fixed exchange rate are inconsistent with national independent
full-emplyment policy with democracy and even with financial stability.
Comments
• In a currency union CA deficit countries suffers of higher interest
rates given the “covertibility risk”, as in a fixed exchange rate
regime.
• Fixed exchange rate regimes require wage and social right
repression, that is they are inconsistent with democracy.
• Fixed exchange rate regimes and financial liberalisation stimulate
the indebtness of deficit peripheral countries leading to financial
crisis. This “this time is different” sequence has happened since the
gold standard age.
References
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Cesaratto, S. 2015. ALTERNATIVE INTERPRETATIONS OF A STATELESS CURRENCY
CRISIS, ASIMMETRIE, WP 2015/08, http://www.asimmetrie.org/working-papers/wp-201508alternative-interpretations-of-a-stateless-currency-crisis/
Cesaratto, S. 2015. Balance of Payments or Monetary Sovereignty? In Search of the EMU's
Original Sin - a Reply to Lavoie, International Journal of Political Economy, vol. 44, no. 2, WP:
Asimmetrie, WP 2014/06 (December), http://www.asimmetrie.org/wpcontent/uploads/2014/12/AISWP201406.pdf
Cesaratto, S. (2015) Fra Marx e List: sinistra, nazione e solidarietà internazionale a/ working
papers 2015/02 www.asimmetrie.org
Cesaratto, S. (2013c): The implications of TARGET2 in the European balance of payment crisis
and beyond, European Journal of Economics and Economic Policies: Intervention, 10, 2013 (3),
versioni working paper: http://www.deps.unisi.it/it/ricerca/pubblicazioni-deps/quaderni-deps/anno2013/681the-implications-target2-european-balance e
http://www.networkideas.org/featart/sep2013/fa03_TARGET_2.htm
Cesaratto S. (2013). Controversial and Novel features of the Eurozone Crisis as a Balance of
Payment Crisis. in Febrero E. et al., editors, Post Keynesian Views of the Economic Crisis and
its Remedies, Routledge, 2013. Working paper:
http://www.econpol.unisi.it/dipartimento/it/node/1649.
Cesaratto S. (2013). The endless Eurozone crisis, where do we stand? A Classical-Kaleckian
overview, Studi Economici, n.2, 2012 (pubblicato nel 2013) Working paper availabe at:
http://www.deps.unisi.it/it/ricerca/pubblicazioni-deps/quaderni-deps/anno-2013/671-endlesseurozone-crisis-where-do-we-stand (n.671) e
http://www.networkideas.org/featart/feb2013/fa27_Sergio_Cesaratto.htm
References
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Cesaratto S., Stirati A. (2011) Germany in the European and Global Crises, International
Journal of Political Economy, vol. 39, no. 4, Winter 2010–11, pp.56–87; working paper version:
http://www.econ-pol.unisi.it/dipartimento/it/node/1267
Cesaratto S. (2011), Europe, German Mercantilism and the Current Crisis, in Brancaccio E.,
Fontana G. (a cura di), The Global Economic Crisis. New Perspectives on the Critique of
Economic Theory and Policy, Routledge, London. Working paper version Quaderni del
Dipartimento di Economia politica,, n. 595 (www.econpol.unisi.it/dipartimento/it/quaderni)
Frankel, J.A., Rose, A.K. (1996), The Endogeneity of the Optimum Currency Area Criteria,
National Bureau of Economic Research Working Paper 5700.
Friedman M. (1953), The Case for Flexible Exchange Rates, in Friedman M. (ed.), Essays in
Positive Economics, University of Chicago Press, pp. 157-203. [due significativi passaggi del
testo sono riportati qui: link]
Godley, W. (1992), Maastricht and All That, London Review of Books, Vol.14, No. 19.
[Goodhart, C.A.E. (1998), The Two Concepts of Money: Implications for the Analysis of Optimal
Currency Areas, European Journal of Political Economy, Elsevier, vol. 14(3), pp. 407-432. [link]
Kaldor, N. (1971), The Dynamic Effects Of The Common Market, in the New Statesman, 12
Marzo 1971; anche in Further Essays On Applied Economics, Cap. 12, pp 187-220, in The
Collected Economic Essays series of Nicholas Kaldor, Vol 6. [link]
Kenen, P.B. (1969), The Theory of Optimum Currency Areas: An Eclectic View, in R.A. Mundell
and A.K.Swoboda (eds.), Monetary Problems of the International Economy, Chicago University
Press, pp. 41-60.
Mundell, R.A. (1961), A Theory of Optimum Currency Areas, American Economic Review, 51,
pp. 657-665.
C.A.E. Goodhart (1998), The two concepts of money: implications for the analysis of optimal
currency areas, European Journal of Political Economy, 14, 407-432;
References (consensus view)
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Matthew Higgins and Thomas Klitgaard The Balance of Payments Crisis in the Euro Area
Periphery, Fed Current Issues in Economics and Finance, Vol.20, N. 2, 2014
Richard Baldwin, Thorsten Beck, Agnès Bénassy-Quéré, Olivier Blanchard, Giancarlo Corsetti,
Paul de Grauwe, Wouter den Haan, Francesco Giavazzi, Daniel Gros, Sebnem Kalemli-Ozcan,
Stefano Micossi, Elias Papaioannou, Paolo Pesenti, Christopher Pissarides, Guido Tabellini and
Beatrice Weder di Mauro. Rebooting the Eurozone: Step 1 – Agreeing a Crisis narrative,
november 2015, http://www.voxeu.org/article/ez-crisis-consensus-narrative 014
Richard Baldwin, Francesco Giavazzi , The Eurozone Crisis: A Consensus View of the
Causes and a Few Possible Solutions, September 2015,
http://www.voxeu.org/content/eurozone-crisis-consensus-view-causes-and-few-possible-solutions
II) Monetary policy in the crisis
Three overlapping aspects of the crisis: banking, sovereign
and foreign debt crises
• The crisis has not a fiscal origin (with the possible exception of
Greece).
• Once the housing bubbles exploded in Spain and Ireland the crisis
became a banking crisis
• Once banks were bailed out the crisis became a sovereign crisis
• The fiscal crisis magnifies the banking crisis (given that banks own a
lot of sovereign bonds)  doom loop between banking and
sovereign crises.
• Since private and public debts are held also by (European)
foreigners, the EZ crisis is also a foreign debt crisis.
• On some degree, the lack of a lender of last resort (a pro-active
ECB) facilitated the contagion of the PIGS crisis to Italy that also
entered in a sovereign debt crisis (the debt was pre-existing)
The three monetarist pillars of European economic policy
• Balanced budget constraints (fiscal policy is viewed as a subtraction
of private resources)
• Monetary policy managed by an independent Central bank
(differences with the FED).
• Employment policy is a national matter.
Monetary policy: objectives and pillars
• The Eurosystem as the central banking system of the euro area
comprises the ECB; and the national central banks (NCBs) of the 17
EU Member States whose common currency is the euro.
• Two main characteristics of the ECB: independence with (below but
close to) 2% inflation target; no bail-out clause
• Two pillars of the ECB monetary policy ( determination of the
interest rate):
• M3  quantitative theory of money (less important)
• A variety of economic and financial indicators (including indicators of
the real activity, current and expected inflation, exchange rate,
financial markets indicators, agents’ expectations, labour market
indicators) that may influence expected inflation
• How monetary policy works?
• We move from the concept of endogenous money that is by now
increasingly accepted in monetary economics and macroeconomics
(the CB fixes the interest rate and let the market decide how much
money it wishes at that rate).
Loans create deposits
Suppose now that customer 1 orders CBA to move 20 Euros of her
deposit to another current account (own or of another customer) at
CBB; what happens?
Interbank market
• CBA has now zero reserves. By contrast, CBB has excess reserves
of 18. This is at the origin of the inter-bank loan market: banks with
excess reserves will lend to banks that lack reserves.
• that the excess of reserves of the CBB is precisely equal to the
reserves needed by CBA (8 as mandatory reserves plus 10 to be
returned to the CB).
The interbank mkt, the corridor and monetary policy
In our example, CBB will lend 18 to CBA at approx 0.05% that will thus
be able to return the overnight loan to the CB and reconstitute its
reserves.
EONIA (Euro Overnight Index Average)
The updated corridor
The Eurosystem balance sheet before the crisis
ECB monetary policy instruments
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We focus upon:
OMO:
1) MRO and LTRO
2) Structural operations  outright purchases
Standing facilities:
MLF and DF
From 2008 the ECB (like the FED and BoE) inflated its balance
sheet.
The same the Fed (QE)
FED Balance sheet (% of 2007 GDP)
And the BoE (QE)
ECB (no QE)
ECB balance sheet (% of 2007 GDP)
Main monetary policy actions undertaken by the ECB
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Interest rate policy
Fixed rate full allotment MRO and LTRO (2008…)
Covered bonds purchases (2008 and 2010)
SMP (May 2010 and Summer 2011)
3y VLTRO (beginning 2012)
OMT (September 2012)
Forward Guidance (June 2013)
TLTRO (June 2014)
QE
ECB https://www.ecb.europa.eu/pub/pdf/other/art01_eb201504.en.pdf
• Classificazione manovre della balance sheet intraprese in seguito
alla crisi:
• - azioni passive En.Cred.Support, VLTRO, TLTRO
• - azioni attive SMP, CBPP, QE
• - azioni condizionate OMT
Why this expansion of liquidity? And where it ends up?
• Given the break up of the interbank market banks wanted to
frontload possible liquidity needs
• Peripheral banks were losing reserves as a result of the sudden stop
and capital flows reversal, that is the repatriation of loans from the
periphery to core EZ countries.
• The TARGET 2 saga.
After VLTRO, before whatever it takes
TARGET2. What is it?
• Acronym: Trans – European Automated Real- time Gross settlement
Express Transfer System.
• TARGET2 has to be used for all payments involving the
Eurosystem. Operated by the Eurosystem.
• TARGET2 mainly settles operations of monetary policy and money
market operations.
In essence, TARGET2 makes possible the transfer of bank deposits
and reserves between countries within the Euro Zone.
International payments outside a CU (from Cesaratto 2013)
International payments in a CU (phase 1)
International payments in a CU (phase 2)
International payments in a CU (phase 2/post-crisis)
- The Spanish bank needs 10 monetary units as the reserve corresponding to its 100 m.u.
of deposits.
- The demand for reserves is rather inelastic. A deficit of reserves in Spain would lead to a
rocketing interest rate there.
- If the interbank market has dried up, only the Eurosystem can provide required reserves.
TARGET2. How does it work? (exposition by Eladio Febrero)
• When a bank deposit is transferred from Spain to Germany, it has to be
done with central bank money.
• At the end of the day, the Banco de España acquires a liability against
the Eurosystem (T2 liability) whilst it reduces the Reserve account held
by the Spanish bank. Simultaneously, the Buba increasese the reserve
account of the German bank when it acquires a claim against the
Eurosystem.
TARGET2. Implications for MP implementation
• After the deposit transfer, the Spanish bank does not comply with
the reserve requeriment (10% deposits). However, the German bank
has excess reserves, amounting to 9 monetary units.
TARGET2. Implications for MP implementation
• The German bank will not lend in the interbank money market its
excess reserves at a rate below the MLF.
• The Spanish bank will not borrow in the interbank market at an
interest above the MCF.
• Under normal circumstances, banks agree on an intermediate
interest rate, which is in the middle of both facilities.
TARGET2. Implications for MP implementation
• TARGET2 claims and liabilities (almost) cancel each other out when
the German bank lends its excess reserves to the Spanish bank.
• The Spanish bank complies with the reserve requirement.
• The interest rate that prevails at the interbank market is that of MRO.
TARGET2. Implications for MP implementation
• What happens when the German bank does not wish to
roll over its lending to the Spanish bank?
(Hyp: the maturity of the loan granted by SPB is longer
than that of the loan granted by GPB to SPB)
– TARGET2 imbalances return, and…
– The Spanish bank does not fulfil the reserve requirement.
TARGET2. Implications for MP implementation
• The Spanish bank needs 10 monetary units as the reserve
corresponding to its 100 m.u. of deposits.
• The demand for reserves is rather inelastic. A deficit of
reserves in Spain would lead to a rocketing interest rate there.
• If the interbank market has dried up, only the Eurosystem can
provide required reserves.
TARGET2. Implications for MP implementation
• The Banco de España, part of the Eurosystem, lends
reserves to the Spanish banking system. It has no other
option if :
– NCBs have to contribute to the smooth working of the payment system.
– The interest rate has to be the same in the whole Euro Zone.
– All banks must have the same access to CB funding.
N.B. MROs are implemented by National Central Banks.
• What happens with the excess reserve in Germany?
– The German bank can pay back prior liabilities to the Buba.
– It may try to lend them at an interest rate below the MRO official rate,
but this means that the Eurosystem loses control of the interest rate.
– They remain deposited in the deposit accounts at the ECB
TARGET2. Some evidence.
• There is a large correlation between GIPS’ T2 liabilities and
Germany’s T2 claims. When we add Italy to GIPS, the degree of
correlation is a little lower. This indicates financial capital flights from
the EZ periphery towards Germany.
TARGET2. A stealth bailout?
• Hans Werner Sinn, president of the highly influential CES Ifo,
Munich based Economic Research Institute, has pressed the alarm
buttons in the mass media, arguing that TARGET2 imbalances are a
stealth bailout of the Euro Zone (EZ) periphery by the ECB.
• Sinn interprets the current crisis in the EZ as a typical balance of
payments crisis in a pegged exchange rate system.
• According to Sinn, peripheral countries (PIIGS) are experiencing a
BoP crisis (capital outflow) and, therefore, they should adopt the
usual measures of economic policy to solve this problem: fiscal
austerity –cum- devaluation, with temporary interest rate hikes.
• In his view, T2 liabilities are Eurosystem loans to the EZ periphery,
providing them with some relief in a protracted balance-of-payments
crisis.
TARGET2. A stealth bailout? Sinn is not wrong (although he had a
number of silly considerations aimed to depict Germany as the eurovictim)
• In a fixed exchange rate system (FERS) a country can finance its current
account deficit either by depleting the Official Reserves or by foreign loans.
In case of sudden stops and once the OR are depleted, it must adjust the
CA by domestic deflation and currency devaluation.
• In a currency union, as seen, a country can continue to finance a CA deficit
by collecting T2 liabilities with its banks reserves re-created by the
Eurosystem.
• In a FERS international payments lead to a loss of reserves; in a CU it is the
same and the loss is counted as a T2 liability (and the gain of reserves as a
T2 claim) while the lost reserves are re-created by the ECB.
• The Eurosystem has to lend reserves as the logical consequence of fixing an
interest rate which has to be the same across the whole EZ. Moreover,
unless it lended reserves, German investors could not repatriate their funds
to Germany.
• Similarity with the currency/clearing union proposed by Keynes in the
1940s in which the IMF should automatically recycle the CA surpluses that
surplus countries do not want to lend.
TARGET2. A stealth bailout? And a risk for Germany?
• TARGET2 loans are a potential source of risk for Germany in the case of a
disorderly euro break up.
• Reserves gained in a CU are T2 claims, not dollars or gold. Reserves lost in
a CU are T2 liabilities, not dollars or gold.
• TARGET2 claims yield an interest rate to the holder, paid by the debtor to
the Eurosystem (GIIPS). And TARGET2 claims are part of the net
international investment position (financial wealth) of a nation, like gold
reserves. In the event of a euro breakup, the Banco de España may renege
on its international debts (T2 liabilities) so that the Bundesbank will make
a capital loss.
• Sinn suggests the ECB should stop lending to the EZ periphery and cancel
T2 liabilities with marketable assetsm (gold etc).
TARGET2. A stealth bailout? And a risk for Germany?
• TARGET2 loans are a potential source of risk for Germany in the case of a
disorderly euro break up.
• Reserves gained in a CU are T2 claims, not dollars or gold. Reserves lost in
a CU are T2 liabilities, not dollars or gold.
• TARGET2 claims yield an interest rate to the holder, paid by the debtor to
the Eurosystem (GIIPS). And TARGET2 claims are part of the net
international investment position (financial wealth) of a nation, like gold
reserves. In the event of a euro breakup, the Banco de España may renege
on its international debts (T2 liabilities) so that the Bundesbank will make
a capital loss.
• Sinn suggests the ECB should stop lending to the EZ periphery and cancel
T2 liabilities with marketable assetsm (gold etc).
TARGET2. A critique.
• What are the true risks for Germany?
In the event of a disintegration of the EZ, or if non-performing loans
increase in debtor countries:
– Germany will lose the interest rate on its T2 claims (an ownership
income paid by the rest of the world).
– Germany will lose part of its financial wealth (net international
investment position NIIP) if debtor nations renege on their T2
liabilities (i.e it is as if Germany had dropped its gold bullion reserves
into the ocean).
– According to Sinn, German tax payers should pay for the
recapitalization of the Buba.
Target 2/rifinanziamento ECB dove finiscono i soldi?
Liquidity needs and excess liquidity
TARGET2. A critique.
Sinn is right when he claims that the German economy will experience
a loss, because the income balance, in the current account balance,
will fall, due to a fall in the interest on T2 claims. And there will be a
loss of financial wealth as well.
But:
– T2 claims change the composition of NIIP without making it to rise:
German private banks reduce their exposure to PIIGS banks whilst the
Buba increases its exposure to the Eurosystem (only 27%). Dullien
and Schieritz, 2012.
– A capital loss may happen if loans are not paid back in the EZ
periphery. If the Eurosystem stops providing liquidity, the banking
systems will collapse in the periphery and with them their whole
economies. Sinn’s recommendations are a self- fulfilling prophecy.
– The value of the Buba’s reserves (denominated in new Deutsche
Mark, fiat money) is not backed by its assets; and the Buba can
‘monetize’ as much public spending as needed.
‒ The real risk is that Germany’s new D-mark shall appreciate with
regard to the already existing currencies. This is a threat for an
exporting country.
Target 2 references:
http://www.ecb.int/pub/pdf/mobu/mb201305en.pdf (chapter on T2)
http://www.bruegel.org/nc/blog/detail/article/731-sudden-stops-in-the euro-area
Febrero E. Uxo J. http://www.uclm.es/dep/daef/DOCUMENTOS%20DE%20TRABAJO/DT2013/2013-2%20DT-DAEF.pdf Excellent
http://www.deps.unisi.it/it/ricerca/pubblicazioni-deps/quaderni-deps/anno-2013/681theimplications-target2-european-balance
http://www.cesifo-group.de/ifoHome/policy/Spezialthemen/Policy-Issues-Archive/Target.html
Cour-Thimann, P. (2013), Target Balances and the crisis in the Euro Area, CESifo
Forum, vol.14 (april). THIS IS THE BEST PAPER
http://www.cesifo-group.de/ifoHome/publications/docbase/details.html?docId=19088305
Bindseil, U. and P.J. König. (2011) The Economics of TARGET2 Balances, SFB 649
Discussion Paper 2011-035, Humboldt University
Cecioni, M., Ferrero, G. (2012) Determinants of TARGET2 imbalances, Questioni di
economia e finanza (Occasional Papers), No. 136, URL:
http://www.bancaditalia.it/pubblicazioni/econo/quest_ecofin_2/qef136;internal&
action=_setlanguage.action?LANGUAGE=en)
Sinn, H.W. and T. Wollmershäuer. 2012. “TARGET2 loans, current account balances
and capital flows: The ECB’s rescue facility.” International Tax and Public Finance 19
(4): 468-508.
Target 2 references:
Cesaratto, S. (2013c): The implications of TARGET2 in the European balance of payment crisis and
beyond, European Journal of Economics and Economic Policies: Intervention, 10, 2013 (3),
versioni working paper: http://www.deps.unisi.it/it/ricerca/pubblicazioni-deps/quaderni-deps/anno2013/681the-implications-target2-european-balance e
http://www.networkideas.org/featart/sep2013/fa03_TARGET_2.htm
Whatever it takes
After whatever it takes
All’alba del QE
Where is Europe going?
• Austerity is now the main cause of the crisis and one main
destabilising factor of the global economy.
• Debate on the size of income multipliers
• Germany does not want to give up its model.
• QE by the ECB – that should buy 1 trilion of sovereign bonds - might
help by devaluating the euro (what it will not be liked abroad given
that the EZ already is a trade surplus area) and by assuring financial
markets that sovereign debt are safe. Devaluation would stop
deflation
• Still, with the structural unbalances brought about by the monetary
unification (the EZ is not an OCA), and with austerity still in place, tis
will help but not solve the problems.
• Even a consensual Euro break up is difficult, let alone a unilateral
separation. Only a dramatic financial-political crisis will bring about
the end of this creazy experiment.
References monetary policy
•
•
Cesaratto, S. 2015. L’ORGANETTO DI DRAGHI: QUATTRO LEZIONI CRITICHE
SULLE MISURE NON CONVENZIONALI DELLA ECB SINO AL QUANTITATIVE
EASING, WP 2015/10: http://www.asimmetrie.org/working-papers/wp-201510lorganetto-di-draghi/ (further references here)
in questo post:
http://politicaeconomiablog.blogspot.it/2015/10/target-due-sulla-natura-della-crisi.html
vi sono riferimenti e link a paper e altri interventi relativi alla mia discussione con Marc
Lavoie sulla natura della crisi europea. Il mio paper di critica a Lavoie dovrebbe
essere scaricabile (sino a 50
copie) qui:
http://www.tandfonline.com/eprint/UbSXuQVeSkjssMqQmPpB/full
Further references monetary policy
•
•
•
•
ottimo manuale
www.ecb.int/pub/pdf/other/monetarypolicy2011en.pdf?d51bad0288e53a9d35f77c3a3f6674df
Cour-Thimann & Winkler 2013 The ECB’s non-standard monetary policy measures, the role
of institutional factors and financial structure, ECB Working Paper SerieS NO 1528 / april
2013, http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1528.pdf
Fabian Eser, et al, The role of The central bank balance, sheet in monetary policy, ECB
OCCASIONAL PAPER SERIES, NO 135 / AUGUST 2012,
http://www.ecb.europa.eu/pub/pdf/scpops/ecbocp135.pdf
ECB Economic Bulletin, Issue 4 / 2015,
https://www.ecb.europa.eu/pub/pdf/other/art01_eb201504.en.pdf