On ifo’s accountability bonds

In a recent press statement, ifo’s President Clemens Fuest argues for second-tier „accountability“ bonds that would allow debt above the current limits of the Maastricht criteria, but with strings attached. From the statement:

Fuest and Becker propose that states only be allowed to finance 0.5 percent of their annual economic output with normal bonds. Should they run higher deficits, the excess debt should be subordinate i.e. it will only be repaid after other debts, must not be bought by the ECB, and should also only be held by banks with higher equity cover.

He continues to argue that such bonds would have far higher interest rates than regular bonds, thus discouraging states from using them to much.

Unfortunately, we have seen the great interest rate convergence across the Euro area prior to the crisis, where spread vis-a-vis German bunds collapsed to almost zero, not accounting for risk differences, because the market participants‘ assumption was that states will be bailed-out, and they won that bet because Europe blinked.

Long term interest rates in the MU12, Source: ECB

I do not see how second-tier bonds (a while ago a similar concept was called red bonds) would not be susceptible to the same hazard. Why should anybody assume that a country defaulting on accountability bonds would not be rescued as well?

Any threat of default on sovereign debt is just not credible in Europe given the bailout programmes and the ECB’s quantitative easing. As long as there is this lack of credibility, Europe’s crisis will linger on.

A good thing about Fuest’s accountability bonds is, however, the requirement that only well-capitalised banks may hold them. In fact, we should require this for all, especially top-tier government bonds if we are serious about breaking the doom-looop between national budgets and bank budgets. But there is no need for another class of bonds to make that happen, only political will.

See also the article in Die Welt: https://www.welt.de/finanzen/article162087078/Top-Oekonom-schlaegt-Suenden-Bonds-fuer-Europa-vor.html

I thought we were past that

In a recent interview with the FT, Peter Navarro, an advisor to Donald Trump claimed the undervalued Euro to be an implicit Deutsche Mark and would benefit only Germany at the expense of our fellow Europeans and, of course, the US.

Hoo boy.

OK, I know that facts are not a particular strength of the new US government, but still, at least the assessment of the situation is correct: The Euro is probably undervalued vis-a-vis the Dollar, if you believe in The Economist’s Big-Mac-Index and thus in purchasing power parity. Given the more robust labour market and the recent monetary tightening of the Fed as compared to the Eurozone’s mess and still ultra-loose monetary policy by the ECB, the claim that the Euro is undervalued isn’t really a stretch.

Also true, undervalued currencies usually, ceteris paribus, benefit exporters of which Germany has a lot. But most of our exports go to Europe, i.e. the claim that Germany would benefit unfairly from the undervalued Euro is not as strong as you may think. In 2015 (oh facts again!), only 9.5% of our exports go to the US (https://www.destatis.de/DE/ZahlenFakten/GesamtwirtschaftUmwelt/Aussenhandel/Tabellen/RangfolgeHandelspartner.pdf?__blob=publicationFile) How exactly our exports to other Eurozone-countries are subject to the (external!) exchange rate is beyond me.

But for the sake of the argument, let’s assume for a second that Germany is benefitting unfairly. The obvious remedy for this would be an appreciation of the Euro vis-a-vis the Dollar, and to do this the ECB should stop its ultra-loose monetary policy and start raising interest rates better sooner than later. Wait, what? Yes, this is basically what Jens Weidmann and Wolfgang Schäuble demand for quite some time now. The allegations that Germany would keep the exchange rate towards the Dollar artificially low is nonsense, at best. And even if, there are some compelling arguments of why the ECB has adopted an ultra-loose monetary policy: weak labour markets in the south, under-capitalised banks, over-indebted governments, etc. Better export opportunities for Germany are merely a side-effect. We can talk about whether the ECB’s policy is adequate or what exactly drives Germany’s exports (non-substitutability perhaps?) or whether purchasing power parity holds, but going back to mercantilist thinking of the past fits the US goverment’s economic thinking: they are not thinking at all.

Repaying Germany’s debt is a good plan, but there is a better one

Politics discuss what to do with Germany’s federal budget surplus of a bit over €6bn. Wolfgang Schäuble, the finance minister, wants to repay some of Germany’s outstanding debt, which is generally a good idea. First, Germany violates a Maastricht criterion by having debt of more than 60 per cent of its GDP and as we have seen in the European debt crisis, high public debt can at times be very dangerous.

Now, usually me as a „fiscal hawk“ would agree with Mr Schäuble. But given Germany’s robust growth (1.9 per cent in the last quarter), the general improvement of the federal budget and the fact that we fall behind schedule in investment (see slide 5 of the above presentation by the finance ministry), I would rather suggest to keep the €6bn in the coffers and try to focus more investment (e.g. broadband, infrastructure and education) to bring the money where it is actually needed.

Deutsche Bank and the curious case of surprisingly low fines

After some two weeks of falling stocks, talk about a merger with Commerzbank, musings about bailouts, bashing of its investment banking arm and reassuring statements by all sort of politicians (and competitors!), Deutsche Bank yesterday made a somewhat impressive rebound at the stock markets. Preceding was a rumour, that it may face fines only worth €5.4b instead of the previously floated €14b.

Deutsche Bank and the curious case of surprisingly low fines weiterlesen

Some thoughts around Brexit

On Friday morning I was shocked, probably just like everybody else. In the course of the day, that shock became anger. As such, I refrained from writing about Britain’s imminent quitting the European Union, fearing that it would only be a rant. Over the weekend, I have spoken with people about it, heard different opinions, read analyses, laughed about jokes and sorted my thoughts. This post might still be somewhat rant-ish, but very much less than if I had written it on Friday or Saturday (luckily I was busy otherwise). I will not deal with Brexit as such, there are already enough analyses about this disaster, but I will focus more on related thoughts about society, democracy and politics.
Some thoughts around Brexit weiterlesen

ECB’s bond purchasing programmes are reckless in several ways

Even though the European public is by now used to ludicrously large sums the amount  of the ECB’s latest interventions should raise concerns. The QE programme for sovereign bonds saps up bonds worth €80b every month, a quarter of it German. Now the ECB has put their eye on another way to shower the continent with freshly printed money: corporate bonds. As if sovereign debt QE wasn’t problematic (and ineffective for that matter) enough, as the experience of last year showed. ECB’s bond purchasing programmes are reckless in several ways weiterlesen

QE is no debt relief

There was a little Twitter exchange on the nature of the ECB’s QE programme between Paul de Grauwe and Marcel Fratzscher. Paul sees QE as a sort of debt relief and asks why the ECB grants such relief to Germany, France and Italy but not to debt-burdened Greece. If you think of QE as a sort of debt relief, Paul’s question is legitimate, after all Greece would benefit most from a debt relief. But that is not what QE is or should be. QE is no debt relief weiterlesen

Enforcing Rules Is Important

A while ago on a German train station, I saw a conductor telling a group of people that smoking is prohibited in this station. He was laughed at and ignored. Later on a passenger next to me on the train told the conductor, how glad he was that he stood up to the smoking people and reminded them of the rules. The conductor replied that it is sadly not in his power to enforce the smoking ban in German stations – and not his job for that matter. This would be the job of DB Security, a subsidiary of Deutsche Bahn, who (together with the German Federal Police) is responsible for the security of German train stations and have the means to enforce the rules. The passenger complained that all the security personnel  making their rounds do rarely remind  people of the smoking ban and even more rarely enforce it. An observation I can confirm. The conductor shrugged „A lot is changing“ to which the passenger replied „Unfortunately“.

We could now dismiss this little story as an unimportant chat of people unhappy about change, but I think there is more to it. It is not a story about change but about rules and how unenforced rules makes people unhappy.

Enforcing Rules Is Important weiterlesen