Schengen has some inconvenient consequences

While Europe’s ongoing economic crisis has revealed fundamental construction errors of the economic and monetary union, the migrant crisis reveals similar faults with Europe’s borders-be-gone Schengen scheme. If the Schengen accords are to survive – and by all means they should – we have to come to terms with the consequences of near-abolishing all internal borders, even if they are hard to accept for politicians and voters. Until now, these consequences were either unknown or ignored, a laziness we can no longer afford. Schengen is an integral, visible and practical part of the peaceful European unification and has to be preserved for practical, political and economic reasons. The pursuit of ever-closer union entails costs, some of them political, such are Schengen’s costs. But as the personal and economic benefits of the accords greatly outweigh the costs, European politics and voters must accept a certain sovereignty loss. Although Schengen is over twenty years old, its completion was not pressing until last year’s onset of the migrant crisis – or it was not seen as pressing. However, it is pressing now. Schengen has some inconvenient consequences weiterlesen

The IMF, Greece and the ECB

There have been leaks of alleged minutes of an IMF high rank conference call about Greece. Allegedly, Poul Thomsen, Director of the IMF’s European Department and his colleagues agreed that Greece only decides on the brink of default (p. 6). While Thomsen is right that Greek decisions are taken in the most effective way only close to default, there is little the fund could do about it. Greece is technically insolvent and is only able to keep on going with the extensive support of the ECB (and the ESM), in fact it is only political will that keeps Greece afloat, so the whole arrangement is near-default anyway. So, the only institution able to exert influence on Greece is the ECB. But the fund is not at all in a position to have a sizeable influence on the developments in Greece anyway, neither economically, since the Greek debt is guaranteed by the ECB’s various unconventional monetary policy programmes, nor politically, since they are currently not taking part in the „rescue“ programme. The IMF wants a debt cut (which German chancellor Angela Merkel refuses) and will until then stand on the sideline. The IMF, Greece and the ECB weiterlesen

Helicopters are for real disasters

So, everybody and their grandmas are discussing something so absurdly wacko, that just a few years earlier, even mentioning it could very well cost you your professional reputation. But in times of QE and negative rates, the perception of „throwing money off a helicopter“ is relatively less crazy. In absolute terms of course, it is still nuts. Helicopters are for real disasters weiterlesen

Inflation is inflation is inflation. Or not?

New numbers of the consumer price index sparked again a debate about what monetary policy can do to fight off European deflation and thence the economic glum across the continent. In brief, in February the HICP fell by 0.2 percentage points an an annualised basis. Since the average HICP is the ECB’s preferred gauge for „inflation“, this would suggest further loosening of monetary policy – not to mention that monetary
policy is as loose as it never has been, and this for years. So you may have noticed that I have put the term inflation in quotes, since inflation is something else, but not (really) the change of the HICP. Inflation is inflation is inflation. Or not? weiterlesen

A central bank cannot monetise away a liquidity trap

As was expected, today the ECB cut its penalty interest rates on banks‘ deposits further into negative territory to 0.4 from 0.3 per cent. Additionally, the ECB also cut its main refinancing operations rate to zero from 0.05 per cent and increased the volume of its QE purchases to 80 billion Euro per month, from 60 billion. As always, the ECB cited sub-par inflation due to slow credit growth as the reason for this policy move.
To my mind, this policy move is merely cosmetic, to keep up the mirage of the ECB’s prowess, where there is actually nothing Frankfurt’s Ostend can do to end Europe’s slump. For years now, Europe is stuck in a liquidity trap. And as we all know, in a situation where the transmission mechanism is broken, more liquidity will not help, that’s why it is called a trap. It seems worth to repeat, that no central bank, no matter how powerful, can monetise away a liquidity trap. Not even the ECB, not even with the fancy, shiny new policy tools of negative rates or QE. Europe’s problem is not liquidity supply, given QE and ultra-low interest, ultra-long provisions, money is everything but scarce. But two features of Europe’s economies make all this supply virtually void.

A central bank cannot monetise away a liquidity trap weiterlesen

Anfa is not as bad as thought but still bad

A bit more than two months ago in early December, there was much fuss about the ECB’s secret Anfa (Agreement on Net Financial Assets) and how the Central Banks of France and Italy allegedly misused it for additional monetary easing to the tune of roughly half a trillion euros, by buying sovereign debt. The public outrage over a secret agreement and using it to circumvent the prohibition of monetary financing, prompted the ECB to first release an explainer, that Anfa was quite the opposite of what was speculated in the media – but nobody believed it and politicians and economists (including myself) demanded the agreement to be made public. And on February 5th, the ECB did publish the text, along with the signatures of the NCB governors, the technical appendix and an extended explainer. Unfortunately, the agreement is a rather unreadable document, but nevertheless, I read through it and came to the conclusion that Anfa is actually bad, but not as bad as we may have thought. Anfa actually does what the ECB claims, namely to limit the amount of assets the NCBs may hold for non-monetary policy purposes. But there are several catches. Anfa is not as bad as thought but still bad weiterlesen

Anfa must be revealed and ended

Last week’s „discovery“ of the secret Agreement on Net Financial Assets (Anfa) that seemingly even ECB President Mario Draghi was not quite aware of (or he was ad subsequently was embarrassed by being caught), showed that matters at the core of the Eurosystem are rotten.

Anfa shows three things: First, some people in the ECB Council must be explained that public trust and transparency are modern central banks only working instruments; second, the decision-making process in the ECB council is in effect worthless; and last, even technocratic expert gremium need either checks and balances or must be greatly curtailed in their freedoms.

Anfa must be revealed and ended weiterlesen

Fiscal transfers without controls are a bad idea

Yesterday, France’s economy minister, Emmanuel Macron, suggested the Euro Area should have a permanent fiscal transfer mechanism that diverts funds from rich members to poor members. A fiscal transfer scheme between (semi-)sovereign nations without any controls is a really bad idea even for the members of a monetary union. Fiscal transfers without controls are a bad idea weiterlesen