Transcript Dia 1
Europe: after the crisis
reaction to the lecture of Charles A.E. Goodhart
Duisenberg School of Finance
Opening Academic Year
September 7, 2011
Wim Boonstra
Chief Economist
Rabobank,
Content
• Charles Goodhart’s conclusions
• Some comments
• Some recommendations: common funding of public deficits
• Concluding remarks
Charles Goodhart’s conclusions
• A monetary union needs some minimal centralisation of power.
• Current account balances are important!
The new Excessive Imbalance Procedure correctly shifts the focus
from public finances to the external sector
• The enforcement of the EIP is misguided
• Interaction between banks and public sector debt is the most severe
problem. There really is no good way to resolve this.
• There is a case for building up a sizeable euro-zone sovereign
wealth fund for use in emergencies
Some comments
•
I agree with Charles Goodhart on almost everything he has said.
•
“For a country like Japan, with a huge public debt but a CA surplus and a
positive NIIP its debt is entirely its own concern”. Is it? Or does it need capital
controls in the end?
•
The corrective arm of the EIP is misguided. Financial sanctions do not make
sense. But would an ‘enforced credit rating downgrade’ have a different effect?
•
What we need is ex ante agreed and automatic political sanctions. Such as:
•
To summarise, we need:
•
Creation of a wealth fund is a good idea, but it is not enough
– (temporary) loss of voting rights in the ECB board
– (temporary) loss of voting rights in the council of ministers
– (temporary) loss of European Commisioner
– measures that hurt politicians, not their electorate
– measures that are easy to implement
On average, EMU public finances are relatively good.
Financial markets’ binary discipline: a case for eurobonds?
The eurobond cacophony
• There are many so-called eurobond proposals. They have one thing
in common: the word ‘eurobond’. The differences are huge.
• Succesfull eurobonds should bring:
–
–
–
–
Stability in the markets
Improved fiscal discipline (supported by a more effective SGP)
Clear benefits for all countries (weak and strong)
A self-financing and pro-active crisis mechanism (via an insurance
premium)
• Most proposals bring at best some benefits for the weaker countries
• Benefits for strong countries might be:
– Lower funding costs due to liquidity premium. This is strongly
–
dependent on the exact design. Here things can go seriously wrong
Self-financing crisis mechanism Goodhart’s SWF
Central funding via the EMU fund
• EMU fund issues (euro)bonds and pays market rates
• Redistributed to the member states
• Countries pay spread over funding costs, depending on fiscal
performance
Member state
• Self-financing mechanism
(‘insurance premiums’)
• Cross-guarantee essential
(not partial guarantees)
Member state
Member state
EMU Fund
Borrowing by EMU-fund
Payments by EMU Fund
(redemtion plus interest)
Global financial markets
Redemption plus interest, incl.spread
Amount borrowed by member state via EMU-Fund
Pros and cons of this approach
•
Advantages
– Flexibility in debt management (maturities etc.)
– Diverging fiscal policies translate into diverging funding costs (restoration of
failing market discipline)
– Countries are sheltered from sudden swings in market sentiment
– Creation of huge and liquid pan-EMU bond market
– Weaker countries pay premium to EMU Fund, instead of higher interest rates
to markets financial buffer against future problems Charles Goodhart’s
SWF?
– Using cross-guarantee the average counts, not the problem in the margin
lower funding costs
•
(Possible) problems
– Potential tensions with no-bail out clause we already have crossed this
line
– Difficulties in calculation of spread see below
– Practical implementation
– Lack of political willingness voluntary participation
– We can start without Germany. Any pair of countries can start and scale up.
Computing the spread
• A simple straightforward formula will suffice:
• R(i) = [O(i) - O(m)] + [S(i) – S(m)]
• Where:
– R(i) = the margin payable by country i over the funding costs of the
–
–
–
–
EMU fund
O(i) = the government deficit of country i, as a % of GDP
S (i) = the government debt of country i, as a % of GDP
The variables O(m) and S(m) represent the acceptable levels for debt
and deficits. They could be the criteria from the SGP.
The parameters and are coefficients, used to determine the weight
of the relative performance on government deficit and government debt
respectively in setting the mark-up.
Concluding remarks
•
A monetary union needs some minimal centralisation of power.
•
Eurobonds can change the interaction between banks and the national public
sector debt
•
There is a case for building up a sizeable euro-zone sovereign wealth fund
for use in emergencies a well-designed eurobond scheme can bring this
forward
•
If fragmentation of EMU’s national public bond markets is not eliminated,
EMU will remain vulnerable and may in the end not survive. Some
centralisation is essential
•
A well-designed eurobond scheme can bring advantages for all participating
countries:
– Deeper markets bring increased liquidity lower funding costs
– Weaker countries benefit from cross guarantee
– Self-financing insurance mechanism no need for additional rescue packages
Thank you
More information: www.rabobank.com/kennisbank