The EMF is a very good idea!! The others not so much may be...

France and German officials have voiced their support for an IMF like organisation for the Eurozone. This situation is part of the normal process of surviving a crisis. First you recognise that there's a problem (which is to say that you stop being in denial, because in economic terms the problem does not build up over night, it has been there and it has created a pretty little bubble on which people were happy to feed. Once it blows, then it is this amazing black swan that no one expected.). Then you come up with a short term solution for it (you patch things up), so that you can think of a good way to try and avoid the problem repeating itself. We are now at that stage in Europe, we have taken stock of what happened and are trying to figure what can be done to solve things. Of course it is difficult to sort through the noise of German and Greek nationalistic slur.

We have a number of things on the table:

First we have this idea by the ECB, that it should somehow possess a financial rating agency of its own. My understanding is that this was put forth by the Governor of the Austrian Central bank, but no one has really spoken out in favour or against it. Finance ministers are discussing it apparently...

Then we have also heard of the more serious proposal for a European System of Financial Supervisors (ESFS) within the framework of a European Macroprudential Supervisory Authority (EMSA?), , which has stirred enough interest for there to be hearings at the EP about it. This is a more official idea (details about it can be found here). It was put forth in the Larosière report drafted by a "High level group" on financial supervision, which is to say a group of credible and important MEPs. From what that article seems to describe the ESFS would be divided in three subcommittees:

The Committee of European Banking Supervisors (CEBS),

The Committee of European Insurance and Occupational Pensions Committee (CEIOPS)

The Committee of European Securities Regulators (CESR)

Finally, there's the EMF (European Monetary Fund) proposal, which was first put forth in recent days by the German Finance Minister Wolfgang Schäuble (analysis here). As the name indicates this would be a type of insurance company for European governments. Everyone pays an yearly premium for an "insurance" and then when the getting gets tough, the fund is there to lend money to whoever has not been able to keep its expenses in check. It is there to ensure that governments who mess up their public balance are still able to pay their debts (oddly enough by contracting even more debt, but at a nice rate) and it deflects public outcry from the affected country to the European Commission rather than to Germany

I think that the first idea is not particularly good... Getting a government agency in charge of determining who is worth what sounds too much like centralised price setting, which is inefficient. Public officials lack the self interest that private agents have in their pursuit of information. Secondly public institutions are more constrained in terms of the monetary incentives it can provide (particularly if one assumes that financial crisis will still happen, and that no single system can prevent them or guarantee that their size will be limited. That would be a little PR mess...). Thirdly, it would open the doors for a greater extent of agency capture in the financial sector. Finally, there's the opposite problem of agency capture by governments, who may try to exploit their new found influence by pushing this agency to provide their debt with inappropriately high quality ratings. In other words there would be a potential for selection bias in the value that this rating agency would attribute to government assets rather than to private assets.

So to sum up: lack of self intrest and a limited set of tools to provide incentives exacerbate, or at least fail to solve, the problem of asymmetries of information

agency capture from both private and public agents seems to create fertile grounds for future conflicts of interest and revolving doors. Regarding the second idea, I think further integration is a really good idea. I agree with the author of the Eurozone entry blog, that there is little point in creating this finacial supervisory authority if the structure is going to be overly decentralised. Of course the committees should be separate, but there should be a supervisory point where all financial sectors (Banking, Insurance and Securities) are aggregated for analytical purposes. These industries cannot be regulated separately. Over decentralisation would be tantamount to coordination under a new name, rather than actual integration/delegation of powers. Regarding the problems that I raised with the EU rating agency, these are absent here. In this sense, the ESFS would outsource financial rating to the private sector (Moodys and S&P, etc). My main problem really is about its name. Why call this a European Macro prudential Supervision? It Finance, not macroeconomics... It should be overseen at the EcoFin level, but more than that I can't quite see the Macro point of the ESFS... Finally I think that the last idea is really good. Although it has faced some opposition. Here are some links for further information> Here, der spiegel and business week ft and bbc Note that I think that the EMF would not suffer from any particular problem of Moral Hazard, as it would provide an incentive mechanism based on conditionality. This is not just insurance. It's insurance "if!". So that's good! Moreover, I believe that the risk is in the rigidity of the proposed conditionality. Too rigid and its intellectually dangerous. Too flexible and its economically useless. On the other hand it could be more targetted, taking advantage of the insider knowledge that the EU already has about the functioning of its member states economies, so that conditions could be targetted at certain economic sectors, political reforms and apply in the Longer rather than in the Shorter term, when appropriate. One of the problems of the IMF interventions has always been that its interventions don't have permanent effects. The risk is that once the EMF will be set up it will repeatedly rescue the same countries. This would be problematic, as self selection would propose that those who are not at risk would simply stop contributing, and instead decide to follow policies that minimise their exposure to their neighbours malpractice. If this logic makes sense then it would imply that poorer countries policies would crowd out foreign investment from the EU. Also check this link for some insights on the present discussions about budget and tax coordination.

US recognise Armenian Genocide. Turks should accept and recognise the native american Genocide

For the last couple of days there have been some quiet reports on the tensions between the USA and Turkey caused by a the fact that "the foreign affairs committee in the US Congress narrowly passed a non-binding resolution condemning as "genocide" the First World War killings of 1.5 million Armenians by the Ottoman empire".

I find this a positive step by the USA. I believe that having been the ones that caused this crime to be established, and consequently becoming the poster boys for it, has given Europe the honesty to call exterminations, by their proper contemporary name.

It is a non binding resolution and as such does not carry any consequences. It is tantamount to the USA recognising internationally and domestically that it is their held view that between 1914 and 1918, the Turks tried to get rid of the Armenians. This was obviously a dreadful development in the history of Turkey, but I don't see why they make such a fuss about it and get so offended. The history of mankind is filled with such collective bigotry and scape goating. Spain and then Portugal effectively commit such attrocities against the Jews in the Renaissance, and later towards the indigenous populations of their colonies in the new world. France did the same with the Occitans and the Hughenots, and if you really want to go back, the attitudes of the roman empire to those who unsuccessfully opposed it, were less than compassionate. As Thucydides put it in the History of the Peloponesian war,

“The strong do what they have to and the weak accept what they must.”

Now here is my idea. Turkey should not moan in a corner a nagg about how everyone is making it feel bad. Do what the Chinese do when the americans lecture them about human right! Lecture them back on the hypocrisy of a country that systematically eradicated its indigenous population over the course of 3 centuries lecturing a country that oppresses the sovereignty, the freedom of expression and association of one its minorities.

I am obviously not saying that because the americans treated their native indigenous population bad that it entitles the Chinese to do whatever they want, just because they don't actually want to eradicate the Tibetans or the Turkmen or the Uyghurs(or any other ethnicity for that sake). I'm saying that all this is played out as a shame and blame game in the media, despite the hypothetical presence of actual moral considerations. It's ultimately a cause of pride, which may shift somewhat the political support of the present government. Turkey should rise above, accept that it commited an attrocity that can be (and has been )qualified as a genocide, and then extend an open hand to the USA and say, "Why don't you follow our example? The truth will set you free!" Playing the shame game might just be the politically intelligent thing to do by the Turkish government of the time.

A potential macroeconomic interpretation of the last 2 years

I post the image underneath, in the hope that someone will make some comments. I'm not arguing that it is the best or even good description of what has happened, but it is the best I could come up with in a short period of time.

"AD" refers to the Aggregate Demand, "SRAS" refers to Short Run Aggregate Supply, and "LRAS" refers to Long Run Aggregate Supply. This should be thought of in the context of the Mundell-Fleming model, of an (large) open economy. AD corresponds to the equilibrium between the IS curve(representing the goods market Y=C+I+G+X-M, which one may choose to develop into: ) and LM (representing the money or financial market approximated by the function: M/P = L(Y,i) ).

LRAS refers to the long run equilibrium in the labour market, where Y=Y*, meaning when output is at its equilibrium level, and unemployment is at its natural rate (u=u*), given the NAIRU (Non Accelerating interest rate of unemployment also known as the expectations augmented Phillips curve, given by: π = π* -φ(u*-u)+ s)). The SRAS is then given by: Π= (Π^f) + φ (y-y*) +s'

My biggest problem is with the implications of exchange rate regimes particularly because I haven't quite yet gone through the full model for floating exchange rates.

All of these formulas are taken from "Introducing Advanced Macroeconomics", written by Sorensen and Jacobsen. They give a much better explanation of this type of analysis than I do. Nonetheless, as the tittle proposes this is the first draft. It is more intuitive than anything else. Prettier versions in upcoming posts might prove more fitting, as I'll have finished teaching myself this type of analysis...

Anyway, please leave some comments. :)

MEP Nigel Farage and his complaints

Here's Nigel Farage, the leader of the UKIP in the European Parliament. For more on him, check wikipedia and this article.

As the following clips show, Mr Farage has decent points, but his cynical and personal rhetoric typical of the Westminster Parliament, does not work so well in a sensitive Europe. Where as in the UK that rhetoric is acceptable, and normal, in Europe it becomes offensive and is unacceptable. He has good points, but wouldn't they be better made if they were put according to the rules of the game everyone else is playing?

Sarkozy, Lisbon Treaty, Van Rompuy and Lady Ashton, Van Rompuy and No apologies to Van Rompuy

On another note, I feel sorry for the members of the European parliament who can't speak either French, English or German, but still try. They ought to make better use of the translators. The bulgarian lady who talks about "popo" is just sad...

So what do you think about the Lisbon treaty? Should there have been a referendum? Was it worth having it? Was it possible to come up with a better treaty, and if so which one?

Government run Ponzi Schemes - Call the IMF!!

So, aside from the brief and recent comment posted yesterday, I haven't written much lately, which is good. It means I have a life. :) However, I think I ought to write something about this whole Greek mess, so as to at least have a reminder of these troubling times for the future. I have five comments about this mess:

First, why on earth is any country allowed to finance the payment of debt itself with more debt? Greece is (today) struggling to pay its debts, so it borrows to pay the debts. Why do markets even lend it the money, given the rather poor growth prospects that Greece is faced with?... It's likely that they have lent some money to Greece at lower interests in the past which now require more lending to get paid. Therefore the idea is that high interest yielding debts pay for low yielding debts. As long as lenders believe that Greece will pay, they keep on lending. So the risk really is to get to a point where Greece loses credibility, because then it will no longer be able to borrow. (this is a bit messy...). As a friend of mine reminded me, this cannot technically qualify as a Ponzi Scheme, because there are no asymmetries of information as the people purchasing Greek bonds are aware of the state of Greek finances and the implications. Indeed it is possible that the Greek government might be the one being defrauded…

Secondly, it is interesting to see the aggressive comments coming out of Greece, about German WWII reparation payments and about Anglo-Saxon media and financial conspiracies... It’s evident that the first two are political manoeuvres to confuse the electorate and shift the blame from the present government to other people. Nonetheless, I must say that the financial conspiracy does carry some weight. I’m not saying that there was any wrong doing. I’m just saying that there is enough evidence to make me believe that it would have been interesting to investigate whether there was collusion between the major lenders to Greece, the last time that it issued its debt. This idea is motivated by the fact that someone recently brought to my attention the fact that although the German bund spreads on Greek debt went up massively the last time they issued debt, the demand for it was massive. This would imply that lenders had estimated an increase in the risk of Greek defaults, but still found them to be attractive enough to want to purchase them. Because the Greek government really needed the money, its demand was rather flat, and inelastic. If there was collusion between the major financial players, then in real terms they would have behaved like a monopolist, supplying cash at an interest equal to their marginal revenue, not their marginal cost. So to go back to the beginning of this paragraph, I’m not saying that there was any wrong doing. I just think its natural to investigate whether the collusion that seems to have taken place was natural, tacit and logical or whether there was some type of explicit agreement between some of the financial actors. Both situations are possible, but only the first is legal.

Thirdly, it was interesting to read Eichengreen's article about why the Euro will not collapse, due to market arbitrage (ie: if Greece was to leave the Eurozone, firms would know that it would devalue its currency, and as such would move their assets abroad before this, so as to not have them devalued) and to practical concerns of paying machines and cash dispensers, as well as the cost and time of producing the new currency itself.

Fourthly, one thing that is becoming more talked about is the consequence of the default for other EU member states as the interdependencies in the EU financial sectors might mean that Greece defaulting on its debt would destroy the assets of some other member states financial institutions. (As illustrated in that article: This in turn would freeze lending in EU markets as markets once more become unable to distinguish between good assets and bad ones, as they did when Lehman fell. This might cause companies to go bankrupt, because they are dependent on some type of lending from the financial sector, and to consequently fire more people. Depending on the size of these interdependencies, we could either have a little glitch or another financial crisis on our hands. Lovely...

I must say that in light of all this, and particularly in light of the stupidity of some greek politicians it might actually be better to bring in the IMF. At least that way the Greeks will stop blaming other Europeans. Moreover I don't think Germany is in the mood to help a country where a government official says something like what the Greek deputy prime minister said and the government does nothing. (Actually I wouldn't be surprised if on the eve of a German led bail out, he would be fired or retire for “personal reasons”, that most political of euphemisms…) "Let the IMF let loose the Washington consensus dogs of war"

A less interesting situation, but one which takes me back to my Varieties of Capitalism days, is the understanding of why people are protesting in the streets of Athens. On this issue, there are two interesting paths to explore here. The first one is that Greece probably lacks a substantial export sector other than its shipyards (which is not little, but probably not overwhelming). This in relation to other insights on labour force reactions to economic policy and industrial relations makes me feel that the default position for labour is protest, not refrain. If it was, then Greek workers from exporting industries would protest against the protestors (for that sake the same would apply to Danish workers when Denmark joined the Deutschmark area). The other thing is that myopic self interest really is a strong force. I mean, Greece is really in a mess. If it does not tighten its belt, it will really have to default on interest payments of its debt. This would bring about a number of painful consequences, where the little business existing in Greece would leave, thus increasing unemployment, and decreasing wages, which is basically what the EU is asking Greece to do. The difference is that business would not leave if Greece did it without defaulting on its debt. However, public functionaries don't really seem to care much about that... I may sound cruel and cold, but the truth is that Greece has no alternative. One way or another it will have to decrease wages. The choice is between the process, ie whether it wants to be coerced into doing that by basic economic mechanisms or whether it decides to do so voluntarily.

Portugal, GDP and the ageing

From a comment posted at: http://sic.sapo.pt/programasInformacao/scripts/videoplayer.aspx?ch=plano-inclinado&videoId={FBD1FC34-B5D8-4DF4-9067-89FFC97615DD}

The dark curve is the growth of GDP, and the light blue is the growth in population of retiring age. As long as the dark curve is above the blue curve, the state can keep or increase its expenditure on pensions. Once the blue curve overtakes the dark on it must start to reconsider its fiscal expenditure or at least start taking money from somewhere else to spend it on pensions.

There's obviously a cyclical element to pension policy, whether the state is a key player in the pension system or not, caused by economic cycles.

The world for the last month and a half

So the last post was... December 5, 2009. What's happened eversince? 1st: Greek statistics are useless aparently. So much so that the EU might end up with audit powers! 2nd: The commissioners have all more or less lined up before the european parliamentary committees. The Bulgarian nominate got kicked out after the Socialists decided to show they could bark and the rest were not ready to see if they could bite as well. The issue was incompetence and political malpractice for not abiding to the rules. In the end there were documents showing that everything was fine. Then again if Greek statistics suck, I can see why some people might not have given much credit to the document. Ultimately it's irrelevant, the issue was political I guess... 3rd: Oh yes, the Copenhagen summit on carbon emissions and the survival of the planet. Let's hope we don't depend on it. If there's something that we can learn from it it's that the developing world is quite strong. Not only that but it would seem to me as though the developed world and the under developped world shared a common wish (though for different reasons) that there be emission reductions. However the developing world seems to be quite powerful these days. More over it might be interesting to reconsider the BRIC (Brazil, Russia,India and China) and replace it with the BASIC (Brazil, South Africa, India and China) as this article argues. 4th: Russia and Belarus exchanged pleasantries over oil, but Europe has so far had a warm enough Winter. 5th: Governments and firms are having to pay a lot for the money they want to borrow, probably because of the risk associated withlending to countries who are facing high deficits and have little prospects of enormous economic growth. (high interest on sovereign debt and on corporate bonds, implying low demand and high supply of bonds) 6th: 2 huge earthquakes have devastated Haiti. In an already poor country infrastructure (what little there was) was more or less completely destroyed. 200 000 people died. The world nonetheless seems to have united in a pledge to help the country. In related news, Sweden has donated less money to that country than Angelina Jolie or Brad Pitt. I hope this means more about Brangelina's commitment than it does about Sweden's, or Poland's for that sake. On a more personal note I've been absent because I have been working on an upcoming article to be published by the European Public Choice Society, on the dynamics of Fiscal Federalism and whether and when there is a "Race to the Bottom". The conclusion is that there is, but the revenues of the subnational polity must be independent of transfers from the central national state. Moreover the policy areas on which this competition occurs cannot enjoy a lot of visibility or relevance to the electorate. When the article will come out I'll put some extracts here. Thats all for now. Hopefully I'll be able to write something more soon.

Lagarde seems more enlightened...

The FT has a nice little report on David Cameron and the EU, here. Moreover, here's what Damian Chalmers has to say about selective EU law. How would he deal with the incentive for time inconsistent promises from the national council and the resulting conflict of interests. The problem is the same as the one face in the implementation of the SGP in the Eurozone: The people who are expected to carry the burden of rules (ie to be punished by them) should not, alone, be the ones expected to ensure that they are well implemented. If everybody can chose what they want, than everybody will be selective. If Damian Chalmers logic applied, the Single market agenda would have never gone forward. Trade-offs are the costs of functional coordination. Without the CAP and regional policy, there would not have been enough support for the single market. I believe however that Damian Chalmers does actually have a point, although the 15 meter rule about the fireworks is not a bad idea and would do a good job at protecting people, if people are stupid enough to want to violate it, then for god's sake, do it. There's just too much human stupidity for governments to contain. However if anyone is to decide which EU laws are constitutional or not, it should be the ECJ. My EU law is a bit rusty, to say the least, but doesn't the ECJ already do this, deriving its power from article 230 TEC? If so would it not be more appropriate to just add a provision in one of these treaties, stating that EU law is supreme over national law, except on those matters whereupon it affects aspects of national culture which do not disrupt higher goals of EU law, or something like this (what I mean is to make a law which would ensure that competition in the single market is not disrupted and that EU integration is not disrupted, but that if a silly amendment is included which disrupts national cultures, if these are harmless, where these national, cultural practices are harmless there is no reason to create conflict, and impose rule from above). Thus I propose that instead of Chalmers proposal for national EU law review councils (which FYI is what parliaments already are...) the ECJ ought to fulfil its role of judicial review, possibly aided by a treaty provision which ensures that harmless national cultural practices should not be disrupted. Then again blowing up in a fire work accident does seem harmful enough. Then again, what do I know... He's a EU law specialist! Finally, Christine Lagarde, French foreign minister has very interesting insights on the financial crisis, discretionary fiscal policy, automatic stabilizers, and on the effects of competition between China and the EU (although I assume competition of an economic nature, one is left to wonder whether her comments may also apply for foreign and military affairs) and how it may stimulate stronger cooperation between EU member states.

Free Online Academic courses from MIT

So apparently, Yale is not the only university posting free courses and materials online. Here's the equivalent from MIT.

Mr Herman van Rompuy, President of the Council of the EU

This is why Van Rompuy might be a good president of the Council of the EU. Summary: Consensus builder; from a small, core EU country; Why does this matter? Because the EU does not need a big ego. The EU system is not about one country or institution imposing its will but rather about the ability of political actors to reach consensus. This is obviously a problem for a country like the UK, used to majoritarian decision making typical of its FPTP electoral system. Tough luck though. You can't accommodate 27 different countries by giving them a president that tells them what to think. A Belgian might just be the best thing that happened to the EU. After all, if you can manage Flemish and Wallons, that's probably as good a practice for a EU job as there is. Regarding Turkey? No worries. He is not the only one with a word on the issue as the HRUFAS also has a vote on the matter. Regarding Van Rompuy's ability to stand up to Hu Jintao and Obama, I believe that the weight of 500 million EU citizens and 13 trillion $ of GDP ought to do the trick. After all the EU is the biggest trading partner of both of those countries.