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Commentary & analysis with a focus on European economic policy

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The IMF on Greek debt – redefining chutzpah?

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A definition of chutzpah is murdering your parents and then claiming social benefits as an orphan. It is not widely recognised, but the IMF illustrates similar brazenness in the current debate on Greece’s debt burden.

While not exactly pretending to be an orphan, the IMF is currently getting a lot of sympathy for its position: it has come out increasingly strongly in favour of debt relief for Greece. On realistic assumptions the debt burden is unsustainable. The country can only recover if there is substantial debt relief. Its most recent debt sustainability analysis claims it was forced to provide loans when the euro crisis broke, alongside European institutions, against its better judgement, but now only massive debt relief will work.

Its realism has been welcomed, and contrasted favourably with the EU (and its German paymasters), which against all reason are insisting on more-or-less full repayment of past loans. In so doing the IMF has been feted by Greek commentators, the many EU citizens/taxpayers sympathetic to the plight of Greek citizens, and much informed economics commentary.

One certainly does not need to think of the IMF as a murderer. But one should be aware of three things.  First the IMF was not simply an innocent [Read more…]

Same ECB medicine, higher dosage – good but more needed

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The ECB has announced a further expansionary shift by beefing up a range of existing policy instruments. Barring unexpected positive shocks this will not be enough to break out of a deflationary environment and convincingly underpin growth and a rapid reduction in unemployment. For that to happen fiscal policy must turn expansionary and/or the ECB must cast caution to the winds and adopt new tools. At the press conference following the policy announcement ECB President Draghi gave a tantalizing glimpse that new tools may indeed be on the way: we may yet see monetary financing of fiscal policy, or helicopter money as it is popularly known. [Read more…]

The right way for Germany to persuade the ECB to raise rates

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The “E” in ECB stands, lest it be forgotten, for “European”. It is the central bank of all the countries belonging to the Euro Area. It is also thanks to the Treaty and its own statutes independent of instruction from European and national public bodies. This does not prevent national lobbyists, commentators and politicians from giving it unsolicited advice, however, particularly when ECB policies are perceived to be out of line with the real or supposed “national interest”, or that of the social group in question.

Germany is something of a special case in this regard, for a number of reasons. It is the EU country most clearly associated with inflation-hawkism and, related to that, upholding the idea of central bank independence. It is the largest Euro Area economy. In theory this makes it less likely that its economic needs will differ widely from those of the currency area as a whole, creating pressure to seek changes in the monetary policy stance. Yet, in practice Germany has been something of a Euro Area outlier. It would have needed lower interest rates for much of the pre-crisis EMU period and would not, by itself, require the extraordinary expansionary measures pursued recently by the ECB. Lastly, its size, economic performance and the nature of the euro crisis mean that Berlin very much calls the policymaking shots in the EU as a whole.

It is against this background that we should reflect on reports that Chancellor Merkel is today meeting Mario Draghi and has been urged by party officials, Bundesbank president Weidmann and lobbyists from the German financial sector to – how to put this delicately? – persuade the ECB president to bring low interest rates and quantitative easing to an end sooner rather than later. [Read more…]