Getting Ready for the 23 April European Council

The European Council will meet by video conference next Thursday.  When it does, the three main items on the agenda will be to approve the recommendations made by the Eurogroup on 9 April, to push forward the conversation about a European Recovery Fund, and to restart and restructure the talks about the upcoming multi-annual financial framework.  In English, that means the conversation will be about money.  Like any conversation about money it will be difficult.  The opportunities for misunderstanding are everywhere.  Now is a good time to sort out some of the issues.

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Why Share Risk through the ECB?

I am an American – an outsider – not a European. I have been studying and living in Europe for a while; I wrote my doctoral dissertation on Dutch politics; I spend more time now looking at politics in Italy. Alongside that political interest, I have spent much of the past thirty years looking at European monetary integration. Europe has taught me a lot, but there are still many things I find confusing. Top of the list right now is that the governments of the euro area would rather accept a higher shared risk in the ECB than they would face if they agreed to share risks through an institution specifically designed to raise credit in the markets. This strange choice about how to share risks matters because the risks the European face have never been greater.

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Citizens of the World and Citizens of Nowhere

During her first address to the Conservative Party as Prime Minister of the United Kingdom in October 2016, Theresa May made it clear that: ‘if you believe you are a citizen of the world, you’re a citizen of nowhere. You don’t understand what the word “citizenship” means.’ Moreover, this was not an off-the-cuff remark. As she explained at the top of the speech, May was setting out her governing philosophy. And central to that philosophy is what she called ‘the spirit of citizenship’, which she defined in terms of ‘the bonds and obligations that make … society work,’ ‘commitment to the men and women who live around you,’ and ‘recognising the social contract’ in a way that puts ‘local’ people ahead of people from ‘overseas’. That sort of thinking is attractive, but dangerous — now more than ever.

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Paolo Gentiloni: Macroeconomic Governance in the Crosshairs

Paolo Gentiloni began his tenure as European Commissioner today by giving an interview in Corriere della Sera. He spoke about a number of the major issues the new Commission has to face, but the part of the conversation that made the front page ran something like ‘the reform of the European Stability Mechanism is not a threat.’ Flip to page three and the title is even more explicit: ‘There is no plot in Brussels against Italy.’ European macroeconomic policy coordination is politically explosive. Gentiloni is the Commission’s first line of defence.

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Brexit and the British Ruling Class

The British ruling class once governed the world; now they struggle to govern the United Kingdom. The political parties are splintered, the people are divided, the institutions are in conflict, and the gap between England, Scotland, and Northern Ireland continues to widen. Worse, the British government has once again failed to negotiate to secure a majority in parliament to exit the European Union or to come up with a convincing plan for how to leave without one. Now the British head to the polls in the hopes that the people will deliver a clear verdict on how they want to proceed. The results may prove decisive. The worry is the voters may return another hung parliament — leaving the British ruling class to sort out what to do next.

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The Battle for Post-Crisis Europe

Europe needs a ‘new narrative’ if it is going to move forward rather than falling back into crisis.  That narrative cannot be a collection of policy initiatives or institutional reforms.  New policies are important; so are new institutional arrangements.  But politics and institutions do not by themselves speak to a democratic electorate – and particularly not to an electorate that has focused its attention on legitimate grievances of its own.  Only politicians with a clear vision of the future can wield influence with voters in such a context.  If the politicians with the best ideas are too afraid to forge a vision, they should not be surprised when voters attach themselves to politicians who run off in the wrong direction.  Europeans deserve better political leadership; so does Europe.

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Central Bank Independence and the Future of the Euro

Central banks are never independent from politics. The bankers who run those organizations may have the institutional power to define their own objectives, the technical capability to adjust the settings on their monetary instruments, and strong legal protections around the terms and conditions for their employment. But none of that is enough to insulate them from politics. Determined politicians will find a way to exercise influence, no matter what the obstacles. More often than not, such politicians will do so without even implicating the legislative process. They do not have to rewrite the laws to violate central bank independence. Politicians only need to take advantage of the fact that central bankers come from society, they (and their families) have to live somewhere, and eventually they will also retire.

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Modern Dilemmas of Central Banking

Central banks have been in the news a lot lately, with Mario Draghi’s dramatic decision to redeploy the full range of unconventional policies alongside Jerome Powell’s more obvious ambivalence about loosening the monetary spigots. In part this is a function of timing. The business cycle is turning and yet central banks have not quite managed to reset their instruments after the last crisis. Part is also due to overload. Central banks have been ‘the only game in town’ for a long time, they have expanded responsibility for prudential oversight, and politicians seem none too eager to assume responsibility for macroeconomic performance. It would be a mistake, however, to focus too much on short term explanations. Three recent books explore some of the deeper forces that have pushed central bankers into the spotlight.

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Italy: This Time is Different

Seasoned observers of Italian politics will tell you that there is a fairly consistent pattern to political crisis. The pattern starts with infighting among the governing coalition; it accelerates suddenly when one of the coalition partners ‘pulls the plug’ on the government; and then things slow down again as the various stakeholders realize how much is at stake for them personally if they let things fall apart. Parliamentary seats are prestigious, the salaries are high, and the pensions are generous provided the members just stay in post long enough to qualify. More important, real crisis comprises a lot of work with very uncertain pay-offs to be gained from an often-fickle electorate. Meanwhile, bad things can happen to the country’s economy, particularly vis-à-vis the banks and bond markets. In such a context, it is only reasonable to expect that cooler heads will prevail. Given the possible threat that an Italian meltdown would pose for the future of the euro (and hence also the European Union), we should all hope these observers are right. Nevertheless, there are four good reasons to believe that this time is different.

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The Political Economy of Housing Finance: Compelling New Analysis by Gregory W. Fuller

At some point in the early months of 2007, the words ‘sub-prime mortgages’ began to filter into the popular press. By the end of that August, they were ubiquitous. This small section of the high-risk, high-yield housing finance market in the United States sparked a global financial and economic crisis that would scar a generation. The stories that emerged to explain how this happened were the stuff of fiction or perhaps something even stranger. Banks booked mortgages to people with no demonstrable assets or income, at introductory rates that quickly reset to terms that only the most resilient of households could afford. By the time the borrowers defaulted, however, the banks had sold the mortgages to other investors using complicated securitization instruments that effectively hid the risks involved. The institutions left holding the bag were not only unaware of the dangers the faced but completely unprepared for the consequences. In his powerful new book on The Political Economy of Housing Financialization, Gregory W. Fuller explains why that happened, how the dynamics differed across countries, and what we might do to anticipate similar crises in the future.

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