European Macroeconomic Governance Reform: Engineering or Ethics

The German grand coalition agreement promises to breathe new life into the debate about European macroeconomic governance reform. The German Social Democratic Party (SPD) will hold the ministries for foreign affairs and finance; SPD leader Martin Schulz has made it clear that he is in favor of further integration; and the bullet-point version of the agreement includes a number of eye-catching suggestions that seem to cross over a number of previous German red lines. Although emphasis on risk-reduction (and national responsibility) remains prominent, risk-sharing, stabilization, and some kind of common backstop for banking resolution and deposit insurance seems more likely now than ever in the past. Nevertheless, I remain unconvinced. The problem is not whether the SPD rank-and-file will vote in favor of the agreement. That remains to be seen. My doubts arise from the categorical difference between engineering and ethics.

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Eurobonds as Hardy Perennial

Europe’s heads of state or government have launched a new conversation about reforming the financial structures of the European Union in order to prevent another economic and financial crisis like the one that consumed the last decade.  They have a number of ambitious proposals on the table — to complete the European Banking Union, to strengthen the European Stability Mechanism, and to enhance political accountability at the European level.  Not all of these proposals are sure to be adopted, and progress is likely to be incremental.  The goal of ensuring financial market stability is nevertheless apparent.

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Reforming Europe Starts at Home

Earlier this week, French President Emmanuel Macron gave a speech outlining his proposals to reform the European Union.  And there were a lot of proposals in that speech.  Surprisingly, though, not many of them focused on the euro area or on the process of European macroeconomic governance.  Macron talked about creating some kind of common budget and naming a European Minister of Finance, but he did not touch on the major issues sketched in European Commission President Jean-Claude Juncker’s State of the Union address or the letter of intent and reflection papers that the Commission has produced as well.

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What We Just Learned about Banking Union from Italy

The Italian government passed a series of decrees yesterday to allow Intesa San Paolo to buy the healthy assets of two small banks from the Veneto region – Banca popolare di Vicenza and Veneto Banca.  The state will move the distressed assets into a ‘bad bank’ for orderly liquidation.  This action closes a chapter on the Italian banking crisis that started in late 2015 when regulators made it clear that the two small Veneto banks needed more capital.  Over the intervening period, investors threw good money after bad as the banks continued to haemorrhage deposits and mount up non-performing loans.  The government did not want to step in because it did not want to impose losses on large depositors or junior bond holders.  Ultimately, though, the situation for the two institutions was unsustainable.  Now we know what the solution looks like.  The question is what we learned from the process.  The short answer is that Europe’s banking union is still dangerously incomplete.

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Two Thoughts on Greece

As we approach another round of talks on the third Greek bailout package, I thought it would be appropriate to share two thoughts on the importance of debt forgiveness and on Europe’s preparedness in case this all goes wrong. My basic line is that debt-forgiveness is the only pragmatic choice. I also worry that Europe is not as prepared for the alternative as it should be.

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Fresh Perspectives on Monetary Union

Oxford University Press has published two new books on the political economy of the euro area that should be required reading.  One, by C. Randall Henning, explains why the International Monetary Fund has become a central actor in the stabilization of the euro area; another, by Waltraud Schelkle, sheds new light on what the single currency has to offer both in its current form and looking to the future.  My reviews of both books are below.

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The Relevance of U.S. Experience for Europe’s Capital Markets Union

This is a talk I gave on 21 June at the European Political Strategy Center, which is the in-house think tank of the European Commission.  The audience was very generous in listening to my presentation.  The point I tried to make is that the capital markets union is an important project, but we should be careful to ensure that policymakers supplement the efforts to make capital markets more efficient with efforts to make them more resilient.  This is an argument that I have made before and yet it is probably worth repeating.  Given the dynamics behind Europe’s economic and financial crisis, there is simply too much at stake.

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Thank you for giving me the opportunity to share some thoughts about the relevance of U.S. experience for Europe’s capital markets union. My argument is that U.S. experience is relevant both in terms of its successes and in terms of its mistakes. The most important lesson I draw from the United States is about the importance of managing or channeling the flight to quality when financial markets come under duress. In jargon, my specific concern is when a sudden increase in liquidity preference translates into a spontaneous return of home bias. In plainer language, what interests me is how we handle situations where investors decide to place priority on protecting the value of their assets.

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