Economía de la Eurozona. Viabilidad de las uniones monetarias

Tendremos un seminario online organizado por la Fundación Rafael del Pino el próximo 17 de diciembre de 2020 a las 18.30 hora de Madrid. Para seguir el seminario en directo, puedes acceder a la pagina de la Fundación a través de www.frdelpino.es. Estaré acompañado por Luis de Guindos (Vicepresidente del BCE) y Pedro Schwartz (UCJC). Se trata de un seminario con motivo de la publicación del libro que he co-editado con Alessandro Roselli y Geoffrey Wood, titulado “The Economics of Monetary Unions. Past Experiences and the Eurozone” (Routledge, 2020). Aquí podréis acceder a un resumen del libro. Se trata de un volumen que (1) analiza las uniones monetarias, y muy particularmente la del euro, en perspectiva histórica, así como (2) plantea los principales problemas que afronta la Eurozona y (3) ofrece las principales alternativas para resolverlos desde puntos de vista bien distintos.

Mi intervención con Pedro Schwartz se centrará en la necesidad de echar la vista atrás y ver qué nos enseñan experiencias monetarias similares en el pasado, así como sugerir un modelo de funcionamiento del euro que sea coherente, ya sea el del area monetaria descentralizada ‘a la Maastricht’ (que nunca se ha seguido realmente), o una versión más parecida a la creación de una moneda en un Estado (plurinacional) moderno; esto es, el modelo tradicional de una moneda, un banco central y un poder fiscal relevante en el centro de tal Estado, con capacidad para transferir riesgos y recursos entre los Estados Miembros.

Podéis mandar vuestras preguntas previamente a confirmaciones@frdelpino.es. Estaré encantado de hablar de estos temas y tratar de vuestras preguntas, aunque solo pueda hacerse ‘online’.

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The assessment of the eurozone: a measurement of its optimality (1999 – 2016)

‘How functional is the Eurozone? An index of European economic integration through the single currency’

This is the title of the paper I have just written with my good friend and colleague, Professor Pedro Schwartz (Camilo Jose Cela University in Madrid and University of Buckingham), which will be published in Economic Affairs (October issue, 2017).

We deal with a quite straight forward question: How can we measure the optimality of a currency area? When does it become more and more difficult to run a single monetary policy? If there are internal asymmetries in the currency area, how do they evolve? To answer, if only tentatively, these questions we have developed the method to calculate the index of optimality of a currency area, which we have split up in four major categories and components: (1) fiscal synchronicity, (2) public finance, (3) competitiveness and (4) monetary. Both the overall index and the above partial indices will inform us about the performance of the currency union and how internal asymmetries have increased or decreased. We have applied it to the eurozone, from 1999 to 2016. The results and calculations give us a metric to identify the building up of internal tensions in the running of the single monetary policy since the inception of the euro in 1999.

If only a chart, this is the summary of what we found in our research; in a nutshell, the adoption of the euro has not increased convergence among eurozone economies. The overall index of dispersion increased by 25% from 1999 to 2005 (see figure below),  and so asymmetries amongst member states even during an expansionary cycle. Of course, as expected, internal dispersion soared during and immediately after the outbreak of the Global Financial Crisis. This increase in dispersion in the crisis years ‘s not a symptom of the malfunction of the euro; what we should rather focus on is on the time taken for asymmetries to resume pre-crisis levels. Overall, even after 10 year since the start of the recent crisis, the optimality index still shows the Eurozone has a long way ahead to resume pre-2007 crisis levels (such as 1999 levels, when even countries joining the Eurozone were far from convergence).

 

 

This is the abstract of the paper:

‘This is a step in empirically assessing how near the Eurozone is to becoming an ‘optimal currency area’, as originally defined by Mundell (1961). For this purpose we have compiled ten indicators, organised them in four chapters, and summarised them in an overall indicator of ‘optimality’. The resulting picture is mixed, with zone optimality not increasing when circumstances were favourable but the trend towards integration returning after the 2008-2014 crisis. The suggestion is that dis-integration during the crisis, rather than an evidence of failure of the Eurozone when the going was tough, showed a self-healing mechanism at work. However our measurements and indices show that optimality is much lower than that in 1999.’

Feedback most welcome, as ever.

Juan Castañeda

 

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The Greek question once more: back to ‘Central Banking 101’ …

Very, very basic hints on how a fractional reserve and fully centralised monetary reserve monetary system works

It seems to be unnecessary but, given all it’s being said by all and sundry in the last two weeks, may I remind the kind readers of this blog that the current monetary crisis in Greece is just a textbook example of how a fully centralised monetary system works. I would have thought that the members of the recently appointed new government in Greece were well aware of the institutional and economic constraints of the euro, as well as the very much restricted range of manoeuvre a monetary union allows to its members. Let’s start with the very basics:

Under a fractional reserve and fully centralised monetary system such as ours, the ultimate source of liquidity is under the control of a central bank, the single issuer of the currency with legal tender power. The Greek economy (along with quite some other countries in the euro area) has been running persistent and quite significant current account deficits and, particularly since the outbreak of the 2007-08 financial crisis, has required the extraordinary assistance of the ECB. When no one was willing to lend out money to Greece, the ECB has not only taken part on the bail-out successive plan(s) granted to Greece but also, and most importantly, has been accepting Greek government bonds as collateral in its main refinancing operation with Greek commercial banks. The latter has been key to maintain a regular source of liquidity to the Greek economy and thus to avoid the collapse of its national monetary system and a run on Greek banks.

Along with the loans, the ECB (actually the so-called Troika with the other two institutional lenders, the EU Commission and the IMF) has imposed conditionality on the provision of the loans granted to Greece. And of course, this is the (natural) expected behaviour of any lender: those willing to lend out their money would like to be sure the borrower will be able to honour his debts. Needles to say that successive Greek governments have accepted the deal because no other international creditor was willing to make a loan to the country or to accept Greek bonds as collateral. Who else but your central bank could take such a high risk and keep on hoarding in its portfolio assets nobody wants? (By the way, all the shareholders of the ECB are contributing to these loans and supporting this continuous financial assistance in accordance to their percentage in the capital of the bank).

Now a new government in Greece is playing a quite risky game, with potentially disastrous consequences for the country. All along the campaign, Syriza has been denouncing the ‘imposition’ of the bail-out programmes and the loss of sovereignty of the Greek government in favour of the interests of the international creditors (let us leave aside the meaningless and populist rhetoric used by its dealers to refer to the bankers, capitalists and free marketeers as those wickedly pulling the strings in the shadow … ). They claim that the debt is unfair and needs to be restructured, if not partially or totally written off (may I remind one more time that a more than 50% ‘voluntary’ haircut was already accepted by private bondholders in 2012). Actually the new finance minister has been very busy in his recent road trip throughout   Europe to demand a change in the rules of the game; as if he was in a position to do so. Let me remind again few very basic facts in this regard:

– The more radical the demands of the Greek governments the more difficult it will become to find any other source of liquidity in international markets and thus the more dependent the Greeks will be on the single source of money available, the ECB. Actually the risk premium of Greek bonds has already exploded in the last two weeks and thus this situation has already materialised.

– The message that the Greek government couldn’t be willing to fulfil the conditions of the bail out programme has already increased capital flights out of the country and this shouldn’t be surprising at all (as it already happened back in 2012). And again, in this financially stressed scenario Greek banks are even more fragile and exposed to high liquidity constraints, which can only be sorted out by the assistance of the ECB (if willing to accept Greek bonds as collateral).

In this context we may well understand last week’s Mr Draghi’s reaction to the demands of the Greek government; in particular, his announcement that since next Wednesday Greek banks will no longer have access to the regular financing operations of the ECB via the ordinary discount of Greek bonds as collateral. This can only mean two things: either (hopefully) the precipitation of a new mutually beneficial deal between the new Greek government and the Troika or, if not feasible, the most likely sudden collapse of Greek banks as soon as the ECB stops providing liquidity to them on a regular basis. Well, perhaps another alternative might happen, which is the return to the national (devalued) currency (see an alternative in line with the introduction of more monetary competition in Europe here).

I do not know who advices the new Greek government on these matters but it would help to familiarise first with the very basics on money and central banking. All my best wishes to the Greeks of course!

Juan Castaneda

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How money is created?

A conversation on money, central banks (and much more)

GoldMoney has just published a very interesting video on money and the current Eurozone crisis. In the video, James Turk interviews Professor Pedro Schwartz (San Pablo University, Madrid) on how central banks create money in our days and on the risks of the current expansionary monetary measures announced and developed by two major central banks, the ECB and the Federal Reserve of the US. As you will see, Professor Schwartz masterly explains how money is created “out of the blue” and why he thinks the ECB is actually disregarding its own Statutes, that clearly establish the prohibition of lending to any national government. How is the ECB doing so? Very easy; by purchasing public bonds of the States in crisis indirectly, in the secondary markets, and by accepting those bonds as valid and unlimited collateral in the conduction of the standard open market operations. Doing so the ECB is actually loosing its independence from political bodies and governments, and it is expanding its own remit; which was just to preserve price stability in the Eurozone, and not injecting money to foster GDP growth in the short run or to finance the State(s). Professor Schwartz also talks about the risks of inflation in the medium to the long term coming from the current (massive) injections of liquidity of central banks in the money markets.

In sum it is a very clear and interesting video that I do strongly recommend not only to any student of Economics, but also to anyone interested in how money is created in our days.

You will find below the summary of the conversation as extracted by GoldMoney.

Juan Castañeda

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“GoldMoney’s James Turk interviews Prof. Pedro Schwartz who is the president of the Economic and Social Council of Madrid. They talk about bank regulation, the creation of money out of thin air and the beauty of the free market system.

They discuss how banks have expanded despite of government regulation which Schwartz in large attributes to the granted privilege of fractional reserve lending. Using this procedure a bank can create loans above the actual amount of deposits at hand and therefore create new money. This also leads to fragility in the banking system and to boom and bust cycles. Schwartz argues for a leaner and more effective regulation of financial markets as the current regulation has not worked in regards to the financial crisis.

They talk about the “tennis” between the Federal Reserve and the European Central Bank when it comes to the creating money out of thin air. Schwartz states that the ECB is disregarding the rules that were aimed to guard it from being influenced by political pressure. Despite the opposition of the German Bundesbank they are buying government bonds. This is equal to digital money printing and Schwartz scents that it is not being done for monetary policy, but for the stimulation of the economy which goes beyond the original remit of the bank.

However despite the injections of new liquidity by the ECB Europe is still in recession, because interbank lending has dried up. That means that banks are parking much of the liquidity back at the ECB. The big question will be what will happen to inflation once the economy starts to pick up again and those funds find their way into the real economy. Schwartz also questions whether it is a productive business when banks can make a profit by borrowing money from the ECB at 1% interest and then turning around to buy government bond which yield 5% or 6%.

A serious inflationary disaster will only be prevented if governments will succeed in reducing their deficits and stop selling bonds. Schwartz states that cutting government spending is the only viable solution to the problem. To accomplish this there has to be a change in social mentality so that people recognise that nothing is free and that the government sector has to shrink. In the end the market is the most efficient mechanism of allocating resources according to the wants and needs of people.

This video was recorded on 14 September 2012 in Madrid.“

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(Summary from: http://www.goldmoney.com/video/pedro-schwartz-on-the-creation-of-money-out-of-thin-air.html)

 

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