None of what we are facing now is new or (wholly) unexpected. Of course everyone hoped this set of problems would pass and believed that politicians would do their utmost to make matters better. But no-one ever completely discounted the possibility that Europe would fall back into crisis.
The Janus-Faced Mandate of the European Central Bank
Eighteen of the nineteen Eurogroup finance ministers met Saturday night to discuss what to do about Greece. What they agreed – according to both their official statement and to the press statement released by Eurogroup president Jeroen Dijsselbloem a couple of hours later – is ‘to complement any actions the ECB will take in full independence and in line with its mandate.’ They also agreed, on behalf of ‘the institutions’, ‘to provide technical assistance to safeguard the stability of the Greek financial system.’
The Longer-term Consequences of Greece Exiting the Euro Would Be Expensive and Divisive
There is a debate right now between those who argue that the single currency can more easily survive a Greek exit from the euro than it could have in the past and those who argue that it will be a shock to the markets similar to the collapse of Lehman Brothers in September 2008. That debate will only end if the crisis abates or there is a natural experiment. The differences between the two camps are irreconcilable.
There is less discussion of what would be the longer-term impact of Greece exiting the euro. Optimists argue that the euro will emerge as a more disciplined union because member states will know that they will not be bailed out. Pessimists warn that Europe will stagger from crisis to crisis as market participants turn on weaker member states as soon as the first sign of trouble. This seems to be a stark dichotomy and yet it is not.
Lessons to Learn (and Not to Learn) from the Greek Crisis
Europe’s heads of state and government held an emergency summit on Greece at roughly the same time that European Commission President Jean-Claude Juncker unveiled a report he drew up with support from the Presidents of the European Parliament, European Council, European Central Bank, and Eurogroup for ‘Completing Europe’s Economic and Monetary Union.’ This juxtaposition is only partly coincidental. The ‘five presidents’ have been working on their report because the ongoing crisis in Greece makes it clear to all that there are still important gaps in the architecture of the single currency. Greece is not, however, the only reason many regard further reform of European institutions for macroeconomic governance as inevitable.
Why the New U.S. Trade Agenda Is Such a Hard Sell
Trade policy is in trouble in the United States right now primarily because it is not ‘trade policy’. Instead, U.S. President Barack Obama has framed his trade agenda around parallel agreements on regulatory cooperation that should make it easier for transnational enterprises to distribute their manufacturing processes across national borders without facing redundant regulatory requirements or losing control over intellectual property rights. This regulatory cooperation is a good idea and yet the devil is in the details. Unlike a more ‘traditional’ trade negotiation over tariff schedules and market access, both the aggregate and the distributive consequences of this type of agreement are more subtle. Worse, the language used to describe both the process of negotiation and the agreements themselves is largely impenetrable. Worst of all, these are negotiations where fundamental principles are involved.
The Impact of the British EU Referendum Debate on Finance
A big unknown in the UK referendum debate is the impact this will have on the City of London as the financial capital for Europe. There are three reasons that impact could be negative. The UK referendum debate and European reform negotiations are going to lessen British influence in the design of Europe’s capital union; they are going to eliminate any incentive for Britain to sign up to Europe’s banking union; and they raise the spectre that the UK government will find itself outside of future decisions about the shape of European financial regulation (and perhaps even without the support of the European Court of Justice inside the internal market).
Banking Union and Democratic Legitimacy
The European University Institute hosted a symposium on Europe’s banking union last Friday, 22 May. The organizing theme was the interaction between ‘banking union’ as a form of integration and ‘democratic legitimacy’. My contribution was to try and frame that question within the larger context of European financial market integration. What follows is the formal presentation.
‘Reasonableness’ and the Link Between Government Default and Euro Exit for Greece
Last week my SAIS colleague Filippo Taddei gave an interview to a Bloomberg journalist about the Greek crisis where he argued that there is no necessary link between a Greek government default and the exit of Greece from the euro area. The reason, Taddei explained, is that a government default is only relevant to Greece’s euro membership insofar as such a default would wipe out many of the assets — and essentially all of the collateral — of the Greek banking system. If that were to happen, then the Greek central bank would have no choice but to give loans to the country’s commercial banks against little or no collateral in order to maintain the liquidity of the Greek financial system. Moreover, everyone is aware of this fact. You only have to look at what happened during the second Greek bailout in March 2012 to see the connection. Hence it is only reasonable to assume that the European Central Bank (ECB) would either accept the extraordinary measures of the Bank of Greece to keep the Greek banking system afloat or come up with some arrangement of its own to restock the collateral of the Greek banking system and restore its liquidity during the process of resolving the Greek government’s default. Indeed, Taddei suggested, people active in European economic policy circles are already planning along those lines.
UK Electoral Economics (redux)
The polls have closed and the votes are counted on what has been one of the more surprising British parliamentary elections in history. The Conservative party has emerged with a narrow effective majority in the United Kingdom; the Scottish National Party has an overwhelming majority in Scotland. Only one of these two outcomes was expected. The Conservatives were supposed to outperform Labour, but not by such a wide margin and never at such a huge cost to their Liberal Democratic coalition partners. By contrast, the Scottish vote was expected, although many pollsters imagined that tactical voting would prevent the SNP from emerging with so many seats.
UK Electoral Economics: A One-Way Bet
On 7 May the United Kingdom will hold the closest election since, well, the last election. The result is widely expected to be a ‘hung’ Parliament: neither the Conservatives nor the Labour Party will emerge with enough seats to control a majority. Although both parties are currently (4 May) projected to receive roughly 34 percent of the votes, the Conservative should come out with a five seat lead when the these votes are translated into Members of Parliament. That gap is too small for the Conservatives to form a coalition government with the Liberal Democrats, even relying on the support of the Northern Irish Democratic Unionist Party. It is too large for the Labour Party to form a minority government with the support of the Scottish Nationalists. By implication, either the Liberal Democrats will have to lend their support to Labour, or Labour will have to vote with the Conservatives to dissolve the Parliament with new elections to be held in October. Of course these projects could change by election time. The calculus of possibilities would obviously change along with it. In a close election like this one, even small differences can have a big impact in terms of outcome.
Erik Jones 