“The I.M.F is Telling Europe the Euro Doesn’t Work”. So the New York Times titles an article about a hitherto ‘secret’ imf ‘public debt sustainability analysis’ through which the fund, after just six years since the beginning of the so-called ‘Greek crisis’, realizes that the debt is (beg to differ: was made to be, by the fund itself, the ecb and the european commission) unsustainable. More on this document elsewhere and back to the title of the NYT.
The NYT’s interpretation of the imf assessment is, of course, legitimate. It is also plausible, I believe. Is it relevant? In what follows I argue that it is not, specifically: that the creations of political creatures, such as a currency is, does work under the strict condition that the Institutions set up to rule and manage it are, indeed, Institutions (capital I). I argue that the ecb is no such thing, and in particular that it does not what it was set up to do and be.
A short autobiographical note
This is just to help remember where we come from. In the decade 1985-1995 reasons to ditch the Italian Lira in favour of the Euro were abundant and simple:
- Inflation was around 20% yoy
- Yields on TBills were, by world standard, ludicrous
- International lenders’ trust on the government and its ability to serve the debt scarce and falling
- Argentina was looming large.
In plain English: fear was the buzzword, fear shared by many, many honest people, people who saw the shortsightedness of competitive devaluations and the need to move to a framework within which a discredited national government (as proved by interest rates on TBills) would be ‘replaced’. What was of particular concern to us was the relationship that the Italian Treasury had with the Italian Central bank, with the latter being used as the cash-cow of the former. I (we) knew true joy (in these matter) when Carlo Azeglio Ciampi took the reins of the Italian Central Bank. But then, again, the Berlusconi devaluation of 1992-1993, welcome by the political right and by zillions of small and micro-enterprises whose low level of competitiveness had not been allowing them to compete on the world markets at 1988-1992 nominal exchange rates.
After signing the Maastricht Treaty, enthusiastically we adopted extremely restrictive monetary and fiscal policies to meet the Maastricht criteria. And we made it. Professor Prodi had promised that to get in we would have to shed ‘tears and blood’, and we did. And we made it in.
What excited us most was that we would be in a place with an ‘independent central bank’, a central bank that would not finance the government as a matter of routine, a central bank that would not obey the government’s dictat (the governments’ in the new arrangement). In short, a central bank that would work for its money, the Euro.
[Needless to say, but better say it, I/we was/were aware of the warnings issued by Paul Krugman and Joe Stiglitz, and we took them seriously. But this is where fear more than filled the gap between their reasoning and our needs.]
Fast forward: end of June 2015. Has the ecb been working for the Euro? NO.
Well, we can search both journalistic and academic sources. On the journalistic side, on June 23 Claire Jones writes on the Financial Times that “ECB holds the trigger in Greece stand-off”. Harsh expression, “holds the trigger”, but it gives a good idea of the gravity of the situation. And the article is good, especially where it points out that “Some on the council, made up of the six members of the ECB’s executive board and the 19 heads of the national central banks of eurozone member states, are itching to fire a shot at Athens” (emphasis added). As we now know, well more than a single shot was fired: Since February, Greek banks had had to apply weekly for additional emergency liquidity assistance; but since Friday the 19 of June they were required to apply daily. And on June 28 they were cut off entirely.
I find it important to emphasize that the strangling is going on even as the Greek Parliament is in session: I never imagined that a bunch of civil servants, to whom the neoclassical principle ‘marginal revenue=marginal cost’ does not seem to apply, could do this to my currency!
On July 6 Martin Sandbu of the Financial Times writes: “ECB, enemy of the euro? Strangling Greek banks is legally and economically unjustifiable”. Everybody will remember that the ecb cut off Emergency Liquidity Assistance to Greek banks on June 28, after a referendum called by the legitimate Greek government had been announced and for the entire week preceding the referendum itself. This is astounding: the central bank that was supposed to be independent of governments’ wills steps into the political scene and strangles (Martin Sandbu word, which I subscribe to) the commercial banks of a country while its citizens are called, rightly or not is not the issue here, to express their will on the most relevant issue they have faced in decades. Obviously, the ecb is the major instrument that austere governments use in this contingency to discredit a legitimate government and nurture fears that voters are necessarily prone to. Indeed, how is that possible? Why did the ecb default on its institutional role of liquidity provider for solvent banks? Nowhere we have seen a document stating that Greek commercial banks are not solvent: simply, they were illiquid, and it is a mandatory duty for the ecb to provide liquidity to illiquid, yet solvent, banks.
Next question: is it the first time that the ecb doers not fulfill its mandate and becomes subservient to political will? On the academic side, a July 3 post by Paul De Grawe, formerly of the University of Leuven and more recently at the London School of Economics and Political Science, titles “Greece is solvent but illiquid: Policy implications”.
Now, this is hot stuff, for De Grauwe shows that not only Greek banks are simply illiquid and not insolvent, but that the Greek Government itself is illiquid but solvent!! Here is the passage of the article I think crucial: “The ECB follows the Bagehot principle, which states that the central bank may lend money only to those institutions that are solvent but illiquid. The ECB assumes that the Greek government with a headline government debt of 180% of GDP is not solvent. Therefore, it is not willing to involve the Greek government bonds into its OMT-and QE-programmes. In contrast, the ECB is ready to buy government bonds of other countries in the Eurozone, which have a higher effective debt burden than Greece,…The refusal by the ECB to treat Greece the same way as the other member-countries of the Eurozone is erroneous and is based on a misdiagnosis of the nature of the Greek debt”. Misdiagnosis: Incompetence? Political will?
On June 29 Charles Wyplosz, Professor of International Economics with the Graduate Institute in Geneva as well as Director of the International Centre for Money and Banking, post an article under the title “Grexit: The staggering cost of central bank dependence”. Very nice paper this one as well, out of which I would like to point out a remarkable statement (which I made myself many times over the years, but obviously not as forcefully and clearly as Wyplosz does here): “…the ECB must accept its share of responsibility for the disastrous management of the Greek sovereign debt crisis. It was the ECB that refused in early 2010 a write-down of the Greek debt (Bluestain 2015)”. Doubts, anybody?
Finally, let me signal to the patient reader a very nice post on 10 July by Simon Wren-Lewis, a Professor of Economics at Oxford. The title of this contribution by Wren-Lewis? “The Non-independent ECB”. Rather straightforward, I’d say.
In the way of a conclusion
Research by high-level academics and economic journalists strongly supports my own belief that indeed this is not the ECB I dreamt of. Was it not Mr. Draghi himself who said in the Summer of 2012 that the ecb would do “whatever it takes” to save the Euro? Just economic policy through words. The facts? Cutting off Greek banks from the ELA program was pretty much the single most powerful act liable to push Greece out of the Euro and thus start the process of Euro demise. [At the moment I am writing this, Greece is still a member of the EMU: a fact for which I thank Mr. Tsipras.] Having seen all this and performing accurate comparisons, I have come to the conclusion that Herr Schäuble and Frau Merkel, usually blamed for the failure of the Euro, i.e. Grexit, found in Signor Draghi the staunchest of their supporters.