By Jacob Funk Kirkegaard, Research Fellow, Peterson Institute for International Economics. Originally published at VoxEU.
Lambert here: Logically, at least to binary thinkers, “to no ill effect” is the same as “to good effect.” But I’m not at all sure that’s what Kirkegaard means. And does anybody else look askance seemingly unmotivated footnotes? Or am I too foily?
* * *
Political pressures are rising again in Europe. This column argues that reactions in parliaments, central banks and on the street are well within the bounds of predictable reactions to hard times. These developments change nothing of significance in the calculus concerning the eventual success of the Eurozone crisis response.
After a quiet few weeks, political pressures are rising again in Europe. Petrol bombs exploding in Athens and news reports of mounting support for the rightist Golden Dawn party bring into questions the durability of the summer stabilisation in the EZ.
Yet there is little to indicate that these developments change anything of significance in the EZ crisis response. Greek protesters invariably fight with police, but so what? The Greek government is likely to agree on a further austerity package, despite the violence and the first strike by (mostly) public sector workers since the new coalition government took office. As for Spain, the government in Madrid presented their fifth fiscal austerity and consolidation package last week, despite a few thousand protesters in Madrid.
In fact the only example of public outrage having an impact in the EZ recently has come in Portugal, where protests have spread spontaneously against the government’s new proposal to shift social security contributions from firms to workers. The furore forced the government to withdraw this step, which had been aimed at increasing competitiveness by an ‘internal devaluation’. While Portuguese developments thus illustrate that widespread public outrage does – when present – lead to shifts in specific austerity and reform policies in the EZ periphery, concerns about the general political stability of the EZ periphery and general direction of reform policies are overblown. Indeed the main risk is that the protests merely make governments less bold on necessary reforms.
Two matters outside the EZ periphery have raised doubts that can be put to rest. First is the public scepticism voiced by the German Bundesbank and its president, Jens Weidmann, over the ECB’s new programme of bond purchases – known as outright monetary transaction, or OMF – to allay concerns about contagion. As I have noted before, this is largely German political theatre. In reality the Bundesbank’s criticism suits both Mario Draghi, president of the ECB, and Chancellor Angela Merkel of Germany very well. In their dealings with Prime Minister Mariano Rajoy of Spain, the role of ‘bad cop’ falls to the Bundesbank. Indeed, the political benefits for all the German political establishment (not just Angela Merkel) of the Bundesbank’s public defence of ‘traditional German conservative monetary policies’ go further than merely helping putting more pressure on the Spanish government to act. In practice, the Bundesbank’s opposition to the OMT programme is irrelevant, because the vote to adopt it at the ECB Governing Council was 22-1, over the Bundesbank’s dissent. In US Congressional political terms, the Bundesbank dissent is a ‘free vote’ of no consequence, politically similar to the House Republicans’ 33rd vote to repeal Obamacare.
But the Bundesbank’s lectures about the dangers of printing money to assist distressed banks and countries helps channel potential German conservative scepticism about European integration in a nonthreatening direction. With the Bundesbank publicly lecturing the ECB (and the IMF incidentally), there is less political space for other actors in Germany to make that case. Or put another way, the Bundesbank venting about ECB money printing pre-emptively takes the wind of potential German real populists by stealing some of their thunder as guardians of traditional German monetary policy virtues. This is important in a country where monetary and fiscal policy matters are never far removed from moral teachings. For the German establishment it is better that a known quantity like Jens Weidmann is articulating such traditional concerns in the public, rather than have them come from a populist platform of the maverick politician Thilo Sarrazin and others. Allowing the Bundesbank to dissent is reminiscent of Lyndon Johnson’s famous quip about keeping J Edgar Hoover at the FBI: that it was better to have him inside the tent relieving himself toward the outside, than outside the tent facing in.
A second question relates to what the ECB might do if the OMT programme and a separate action revamping its collateral requirements fail to restore market confidence in the EZ. Will the creation of a credible backstop in the EZ prove sufficient? What happens if the divergent borrowing costs for businesses and individuals in the EZ persist because of backtracking in Spain and delays in the creation of the European banking union? Will such problems aggravate what Draghi has called “unfounded fears about the future of the Eurozone” on the minds of global investors?
Since early 2010, the ECB has shown that it has unparalleled coercive crisis management powers to nudge EZ governments in the direction it wants. But even if the ECB decides to not unleash the full force of the crisis on EZ elected leaders again to get them to do their political homework, it retains a large arsenal of other measures to recreate the monetary transmission mechanism (i.e. ensure that non-financial firms and households in every EZ country faces the same cost of borrowing). Lowering financing costs for households and the non-financial sector in the EZ periphery can be accomplished by the ECB by loosening its collateral requirements to banks further by for instance accepting highly illiquid collateral or buying more private financial assets, such as the roughly €70 billion in covered (e.g. supported by earmarked collateral) bond purchases already acquired.
The political and economic implications of purchases by the ECB of covered bonds or other even riskier private asset classes is different from what they would be in the US. Because EZ countries retain their fiscal sovereignty and because the EU treaty bans monetary financing of sovereign bonds, the Securities Market Program (SMP) and potentially the OMT are more politically difficult for Frankfurt than buying more private assets. Recall that not even German monetary hawks paid much political attention to the ECB’s two covered bond purchase programs in 2010. It is the sovereign bond purchases that carry the political risks in the EZ, whereas more covered bond purchases and the like would probably be more acceptable.
By contrast, the US Federal Reserve has bought large amounts of treasuries and treasury-guaranteed mortgage bonds. But it, despite being legally able to buy these at short maturities, has shied away from US municipal bond purchases and – apart from crisis and bailout related programs like the Maiden Lane Special Purpose Vehicles in 20081 – generally not bought US private assets. This reflects the legal constraints on the Fed, which according to the Federal Reserve Act’s Section 14 is not allowed to conduct open market purchases of anything other than assets issued or guaranteed by the US federal government with the exception of municipal bonds with a maturity of up to six months. This design of the Federal Reserve Act in return reflects the alarm bells that go off in the US when the government is seen to be ‘picking winners’ in the marketplace. The hardest thing to do from Washington is to buy private assets.
In the EZ, however, the politics work just the opposite. The threshold for further ECB actions to secure the reinstatement of the monetary transmission mechanism through such non-standard measures as the purchase of private assets is much lower than in the US. The ECB might be explicitly barred from purchasing bonds directly from member states’ governments, but otherwise have a remarkably free hand in the markets as outlined by Article 18 in the ESCB/ECB Statute. It merely states that: “In order to achieve the objectives of the ESCB and to carry out its tasks, the ECB and the national central banks may operate in the financial markets by buying and selling outright (spot and forward) or under repurchase agreement and by lending or borrowing claims and marketable instruments, whether in euro or other currencies, as well as precious metals .” With the restoration of the monetary transmission mechanism now clearly defined as within the ECB’s objectives, there are in other words no real legal constraints on what additional non-standard measures it might take in the future to ensure this goal. Certainly additional covered bond and/or corporate bond purchases seem fairly straight forward options for Frankfurt, if required by market circumstances.
Finally, coming back to Spain, there are some danger signs surrounding the recent events in Catalonia and the cynical attempt by the Catalan government to exploit long-standing nationalist sentiments to divert attention away from the region’s deep economic problems. The decision by Artus Mas, the Catalonian leader, to call a new election on November 25 – two years ahead of schedule – to move toward a referendum on Catalan independence, must be seen as driven by the longer-term constitutional process in Spain. In 2010, the Spanish Constitutional Court rejected parts of a new Statute of Autonomy for Catalonia, which would have devolved more powers to the Catalan region, effectively granting it nationhood within Spain. Beyond the legal issues are objections in Catalonia, as a relatively wealthy part of Spain, to continue subsidising other parts of Spain though regional fiscal transfers within Spain.
Yet, despite all this and despite the largest separatist march in decades in Barcelona recently, the risk of secession by Catalonia is virtually zero. It is far from obvious that most Catalans would back such a step. Mas’s political gambit is likely to be seen for what it is – an attempt to divert attention away from a tough economic situation and to secure more powers for the region within Spain. It is also it is not obvious that the Spanish constitution can accommodate a move towards independence. Moreover, other EZ countries would not welcome a highly destabilising move towards Catalan independence. They can be expected to play hardball and demand that an independent Catalonia would have to re-qualify for EZ membership without being grandfathered into the privileges enjoyed by Spain as a member of the EU and the EZ. Like Scotland, Catalonia can dream. But there is no persuasive economic case for secession.
1 These emergency measures were legally carried out under the emergency powers granted to the Federal Reserve by the Federal Reserve Act Section 10A, allowing it to lend to various entities (such as Maiden Lane SPVs) provided that a super-majority of Federal Reserve Board Governors agree.
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The following segment comes from the opening of the article: “This column argues that reactions in parliaments, central banks and on the street are well within the bounds of predictable reactions to hard times. These developments change nothing of significance in the calculus concerning the eventual success of the Eurozone crisis response.”
Where do you find what are “predictable reactions to hard times?” Of course, a range of predictable reaction doesn’t exist. It the invention of the post writer. It turns out that citizens reactions “change nothing of significance in the calculus” in the EZ. The many corrections the ECB reluctantly made already where mainly due to the objections made by the countries where “predictable” protest were under predictable. To add insult to injury, how do we know what next year will bring? Kirkegaard doesn’t write history; he claims to offer analysis of current financial and political events.
Where did you find this guy?
The Peterson Institute! He’s practically official!
Edit: “than” should be “that”
The desires of those that rule those that govern are paramount. All else is meaningless.
Got it
hmm ….i am sure you know very good what mine (proclisi)
A.Merkel is smart
she do with (one roce bit 2 corner )one she say (iam not scary ) 2 she say is politice trip (because the economic you have to do waht we say)not change .so the caramela (i want the GR in EUZ) some inegorant believe ..IF GR DOESN’T WANT TO GO OUT SHE CAN NOT DO NOTHING SO IS NOT IN HER HAND .
GER thinking we can do the law in EU (i like to see beautifull dream too)WE are stupit and leave her to play with our money …
SPAIN …is the same situation with others country in EU not wors than IT SLOV FR GER AUST POL ..THEY HAVE POLITICE PROBLEM WITH CATALONIA ..some one there wanted to use for bad or some who????like in EU to have war ..because IF MERKEL wnated UNION EUR this can happening after 50-60 years …I DONT LIKE THE POLITICE THEY USE …in WW2 was GER who destroyed the world (and did not pay for that ) now we are 2012 so times have change ..they have forget the people have very much power …
ciris is artificial infaltion is artificial ..money is papers and we can burn and make new inflation is therem economic for one limit use ..and we can fix —————
thank you for your post .
You should format your post and make it readable.
Thanks.
citalopram, it’s a “translation” problem: “English” language text from an enthusiast thinking in a “foreign” language. (“The spirit is willing but the flesh is weak.”). It doesn’t seem like a “Google translation.”
Nonsense surrounded by flashing advertisements. How is this different from television?
Kirkegard seems to lack any real knowledge of the effects of austerity on real people’s lives.
Public outrage is obviously having no immediate effect on government action – that is why there is still outrage and why outrage is growing.
There comes a point where public outrage results in the country being ungovernable and you wind up with a new government. Whether the new government can solve the problems is a separate issue.
Germany will change its policies only when there are no alternatives – and then they will continue to be true believers and will resent whatever solutions are forced upon them.
Who are these “real people” of whom you speak?
In Greece, those real people might include those who can’t get a lifesaving prescription filled because the pharmacies lack the credit to pay for imports.
It might include parents who are on their own because their children have emigrated.
It probably includes those who are setting fire to buildings in Athens out of rage and frustration.
Other than that, did I misunderstand the question?
Not enough irony in your diet….
You’re right. But in my defense, I had been dealing with a few people on a ‘progressive’ site where this kind of question is their preferred method of “debate”.
I got tired of being asked for links when I mentioned that the sun rises in the East. When I mentioned war crimes in connection with Obama, I was actually asked which war crimes I was referring to. I presume they wanted a list.
Why does Germany have to change its policies?
Why can’t the ViceRoys in Spain and Greece simply change their policies by unilaterally announcing that they are leaving the EZ, are paying 5 cents on the dollar of their debt, and reedopting their legacy currencies?
By saying that you want Germany to change it policies, you are implicitly saying that you want (i) Germany to finance the budget deficits of the non-core countries, in the same manner that California residents finance the budget deficits of NM, and (ii) a US of Europe, comprised of 17 countries, with the non-core residents, via popular vote, squeezing the core-residents for all they’ve got.
I really wish that EuroPhiles would be more honest as they inveigh against Germany. I really wish that they would simply admit that they don’t like the nation-state and that they don’t like Germany.
Everything will be fine …
… Until the wheels fall off.
yeah I’m thinkin this post might a sign of the top, right before all hell breaks loose.
maybe today is the day to go big into UVXY.
It’s been a slaughterhouse for the past month, with a steamroller of contango crushing your trade like it’s a dead squirrel on the road.
You’ve got to work it with very shallow stops and just take the nicks and the blood. Cause when it flies it’s gonna fly like a rocket to the moon.
Could be. Listen to the Alperowitz video though. He seems to foresee a long slow grind, a permanent grind. (That’s how the intuitive part of me feels, though judgment is silent….) For myself, it’s the heating season so I don’t look more than a month or so ahead. It seems unlikely to me that the powers that be will let the system crash until after The Obama is safely re-elected. After all, he can negotiate The Grand Bargain by anaesthetizing the liberals and the progressives, which Romney can’t do, any more than Bush did. So there’s a lot of money at stake ha ha.
That is to say: The dead hand and zombie brain of Authoritarian Despotic Bureaucracy shall be severed from the Body Politic Becoming Vital Human Beings Engaged in Vital Exchange Together.
“The people that walked in darkness have seen a great light; and they that dwell in the land of the shadow of death, upon them hath the light shined.” (ISAIAH: 9:2)
We the People are awakening from hypnotic sleep. We are “Alive!”
DR. JILL STEIN 2012: TO WIN! Let our health begin with “good food.”
It’s sort of a sumo wrestling contest between sloth and rage.
It looks like nothing is happening, and it could go on this way for years, but if one somehow gets the uppper hand, Holy MOly the shit will fly in a nanosecond.
This is what the pinheads at the Institute for Nonlinear
Ephemeral Transformations think they can identify in advance and model with factors and agents.
I think the truth is, if you go behind the scenes, that they just can’t help themselves, like addicts.
Even a squirrel knows more than one way to gather nuts. But if you like the swagger of the Big Math Equation, well . . . :)
craazyman, “might [be] a sign of the top, right before all hell breaks loose” — you mean, like when Rasputin was “advising” the Czar and Czarina? like right before the captives were freed from the Bastille?
Hoping for a bloodless coup this time, through an “overnight success.”
Be careful with UVXY its designed to go to 0. Yeah, it will have a pop, but you have to time it perfect. You’re better off buying SVXY on dips, it’s designed to go to infinity.
To describe the risk of Catalan secession as “virtually zero” is disingenuos at best. Frankly, you’re engaging in wishful thinking. Catalan independence is a virtual certainty, along with independence for Scotland and Venice. Spain can continue to brutalise protesters and repress strikers, impose austerity and increase welfare for the rich, but the state cannot contain nationalist aspirations with the same measures. “Mas’s political gambit’ is far more likely to be seen as the only viable escape plan from a downward spiral of austerity in a failed state.
Not “you.” This is a cross post. I am more in agreement with you than the poster on Catalonia, Scotland, and (perhaps) the Basques, the North of Italy… Cascadia…
That said, I bet this post is a good indicator of what the official view is; they believe they can “ride it out,” and it’s going to be a grind, there as here.
Indeed, the pronoun was in reference to Mr Kirkegaard.
Kirkegaard doesn’t really look at austerity. Which must be an intentional tactic to some unspecified end in order to change the entire economy, but they are all pretending it is just German accounting. He looks at the result he chooses and calls it insignificant social unrest. He also avoids clear talk about just what better EU politics would look like. But the part that irked me was his comparison with the Fed, and by the time he was finished with that paragraph it was clear the Fed is just as bad as the EU banking vaudeville going on. I swear I see no difference between them. Except that here we can deficit spend and provide, at least on a small scale, some public good. But, lets face it, we only allow deficit spending here so we can surreptitiously support the military. The EZ should go straight to MMT, save themselves a lot of grief. It would actually restore and clarify their confused sovereignty.
I mean, how convoluted – this is clearly inspired by our system: The EU is looking at lowering collateral requirements, accepting highly illiquid collateral from private banks – no problem about all those MBS things… but buying sovereign debt is verboten – just like munis. What an ass-backwards way to run a “Union.”
Adressing private borrowing costs in the periphery would not be a solution, in my oppinion, if at the same time governments are squeezing private incomes and reducing company incentives to invest by reducing tax deductions from fixed asset amortization.
This is a fancy way of saying “screw democracy, bring out the hammers.” Nice to know what side this guy is on, as a friend of mine says.
It *seems* like the protests in Europe and the US are having no effect to speak of.
But … it may have been David Swanson who pointed out, that with regard to anti-war protests, you may not be able to tell if your protests are having an effect until years later, if ever. We don’t know what discussions the powers that be are having behind closed doors. We may never know.
Even when protests completely fail to influence the powers that be, other casual observers may be inspired and influenced. To this day, people are still being inspired by Emmett Till, Rosa Parks, and MLK.
Mass movements, like the abolitionist movement in the US, may take decades before they make a tangible difference. But if they keep growing, eventually they may reach a tipping point.
Myself, I see this as a long struggle that will could take years or even decades to play out.
“if they keep growing,”
Aye, there’s the rub – folks seem to be so easily spooked by such simple BS memes like “can’t win”, “spoiler”, TINA
If more folks had voted 3rd party in ’04 than in ’00, and more again in ’08, we would have a very different political scenario by now, ISTM ….
Valley Forge patriots we ain’t ….
“In fact the only example of public outrage having an impact in the EZ recently has come in Portugal, where protests have spread spontaneously against the government’s new proposal to shift social security contributions from firms to workers.”
[Disclosure: I’m of Portuguese descent.] The “impact’ of Portuguese outrage on the EZ is that of a cockroach facing a steamroller (an old joke I remember from grade school). We’ve been through all of this already with Greece, OK?
The general public is like a faithful old dog. You can kick him , starve him, and generally mistreat him and he will stick his tail between his legs and slink away. But do it once too often and he will bite. How many kicks can our so called leaders get away with before they get what they so richly deserve?
While some of us wax poetic, let W.H. Auden rise from the dead:
“Leap Before You Look”
“The sense of danger must not disappear:
The way is certainly both short and steep,
However gradual it looks from here;
Look if you like, but you will have to leap.
Tough-minded men get mushy in their sleep
And break the by-laws any fool can keep;
It is not the convention but the fear
That has a tendency to disappear.
The worried efforts of the busy heap,
The dirt, the imprecision, and the beer
Produce a few smart wisecracks every year;
Laugh if you can, but you will have to leap.
The clothes that are considered right to wear
Will not be either sensible or cheap,
So long as we consent to live like sheep
And never mention those that disappear.
Much can be said for social savoir-faire,
But to rejoice when no one else is there
Is even harder than it is to weep;
No one is watching, but you have to leap.
A solitude ten thousand fathoms deep
Sustains the bed on which we lie, my dear;
Although I love you, you will have to leap;
Our dream of safety has to disappear.
(December 1940)
Quoted from p. 244 of “W.H. AUDEN: COLLECTED POEMS” – Edited by EDWARD MENDELSON (New York, Random House, 1976).
“The way is certainly both short and steep,” – as we shall see.
For balance, read John Dolan’s critique.
http://exiledonline.com/w-h-auden-the-worst-famous-poet-of-the-20th-century/
cs, “The lady do protest too much.” Great cherry-picking from a punk.
I think I get your drift, but would you be more explicit. I’m not the “brightest whatever.”
Ah Auden, Ah Britten (Benjamin)
Ah The English Language!!
Night Mail
http://www.youtube.com/watch?v=Gmq
6mFAEqNQ
The entire 23 minute “film” in all
its glory.
http://www.youtube.com/watch?v=FkLo
Dg7e_ns&feature=related
mary, both links yield: “This video does not exist. Sorry…”
“to rejoice when no one else is there
Is even harder than it is to weep;
No one is watching, but you have to leap.
Our dream of safety has to disappear.”
Thanx for that – strikes a chord ….
Kirkegaard is asking us to take a leap of faith. His brand of thinking reminds me of how the ancien régime got to be the ancien régime: Those peasants are always getting drunk and breaking things. Nothing to worry about!