Saturday, 31 December 2011

And a Happy New Year...


Friday, 23 December 2011

Star Child

                                              Merry Christmas!


Monday, 19 December 2011

Seigniorage to the Rescue

When the Eurozone gets its act together (which should be well under way) and supplies a unified sovereign for the European Central Bank, the Governor of the ECB will finally be able institutionally and constitutionally, to take all the necessary actions that will end the Eurozone crisis.  Wisely and resolutely  Mr Draghi has refused to step outside the remit the Bank has under current laws,  ignoring the siren calls to do just that and destroy the standing of the Bank  and its capacity to command the trust of both the markets and the people.  A Central Bank is not a sovereign, least of all in a democratic world,  even if it could be, briefly, in the face of global financial and economic meltdown fears.

It is notable that Mario Draghi has never said that he cannot act but that he cannot act under the current Treaty.  Nor has he said that he will not act if terms change.  He has both the means and the will to act as soon as there is a sovereign to instruct him to do so.  Which puts a  different, wrecker's light upon Cameron's gesture of seeking a quid pro quo entirely unrelated to the matter under discussion  in return for according unanimity, and the European Union institutional and legislative processes, to the creation of appropriate structures under which the Governor of the European Central Bank can act.

For if creating the new agreements on the actions permitted to the Central Bank is successful  there will be no Euro collapse.  Instead there will be a significant transfer of wealth from outside the Euro area into the Euro area (on balance) and, globally,  from those who have betted against  the Euro to those who accepted its  soundness.  Those who have  sold  Euro sovereign bonds  may bitterly regret having done so,  although they will lose nothing but  the profits  they would have made from them.   Those who have sold short will incur  losses.  It is difficult to assess the extent of these losses  because they depend on the time-pattern of purchases and sales,  and the size of short sales and credit default swaps cover (CDS will become worthless to the benefit of issuers);  the Euro will rise to its historical peak, around 1.50 to the dollar, the cost of Euro sovereign debt will fall leaving room for easing austerity measures and reviving the Euro economies in spite of the loss of competitiveness from a stronger Euro.

With 3.3 trillion euros of resources from its seigniorage enabling the ECB to continue its purchases of eurozone government bonds, and the changes needed in the ECB's statutes,  the Euro is unlikely to be brought down to save the profits ( how great can they be?) of  some global speculators.  The political forces ranged against the Eurozone and against the financial and economic measures it embraces have chosen an economic rather than political offensive and in so doing may well find themselves beaten off and out of pocket.

Wednesday, 14 December 2011

A Good Read: How to Resolve the Euro Crisis Without Fuss and Expense

The Debt of Nations texts can be found here and here.  The second text, in particular is an innovative and convincing thesis on the resources available to the European Central Bank and its role as a fiscal player.

Have a good read..

Monday, 12 December 2011

The Debt of Nations

The Bank of Italy and the University of Rome La Sapienza have kindly arranged for Willem Buiter to talk to us all tomorrow on:

Excessive debt in rich nations: what happens when sovereigns, banks and households deleverage at the same time?  and

The central bank as a quasi-fiscal player: theory and application for the Euro Area and other advanced industrial countries

Dinner too; Angels are promised excellent fish and considerably more sense being talked than in Brussels last weekend.

Sunday, 11 December 2011

Pacta Sunt Servanda

"If the euro breaks up because its members have to move clumsily and slowly outside the formal EU treaties and institutions because of Cameron's veto, the resulting series of bank collapses and consequent depression will hurt Britain badly.", writes Will Hutton in today's Observer.

Consider, though, the view expressed by the draftsman of the Lisbon Treaty, from this morning's Sole 24 Ore:

"The fact is that to reinforce the eurozone it is  not actually necessary to change the Treaty, it is enough to apply the clauses on the eurozone and,  further, the clause on flexibility. The final communique' of  Friday's  Council  specified among the things to be done as a priority, the reinforcing of  procedures and  sanctions for all the eurozone countries with excessive deficits  under Article 26 of the Treaty.  It is precisely  that which  is  already permitted  under Article 136 of the same Treaty." *   

The ntergovernmental  accords that Hutton fears are too slow are sought, not imposed upon the 26, by Germany.   Why? because Germany must convince its voters that something more than the low-level language of the Lisbon Treaty is reinforcing  a more disciplined and integrated fiscal stance throughout the eurozone and indeed throughout the EU ( bearing in mind that all except two of the 27  - shortly to be 28 -  member-states are necessarily candidates for entry to the Euro) and all are bound by Stability and Growth Pact requirements, euro-users or not.

Has the UK Prime Minister vetoed parts of the Lisbon Treaty signed so gracelessly by his predecessor?   And if he has what other international treaties to which the United Kingdom is a signatory  might the Coalition government be tempted to repudiate?

'Il fatto si è che per rafforzare la zona euro non era affatto necessario modificare il Trattato, bastava applicarne le clausole che riguardano la stessa zona euro, più, eventualmente, la clausola di flessibilità. Il comunicato conclusivo del Consiglio di venerdì indica tra le cose da fare con priorità il rafforzamento per i paesi dell'euro delle procedure e delle sanzioni previste dall'art.126 del Trattato per i disavanzi eccessivi di tutti gli Stati membri. È esattamente ciò che già consente di fare l'art.136 dello stesso Trattato.'

Saturday, 10 December 2011

Britain Can't Afford EU Membership

Britain must have a totally free fiscal hand for the financing and refinancing of government debt and deficit by the Bank of England.

It cannot satisfy the rules which, even without the new pact that it has failed to join, discipline all EU members' fiscal policy (regardless of the use or no of the euro) through the Growth and Stability Pact.

Nor can the the main Coalition Government partner  antagonise the City institutions that have so generously funded them in their electoral campaign and current activities.

Of course they could always have continued to go through the motions of looking as if they are following the rules, with small qualifications, , exceptions and delays, and pretexts,  as they have been doing up to now, claiming exemptions - euro, internal market, Schengen - although sooner rather than later they would have had  to accept squarely that the country is excessively indebted and that the Party is in pawn to its funders.

This might once more have been acceptable or benignly neglected by  the EU but  it hasn't helped that London-based hedge funds mounted the assault upon Italian bonds.  Italy isn't a minor, peripheral member-state  of the EU;  Merkozy is complemented by Montraghi   in the  governance of Europe.

This time bluffs have been called and exceptions not allowed.

The Full Text of the EU Statement

EUROPEAN COUNCIL Brussels, 9 December 2011


The European Union and the euro area have done much over the past 18 months to improve economic governance and adopt new measures in response to the sovereign debt crisis. However, market tensions in the euro area have increased, and we need to step up our efforts to address the current challenges. Today we agreed to move towards a stronger economic union. This implies action in two directions: 
- a  new fiscal compact and strengthened economic policy coordination;
- the development of our stabilisation tools to face short term challenges. 
A reinforced architecture for Economic and Monetary Union 

1.  The stability and integrity of the Economic and Monetary Union and of the European Union as a whole require the swift and vigorous implementation of the measures already agreed as well as further qualitative moves towards a genuine "fiscal stability union" in the euro area. Alongside the single currency, a strong economic pillar is indispensable. It will rest on an enhanced governance to foster fiscal discipline and deeper integration in the internal market as well as stronger growth, enhanced competitiveness and social cohesion. To achieve this objective, we will build on and enhance what has been achieved in the past 18 months: the enhanced Stability and Growth Pact, the implementation of the European Semester starting this month, the new macro-economic imbalances procedure, and the Euro Plus Pact.

2.  With this overriding objective in mind, and fully determined to overcome together the current difficulties, we agreed today on a new "fiscal compact" and on significantly stronger coordination of economic policies in areas of common interest. 

3.  This will require a new deal between euro area Member States to be enshrined in common, ambitious rules that translate their strong political commitment into a new legal framework.

A new fiscal compact

4.  We commit to establishing a new fiscal rule, containing the following elements: 

• General government budgets shall be balanced or in surplus; this principle shall be deemed respected if, as a rule, the annual structural deficit does not exceed 0.5% of nominal GDP.
• Such a rule will also be introduced in Member States' national legal systems at constitutional or equivalent level. The rule will contain an automatic correction mechanism that shall be triggered in the event of deviation. It will be defined by each Member State on the basis of principles proposed by the Commission. We recognise the jurisdiction of the Court of Justice to verify the transposition of this rule at national level.
• Member States shall converge towards their specific reference level, according to a calendar
proposed by the Commission.
• Member States in Excessive Deficit Procedure shall submit to the Commission and the Council for endorsement, an economic partnership programme detailing the necessary structural reforms to ensure an effectively durable correction of excessive deficits. The implementation of the programme, and the yearly budgetary plans consistent with it, will be monitored by the Commission and the Council.
• A mechanism will be put in place for the ex ante reporting by Member States of their national debt issuance plans. 

5.  The rules governing the Excessive Deficit Procedure (Article 126 of the TFEU) will be reinforced for euro area Member States. As soon as a Member State is recognised to be in breach of the 3% ceiling by the Commission, there will be automatic consequences unless a qualified majority of euro area Member States is opposed. Steps and sanctions proposed or recommended by the Commission will be adopted unless a qualified majority of the euro area Member States is opposed. The specification of the debt criterion in terms of a numerical benchmark for debt reduction (1/20 rule) for Member States with a government debt in excess of 60% needs to be enshrined in the new provisions. 

6.  We will examine swiftly the new rules proposed by the Commission on 23 November 2011 on (i) the monitoring and assessment of draft budgetary plans and the correction of excessive deficit in euro area Member States and (ii) the strengthening of economic and budgetary surveillance of Member States experiencing or threatened with serious difficulties with respect to their financial stability in the euro area. We call on the Council and the European Parliament to rapidly examine these regulations so that they will be in force for the next budget cycle. Under this new legal framework, the Commission will in particular examine the key parameters of the fiscal stance in the draft budgetary plans and will, if needed, adopt an opinion on these plans. If the Commission identifies particularly serious non-compliance with the Stability and Growth Pact, it will request a revised draft budgetary plan. 

7.  For the longer term, we will continue to work on how to further deepen fiscal integration so as to better reflect our degree of interdependence. These issues will be part of the report of the President of the European Council in cooperation with the President of the Commission and the President of the Eurogroup in March 2012. They will also report on the relations between the EU and the euro area. 

Stronger policy coordination and governance

8.  We agree to make more active use of enhanced cooperation on matters which are essential for the smooth functioning of the euro area, without undermining the internal market. 

9.  We are committed to working towards a common economic policy. A procedure will be established to ensure that all major economic policy reforms planned by euro area Member States will be discussed and coordinated at the level of the euro area, with a view to benchmarking best practices. 

10.  Euro area governance  will be reinforced as agreed at the Euro Summit of 26 October. In particular, regular Euro Summits will be held at least twice a year. 

Strengthening the stabilisation tools

11.  Longer term reforms such as the ones set out above must be combined with immediate action to forcefully address current market tensions.

12.  The European Financial Stability Facility (EFSF) leveraging will be rapidly deployed, through the two concrete options agreed upon by the Eurogroup on 29 November. We welcome the readiness of the ECB to act as an agent for the EFSF in its market operations.

13.  We agree on an acceleration of the entry into force of the European Stability Mechanism (ESM) treaty. The Treaty will enter into force as soon as Member States representing 90 % of the capital commitments have ratified it. Our common objective is for the ESM to enter into force in July 2012.

14.  Concerning financial resources, we agree on the following: 

• the EFSF will remain active in financing programmes that have started until mid-2013 as provided for in the Framework Agreement; it will continue to ensure the financing of the on- going programmes as needed;
• we will reassess the adequacy of the overall ceiling of the EFSF/ESM of EUR 500 billion (USD 670 billion) in March 2012; 
• during the phasing in of the paid-in capital, we stand ready to accelerate payments of capital  in order to maintain a minimum 15% ratio between paid-in capital and the outstanding amount of ESM issuances and to ensure a combined effective lending capacity of EUR 500 billion; 
• euro area and other Member States will consider, and confirm within 10 days, the provision of additional resources for the IMF of up to EUR 200 billion (USD 270 billion), in the form of bilateral loans, to ensure that the IMF has adequate resources to deal with the crisis. We are looking forward to parallel contributions from the international community.

15.  We agree on the following adjustments to the ESM Treaty  to make it more effective:

• Concerning the involvement of the private sector, we will strictly adhere to the well established IMF principles and practices. This will be unambiguously reflected in the preamble of the treaty. We clearly reaffirm that the decisions taken on 21 July and 26/27 October  concerning Greek debt are unique and exceptional; standardised and identical Collective Action Clauses will be included, in such a way as to preserve market liquidity, in the terms and conditions of all new euro government bonds.
• In order to ensure that the ESM is in a position to take the necessary decisions in all circumstances, voting rules in the ESM will be changed to include an emergency procedure. The mutual agreement rule will be replaced by a qualified majority of 85 % in case the Commission and the ECB conclude that an urgent decision related to financial assistance is needed when the financial and economic sustainability of the euro area is threatened.1
  subject to confirmation by Finnish parliament.
16.  We welcome the measures taken by Italy; we also welcome the commitment of the new Greek government, and of the parties supporting it, to fully implement its programme, as well as the significant progress achieved by Ireland and Portugal in implementing their programmes.

Some of the measures described above can be decided through secondary legislation. The euro area Heads of State or Government consider that the other measures should be contained in primary legislation. Considering the absence of unanimity among the EU Member States, they decided to adopt them through an international agreement to be signed in March or at an earlier date. The objective remains to incorporate these provisions into the treaties of the Union as soon as possible.

The Heads of State or Government of Bulgaria, Czech Republic, Denmark, Hungary, Latvia,
Lithuania, Poland, Romania and Sweden indicated the possibility to take part in this process after
consulting their Parliaments where appropriate.


Friday, 9 December 2011

Cooked his Goose

Seventeen eurozone countries signed-up forthwith, the remaining countries are inclined to do so but will consult their Parliaments first out of sheer democratic animal spirits.  Except for the United Kingdom, whose Prime Minister displayed the brutal reality of Executive power in the United Kingdom's so-called democracy by refusing point blank to accept the greater interest of the European Union, or indeed of the United Kingdom, over that of his party's unity.   A democratic leader would have consulted his country's Parliament on Lisbon Treaty changes.

Not even   his government coalition's survival was at stake;  there is a European majority in the UK Parliament.  Cameron put at risk the economic security of most of Europe for  a Conservative party faction.  He wasn't defending City interests, despite his protestations, for City interests require the highest levels of representation within the EU and he has certainly lost that.  Nor could anything prevent greater EU surveillance over the City's 'light touch' regulation; those glory days are gone.  EU business will be regulated and (to a far greater extent than might have been with the UK properly represented) transacted within the core EU from now on.  And it is impossible to imagine the European Union taking any repatriation of powers to the UK  seriously after facing down the UK on an issue as important as  the Euro itself.

Let us hope Cameron has the courage of others' anti-EU convictions and leaves altogther; there's nothing but a price to pay  and Union meddling in the UK's internal affairs left for the UK in Europe now.  No reason to stay and every reason to go.

Innocent Tax Evasion

The refusal of the Roman Catholic Church  to volunteer to pay property taxes has been dubbed 'innocent tax evasion'.  Of course it is nothing of the sort.  There has been every sort of pressure applied to the lay State not to levy property taxes on the Church, not least the threatening claim that the Church 'does good' for the poor and deprived and it should not be interrupted in this undertaking  by having to pay taxes like everyone else.  If it paid taxes like everyone else there wouldn't be so many poor and needy because they could be supported better by all of us and not subjected to Church requirements before qualifying.

This outrage, being presented as a defence of charity by the Church, has given rise to an enormous outcry - the web has resources that have never before been available to those who oppose the primitive internet of the pulpit. 

So, just in case our efforts to assert the lay governance of Italy and its people might succeed,  a further layer of defence of the politocreligious privileged has been inserted into the  the Salva Italia provisions.   The revision of property values by the land registry (up, of course) will not be applied to ecclesiastical property:  churches, vicarages (or whatever they call them - the priest here has a house big enough for an army) hotels posing as monasteries and convents, city centre commercial developments on Church land, monuments, .....on and on goes the recitation of untaxed riches,  while the faces of the poor are being ground unless they pray (and vote) correctly.

Thursday, 8 December 2011

The Future Is Not What It Used To Be

The real problem, and the fear, facing European Union countries is not sovereign debt  or inter-bank liquidity (as the Governor of the Austrian Central Bank pointed out in Vienna, much can be done to improve  liquidity).  It is stagnation that threatens our living standards and our political arrangements.   

Governor Novotny noted too that last year the Bank of England bought 80% of new issues of UK government debt - an action not permitted to the European Central Bank.    If tomorrow the ECB were to be given  latitude  on this scale, if not unlimited powers, to buy government bonds at least in the secondary markets in exchange for tighter discipine on national governments' fiscal policy, then the Euro would be home and dry. Although frankly this can only be regarded as a quasi-fiscal activity bordering on abuse of central bank position as a monopolist of currency issue.

There are three inter-related crises: budget - the re-financing of the public sector;  bank - their not lending to each other ; and  in the real economy.  And the greatest of these is the crisis of the real economy, for it is this crisis that is intractable. 

The United States, Europe and Japan represent over two thirds  of the world economy.    They  are displaying all the signs that they have reached the limits of standard fiscal and monetary instruments used in the past.  In the US despite flat or declining wage levels - something that had not happened in 40 years - unemployment has increased since 2008.   Interest rates have been fixed at 0% for two years in advance.  Japan has been flat as a pancake for 20 years no matter what has been attempted, and the US is heading in the same direction.

Europe, despite the fuss surrounding government debt re-financing, and the currency,  still shows signs of life.  How can it be nurtured?  First of all  Germany  must conform to the Euro requirement for staying under but close to a 2% inflation rate just as certainly as any other member state must not exceed it. 

Paradoxically, higher wage levels are needed.  Technological innovation under-pinned by reseach and development must be  enhanced and facilitated by governmental action. Infrastructural development  (not the greenery-yallery agenda but  real provision of better communications, natural disaster protection, the recuperation of the devastations of 19th and 20th century industrialisation) undertaken.  An end is needed  to cruel programmes of 'austerity' that merely attack the weakest rather than the corrupt, driving down demand while spreading poverty, inertia, ignorance and incapacity.

For our political culture failure to ensure growth in Europe is encouraging incoherent but worrying claims for non-capitalist economic systems.  As Janos Kornai states plainly:

"At a time when socialism is being reconsidered we need to remember its human cost and we need to re-emphasize its failure on technical grounds - macro-data decision-taking failed to match market choice.  There isn't a solution to capitalist difficulties through socialist theorising or practice."

Wednesday, 7 December 2011

PIGS Breakfast

The usual 'austerity'  has been delivered, this time to the Italians, by a seriously technically and intellectually under-powered government.   The strong impression that an EU blueprint was handed to Monti and he thought  merely to give it an Italianate tweak is hard to avoid.

Rise in petrol tax, cuts in pension rights, rise in property taxes, retrospective tax grab at savings repatriated to Italy, VAT hike.   Yawn.  "Salva Italia!" ?  What for?  So Church and Mafia and  State elites can go on exploiting the captive people - the not awfully well-paid employees, the elderly on pensions and fixed incomes, and with spoiling the life chances of the young through under-funded education and training and long-term unemployment? 

The trade unions are calling a national strike; but there's a bit of a problem with timing as today is St Ambrogio, tomorrow is the Immaculate Conception and then it's virtually the weekend so nobody's counting Friday and everyone has gone skiing, or to the Alto Adige to the Christmas markets, or to the near abroad for 5 days (Vienna was already packed with Italians when we left on Tuesday evening).

The minister for Pensions wept crocodile tears in Parliament as she hacked at the incomes of the old and poor, but nothing was said about the cost of useful things like food going through the roof with the fuel hikes.  Or about people who have worked and contributed for 40 years from virtual childhood (staying at school and tertiary education is quite recent in Italy) suddenly facing five more years.  There are zillions of technical studies on limiting pensions in equitable ways but she showed no sign of knowing them, never mind understanding them.  To add injury to insult the old and poor are  also having their greater need for health services and treatment met with cuts to free medicine.

When asked why property taxes were not being levied on the Church at all,  never mind raised like other people's,  Monti acknowledged they hadn't discussed doing that.  Well, he wouldn't, would he, getting himself on the telly waving the Pope off on trips and going to mass with the missus all the time?  So there's tax  introduced on prima casa  and rises on seconda casa,  but nothing on prima and seconda chiesa.

No cuts  to the admirals and the generals either - probably wasn't discussed.  And the only nod to encouraging growth is easing payroll taxes - for the South of course: wouldn't want the special status of the corrupt South disturbed would we?

This isn't technical governance - these people couldn't find their bottoms with both hands  in broad daylight - this is maintaining the political status quo which delivered Italy to its current public indebtedness, while creeping to the Brussels statist agendas.  Just wait until we all get back from the early December holidays next week (not to be confused with the Christmas holidays of course, they go on until 6 January next year) and then we'll see how Monti and his perben'isti mates get this disgrace of iniquity and inequity through.


There is a general strike on Monday next and another of state employees probably on 16 December (they have to give prior notice because of essential services being maintained).  The spread has risen above 400 again. [Now hovering in the 390s.]

Sunday, 4 December 2011

The Best Cartoon

                  Shingo Araki, 1 January 1939 - 1 December 2011.

Thursday, 1 December 2011

School for Scandal

The London School of Economics and Political Science has always been an institution that links more widely with governments and political elites worldwide than do many universities.  Economics and political science, too,  attract more contention than most fields of study - we all have  views and experience of LSE's central concerns for they are the central concerns of all our lives.  It is to the credit of the School that until the onset of the mass corruption engendered by New Labour governance it had kept clean hands and a clear head in much of what it did and is.  It might have been disliked, contested, accused of disruptive, even revolutionary tendencies (quite wrongly, this last, but truth-telling is often confused with  subversion) but it maintained its reputation for scholarship and research, and for the independence and distance that must be maintained by any university worthy of the name.

Lord Woolf's report on  his Inquiry into the School's relations with the recently overthrown Libyan regime and its dictator ends all that.  Couched in the careful clarity and understatement of inquiryspeak it  illuminates a hinterland of collapsed political and administrative standards,  moral standards even, that typified New Labour's Third Way and its exponents and practitioners.