Blog Post

Dealing with European sovereigns in trouble

What’s at stake: There has been over the last couple of weeks a series of comments suggesting that there could be some kind of assistance organised for Greece. The first instance of panic on intra EMU spread last year has been solved by massive ECB liquidity operations and an extension of the collateral list. As […]

By: Date: January 4, 2010 Topic: Macroeconomic policy

What’s at stake: There has been over the last couple of weeks a series of comments suggesting that there could be some kind of assistance organised for Greece. The first instance of panic on intra EMU spread last year has been solved by massive ECB liquidity operations and an extension of the collateral list. As the ECB slowly withdraws and returns to its core monetary policy mandate, an alternative solution needs to be found and this means the ECB is passing on the burden to fiscal authorities (i.e. Member States and the Commission). The no bail out clause theoretically prevents member states to explicitly take on the Greek debt but nothing prevents a solidarity mechanism to be created. There however needs to be a body enforcing more fiscal consolidation and this will hardly be the EU as its record is relatively poor.

Wolfgang Munchau says that the Greek crisis was started and fuelled by European leaders in what now looks like a very uncooperative and uncoordinated way of demanding fiscal consolidation. The ECB has also played an important role in signalling repeatedly (Weber, Trichet and even doves like Nowotny) that it would not twist its collateral eligibility criteria to suit one particular member state.

Simon Johnson says the Abu Dhabi-Dubai affair shows where Greece is heading. The global funding environment will remain easy for the foreseeable future.  This makes it very easy and appealing for a deep pocketed friend and ally (Abu Dhabi; the eurozone) to provide a financial lifeline as appropriate (a loan; continued access to the “repo window” at the ECB). Of course, there will be some conditions. But, in reality, there are many voices at the ECB table and most of them are inclined to give Greece a deal – put in place a plausible “medium-term framework” and we’ll let your banks roll over their borrowing at the ECB, even if Greek government debt (i.e., their collateral) is downgraded below the supposedly minimum level. So Greece has a carrot and a stick – and refinancing its debt is so cheap in today’s Bernanke-world, they will not miss the opportunity.  The important development is the role of the European Central Bank.  It is becoming a de facto International Monetary Fund (IMF), but just for the eurozone (or is that the European Union?).  It will lend a troubled country money, but only if the government does some of the hard fiscal work.  The IMF may have a role to play in budget advice and assessment for Greece, but it may also be squeezed out of a meaningful policy role.

Paul De Grauwe says that Eurozone governments should make clear where they stand on this issue. Not doing so implies that each time one member country gets into financial problems the future of the system is put into doubt. De Grauwe argues that the other Eurozone governments are very likely to bail out Greece out of pure self-interest because a significant part of Greek bonds are held by financial institutions in Eurozone countries and a failure to bail out Greece would trigger contagious effects in sovereign bond markets of the Eurozone. It is sometimes said that bail-outs in the Eurozone are illegal because the Treaty says so (see Wyplosz 2009 on this). But this is a misreading of the Treaty. The no-bail-out clause only says that the EU shall not be liable for the debt of governments, i.e. the governments of the Union cannot be forced to bail out a member state. But this does not exclude that the governments of the EU freely decide to provide financial assistance to one of the member states. In fact this is explicitly laid down in Article 100, section 2.

Sebastian Dullien and Daniela Schwarzer argued last February that the no-bail-out clause has no relevance in the current crisis and EU member states would bail out a EMU member with solvency or liquidity problems. The question is not only which instruments could be used to raise money (for instance a Eurobond), but also which legal base could apply. Although the financial assistance granted to EU but non EMU members (Hungary, Latvia, Romania…) would be hard to extend legally to EMU members, there are a couple of avenues to support a member. Article 100 TEC, section 2 could, for instance, be used as a legal base:  “Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by […] exceptional occurrences beyond its control”. While inapplicable to EMU members, the balance of payment assistance facility has established the legal and practical foundation for the issuance of the first Eurobonds.

Sebastian Dullien and Daniela Schwarzer argue in a recent post that there is a danger that market reactions drive Greece into sovereign default, if politics does not succeed to construct a clear link between a bail-out promise and very clear conditionality (in terms of reforms expected from Greece). In order to calm market reactions and especially prevent contagion, they argue that the EU should immediately set-out conditionality under which countries would get rescue packages. One condition could be that the national budget would have to be approved by the European Commission and the member states, for instance in the Eurogroup.

The ECB has released a particularly timely article in its ECB legal paper series on “Withdrawal and expulsion from the EU and EMU”. The author argues that a unilateral withdrawal from EMU would force a withdrawal from the EU but that an expulsion through legal means appears next to impossible but he reckons that the use of the euro might still be possible by the departing country, although without the rights and privileges associated with full EMU membership. The use of the euro could be de facto or consensual (cases like Monaco, the Vatican…).

*Bruegel Economic Blogs Review is an information service that surveys external blogs. It does not survey Bruegel’s own publications, nor does it include comments by Bruegel authors.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More by this author
 

Blog Post

It’s hard to live in the city: Berlin’s rent freeze and the economics of rent control

A proposal in Berlin to ban increases in rent for the next five years sparked intense debate in Germany. Similar policies to the Mietendeckel are currently being discussed in London and NYC. All three proposals reflect and raise similar concerns – the increase in per-capita incomes is not keeping pace with increases in rents, but will a cap do more harm than good? We review recent views on the matter.

By: Inês Goncalves Raposo Topic: Macroeconomic policy Date: July 8, 2019
Read article More on this topic
 

Blog Post

The breakdown of the covered interest rate parity condition

A textbook condition of international finance breaks down. Economic research identifies the interplay between divergent monetary policies and new financial regulation as the source of the puzzle, and generates concerns about unintended consequences for financing conditions and financial stability.

By: Konstantinos Efstathiou and Bruegel Topic: Banking and capital markets Date: July 1, 2019
Read article More on this topic
 

Blog Post

The June Eurogroup meeting: Reflections on BICC

The Eurogroup met on June 13th to discuss the deepening of the economic and monetary union (EMU) and prepare the discussions for the Euro Summit. From the meeting came two main deliverables: an agreement over a budgetary instrument for competitiveness and convergence and the reform of the European Stability Mechanism (ESM) treaty texts. We review economists’ first impressions.

By: Bruegel and Inês Goncalves Raposo Topic: Macroeconomic policy Date: June 24, 2019
Read article More on this topic
 

Blog Post

The campaign against ‘nonsense’ output gaps

A campaign against “nonsense” consensus output gaps has been launched on social media. It has triggered responses focusing on the implications of output gaps for fiscal policy under EU rules, especially for Italy. But the debate about the reliability of output-gap estimates is more wide-ranging.

By: Konstantinos Efstathiou and Bruegel Topic: Macroeconomic policy Date: June 17, 2019
Read article More on this topic
 

Blog Post

The inverted yield curve

Longer-term yields falling below shorter-term yields have historically preceded recessions. Last week, the US 10-year yield was 21 basis points below the 3-month yield, a feat last seen during the summer of 2007. Is the current yield curve a trustworthy barometer for future growth?

By: Inês Goncalves Raposo and Bruegel Topic: Global economy and trade Date: June 11, 2019
Read article More on this topic
 

Blog Post

The 'seven' ceiling: China's yuan in trade talks

Investors and the public have been looking at the renminbi with caution after the Trump administration threatened to increase duties on countries that intervene in the markets to devalue/undervalue their currency relative to the dollar. The fear is that China could weaponise its currency following the further increase in tariffs imposed by the United States in early May. What is the likelihood of this happening and what would be the consequences for the existing tensions with the United States, as well as for the global economy?

By: Inês Goncalves Raposo and Bruegel Topic: Global economy and trade Date: June 3, 2019
Read article More on this topic
 

Blog Post

The next ECB president

On May 28th, EU heads of state and government will start the nomination process for the next ECB president. Leaving names of possible candidates aside, this review tries to isolate the arguments about what qualifications the new president should have and what challenges he or she is likely to face.

By: Bruegel and Konstantinos Efstathiou Topic: Macroeconomic policy Date: May 27, 2019
Read article More on this topic More by this author
 

Blog Post

The latest European growth-rate estimates

The quarterly growth rate of the euro area in Q1 2019 was 0.4% (1.5% annualized), considerably higher than the low growth rates of the previous two quarters. This blog reviews the reaction to the release of these numbers and the discussion they have triggered about the euro area’s economic challenges.

By: Konstantinos Efstathiou Topic: Macroeconomic policy Date: May 20, 2019
Read article More by this author
 

Blog Post

Is an electric car a cleaner car?

An article published by the Ifo Institute in Germany compares the carbon footprint of a battery-electric car to that of a diesel car, and argues a higher share of electric cars will not contribute to reducing German carbon dioxide emissions. Respondents rejected the authors’ calculations as unrealistic and biased, and pointed to a series of studies that conclude the opposite. We summarise the article and responses to it.

By: Michael Baltensperger Topic: Digital economy and innovation, Green economy Date: May 13, 2019
Read article More on this topic More by this author
 

Blog Post

All eyes on the Fed

Last week the US Federal Reserve left the federal funds rate unchanged and lowered the interest rate on excess reserves. We review economists’ recent views on the monetary policy conduct and priorities of the United States’ central bank system.

By: Inês Goncalves Raposo Topic: Global economy and trade Date: May 6, 2019
Read article More on this topic More by this author
 

Blog Post

Is this blog post legal (under new EU copyright law)?

How new EU rules on using snippets from news publishers and on copyright infringement liability might affect circulation of information, revenue distribution, market power and EU business competitiveness.

By: Catarina Midões Topic: Macroeconomic policy Date: April 8, 2019
Read article More on this topic
 

Blog Post

Secular stagnation and the future of economic stabilisation

Larry Summers’ and Łukasz Rachel’s most recent study documents a secular fall in neutral real rates in advanced economies. According to the authors, this fall would be even more marked in the absence of offsetting fiscal policies. Policymaking in a world of permanently low interest rates may be hard to navigate, especially in troubled waters. We review economists’ views on the matter

By: Inês Goncalves Raposo and Bruegel Topic: Macroeconomic policy Date: April 1, 2019
Load more posts