Baltic Business Research

Sammanfattning;
Som ekonom har jag upplevt en hel  del riktigt allvarliga kriser: USA:s hyperinflation, Latinamerika-krisen, den svenska krisen, Tequila-krisen i Mexiko,  Asienkrisen,  Rysslandkrisen,  subprime-krisen med dess globala spridning och nu senast (den partiella) eurokrisen. Jag har dock sällan noterat en sådan bristfällig intellektuell behandling av en kris med stora dimensioner som denna gång. Det kan gälla förslagen om euro-obligationer, om skapandet av två eurozoner mm.  Alltför många kommentarer och förslag är föga genomtänkta. Frågan är,  i vad mån denna otillräcklighet försvårar och förlänger den pågående krisen inom EMU.

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Poorest intellectual dealing with a major macro/financial crisis!
My own analytical experience from economic and financial crises includes a range from the hyperinflation in the U.S. some 30 years ago up to the ongoing euro crisis. Today, by far too many spontaneous comments and proposals are made with unbelievable shortage of intellectual accuracy. Many times even rubbish is said and produced. This is a serious shortcoming that probably worsens and prolongs the ongoing (partial) financial crisis in euroland. 

Players on financial markets don’t understand politicians – and vice versa!
Despite some certain historical memory, I cannot remember that a major economic crisis has been accompanied by intellectually so many unsophisticated comments, ideas and premature conclusions. Politicians foresee mare dream scenarios – even from outside the EMU area – with former British prime minister Gordon Brown as a negative example very recently. Within EMU, the open ”North/South confrontation” of top politicians contributed a lot to puzzle financial markets. Financial markets, on the other hand, do not understand political strategy and the game (theory) behind it. Neither do financial markets really understand that political processes can be very complicated and can take quite some time.

Private government risk taking – a good or bad idea?
Recently, German chancellor Angela Merkel launched the idea that private investors in the future should take some risks when purchasing government bonds. Financial markets, of course, got very confused and angry by this idea. The verbal reaction by financial markets was logical: If this was going to happen, they will not invest in government bonds from shaky countries – which would have negative effects on exactly the weak countries! Indeed, this could be the outcome for some time of a risk-sharing change. On the other hand – when applying historical experience – we know, too, that after normalization of a previous crisis high yields become popular again for investors (which brings down the high long-term rates). This should/could also happen in the aftermath of the current acute crisis, even with a risk-sharing system for new bonds. Risk sharing may even result in better early warning signals.
However, I find that discussions on strategic issues like future risk-sharing should be delayed until more normalized circumstances, particularly since the idea has quite some logic. Furthermore, big fundamental changes like private risk sharing of government bonds, should be discussed from a position of relative common strength in the union and not during financial hurricanes.

A new “North” and new “South euro” – what a horrible idea!
Another crazy topic of discussion is the idea to create a  new EMU system with a northern and a southern euro (maybe plus Ireland). What a horrible idea! This would mean a lot of bad consequences: ongoing European political and probably economic divergence, “A and B teams”, increased foreign debt for the “B team” after a necessary major devaluation, much higher funding costs and visibly higher interest rates for the “B team”, serious troubles for many banks in the northern area because of all their financial exposure in the southern area, etc. It’s hard to believe that suggestions like a northern and a southern euro are discussed at all. And the question remains: Would all southern European countries really like to join the “B team”? I don’t think so.

Creation of eurobonds  – another way of creating “A teams” and “B teams”
This approach is not bad at the first sight but very questionable after some deeper analysis. It is mostly favored by politicians in weak E(M)U countries, but also by Luxemburg’ s well-respected prime minister Jean-Claude Juncker (who also works as the president of the Euro Group within EU). The creation of eurobonds would imply that there should be created an EU institution for issues of common government eurobonds, related  to a given limit for a country’s public debt related to GDP (40%?) – with relatively low interest rates as the main result.
These lower rates would be achieved by the eurobond issues of the new institute – thus switching higher yielded old national bonds into common eurobonds with markedly lower costs for the new issues (senior bonds). Issues above the supported level (junior bonds) would be made at a country’s individual market condition – certainly at higher rates than in the eurobond case. This (substantially) higher national rate is only one disadvantage of a eurobond system. Another one may be  the shrinking incentive to combat increasing budget deficits. A third disadvantage would be the risk of more formal classifications into A and B countries. The biggest risk, however, would be that the existence of senior bonds would allow for attacks by financial markets on the whole euro system.      

Unlimited bond purchasing programme by the ECB  – would it work?
Fortunately, this approach is mostly suggested in academia – and it should stay there. It’s not a bad idea in theory. Investors who speculate against the EMU/the euro would get burnt at some point and lose a lot of money, according to the supporters of this plan. But I never would bet that such a strategy must succeed. Besides, liquidity in the economy could increase by far too much, and, thus, create future inflationary problems. Not to forget the further deterioration of the collaterals that are accepted by the ECB!

Conclusion:
In this blog, I only gave a limited number of bad or at least questionable ideas that have been coming up only recently. It would be desirable that possible contributions to a more stable EMU system could be the result of more second and third thoughts than so far.

PS: The comments on the European and the global financial crises I myself appreciate the most are the ones made by Barry Eichengreen, professor at Berkeley. In my eyes, he’s the best expert on international financial markets.