Saturday, April 27, 2013

Will the ECB Cut Rates?

Brad Plumer, citing Benn Steil and Dinah Walker of the CFR, argues that the answer to the question isn't as simple as it might appear.

Consider this graph:

And this discussion from Steil and Walker:

The ECB’s official inflation-rate target is “below, but close to, 2%.” Both Portugal and Greece have inflation under 1% , but the transmission mechanism from ECB rates to business borrowing rates in those two countries has been virtually severed by the crisis. In short, they need a rate cut, but the ECB can’t deliver them one.
In those Eurozone countries where the monetary transmission mechanism is still working normally—Austria, Finland, France, Germany, and the Netherlands—the GDP-weighted-average inflation rate is 1.8%, right near the ECB’s target. … Some will argue that a bout of robust inflation in the north is just what is needed to restore competitiveness in the south. But the ECB will have to willfully ignore its price-stability mandate if it is to justify a rate cut right now, and it will almost certainly need to apply more radical tools if it is to aid the south quickly.
In short, Europe is a more diverse and disparate region than, say, the United States. It has a single market and a single currency, but its constituent economies have not converged. That makes the central bank's job difficult and impedes progress toward a more centralized economic executive.

The "Political Crash" Ahead

Mediapart sees a "political crash" ahead. This has been a decisive week in the euro crisis, according to the paper. The dam has cracked, and a torrent of criticism of austerity has come pouring forth from all sides, as I've reported in previous posts. Distrust in the EU has reached alarming proportions:

It's all quite sobering. What is more, the Bundesbank drafted a report for the German Constitutional Court questioning the legality of the ECB's Outright Monetary Transaction policy, which is the only thing holding the euro together. Yanis Varoufakis sees this report, which has now been published, as either a huge error by the Bundesbank or else a deliberate strategy to sabotage the ECB and precipitate a euro crisis. "It is not within the purview of the ECB to ensure the irreversibility of the single currency," wrote the Bundesbank. As if it wished to see Germany out of the Eurozone. Here is Varoufakis:

Three statements make this is bombshell of a deposition. The first openly questions whether the ECB has a mandate to preserve the integrity of the euro; that is, to prevent the currency’s collapse. The second, in reality, questions the joint decision of Mrs Merkel and Mr Draghi to keep Greece in the Eurozone. And the third challenges Mr Draghi’s oft-stated conviction that the ECB’s broken monetary transmission mechanism should be mended as quickly as possible. Taken together, these three passages constitute an act of war against the euro as a coherent currency; especially in view of the fact that they are official depositions by the Bundesbank to the German Constitutional Court for the purpose of invoking a constitutional ban on Mr Draghi’s monetary stance.

Dissolving the Eurozone in the Name of Social Democracy

David Lizoain means to provoke: since the crisis does not appear to be producing a swing toward social-democratic majorities across Europe, he argues, perhaps the only hope for social democracy is to dissolve the euro. The logic may be flawed, but the thought, once unthinkable, is increasingly voiced aloud in both the periphery and core of Europe.

Lizoain's final point is that "dissolution would be easier if initiated by the strong partner (Germany), rather than by the periphery. If solidarity cannot be achieved through a progressive reform of Europe’s economic institutions, then perhaps it is time to consider taking them apart." The new German party Alternative für Deutschland would be only too happy to oblige him.

But could dissolution be achieved without exorbitant costs? Conventional wisdom says no, but I am told by a researcher working on the problem that there are numerous historical precedents in which dissolution of a currency union proved far less costly than predicted ex ante. Then the question is, "Would the EU survive a dissolution of the eurozone?" My sense is that it would not. Although the distinction between the two is sharp in principle, the politics of the situation blurs these sharp boundaries. Except for AfD, nearly all of the political forces calling for withdrawal from the Eurozone are also hostile to the EU.

Would the collapse of the EU be a disaster? I am old enough to recall the days when the EU stood not for the thin end of the neoliberal wedge, as anti-EU forces consider it today, but for perpetual peace in Europe after a singularly bloody half-century of war. To be sure, the Single Market has in some respects become an arena for the continuation of war by other means. Germany's dominance in a context of free trade and single currency is no accident.

In theory, the gains from trade should be shared, and indeed the periphery has gained a great deal, but in this period of adjustment, the gains are mostly forgotten and the pain of adjustment is paramount. Some fear that Germany is more redoubtable as a trading partner than it ever was as an armed conqueror. That is a dubious proposition. The peripheral countries need to reflect on their wherewithal to succeed in economic competition. Whether they want to make the changes necessary to do so should be a matter of democratic choice, not imposed obedience. But painful change will be necessary either way: maintaining the EU will require deep structural change, but dissolving it will be wrenching in other ways.

The UMP Finds Its Angle of Attack

Alain Juppé is leading the pushback. François Hollande has "broken faith" with Germany, raising a "mortal peril" for France (really?). Bartolone and Cambadélis have called for "confrontation" with France's primary European partner, and either Hollande is complicit in this or else he is a weak president who cannot command his troops and is facing an internal rebellion within his own party. François Fillon is taking a similar line, but he expressed himself in more measured terms, in part because he was in Germany yesterday.

Somewhat more surprisingly, Le Monde more or less echoed Juppé in its lead editorial:
Soit ce langage belliciste est autorisé en haut lieu, et c'est inquiétant. Soit il ne l'est pas, et c'est tout aussi inquiétant, puisque cela impliquerait que le président ne tient pas ses troupes. La réalité, c'est que le PS est en train d'imploser sur la question de la politique économique du gouvernement.
The paper also found a prominent Socialist willing to defend its defense of Germany policy (which it mutes by calling the Socialist attacks on German policy and on Germany's leader attacks on "Europe" by untamed "populists"):
Elisabeth Guigou, présidente – socialiste – de la commission des affaires étrangères de l'Assemblée nationale, ne s'y est pas trompée. Les propos de M. Bartolone, a-t-elle dit, sont "nocifs", voire "dangereux". On aimerait entendre des prises de position aussi fermes de la part du président de la République : le débat d'idées avec l'Allemagne, oui. L'affrontement, non.
Meanwhile, we have a German Social Democrat, Martin Schulz, head of the European Parliament, taking the side of the French dissidents--the first German to do so, to my knowledge:
Les gouvernements des pays de l'UE vont "beaucoup trop loin" dans la politique d'austérité, juge le président du Parlement européen, le social-démocrate allemand Martin Schulz, dans un entretien avec le quotidien belge L'Echo samedi 27 avril.
So, at last, an actual debate about European economic policy is under way. There is little hope that it will lead to a significant change of policy. There are German elections in the fall, and Germany is not about to change course now.  But we might hope for some discreet loosening now and a broader rethinking of policy after the elections--if unrest does not break out in one of the countries squeezed by austerity before then.

Is Europe's New Language on Austerity Real?

Politicians on the left who have long campaigned against austerity worry that the softer tone on spending cuts adopted by Mr. Barroso and others will bring only policy tweaks on the margins. “Are we just fiddling while Rome burns?” asked Udo Bullmann, a German Socialist. “Europe is burning,” he told Mr. Rehn in Parliament on Thursday.
Pervenche Berès, Socialist chairwoman of theEmployment and Social Affairs Committee, is skeptical that signs of greater flexibility will result in a dramatic change of policy. “They still want to kill Keynes,” she said, referring to the British economist John Maynard Keynes, who believed that fiscal stimulus, not contraction, is sometimes the best solution to crisis. “They always make minimal changes at the very last minute when they have no choice,” she added.