Sovereign Debt Restructuring and Debt Mutualisation in the Euro Area

The euro area lacks a framework for sovereign debt restructuring and it lacks a common risk-free asset. Both issues are important in looking ahead to the prospect of any future crisis. Of the two, however, the creation of some kind of sovereign debt restructuring mechanism appears to attract the most political attention. This briefing note outlines the issues that would need to be addressed to bring greater stability to the euro area.

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Trouble at the Fed (and Elsewhere)

As U.S. President Donald Trump starts asking about whether he can fire the Chairman of the Federal Reserve, it is time to start asking how strong the protections are for politically independent central banks.  The answers are alarming: Trump is not the only one challenging central bank independence; he is also not the most successful.  Indeed, the challeges are widespread and they have been growing for some time.  That is reason enough to pick up Paul Tucker’s book Unelected Power — which was recently named by Foreign Affairs as one of the top books published in 2018.  If you want a taster, my review of Tucker’s book from Survival is below.  The punchline is that while people are right to be concerned that Trump would violate the independence of the Fed, that does not mean either the Fed or any central bank should be left entirely to its own devices.

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The Changing Relationship between Finance and Politics in Europe

The turmoil that struck Italian sovereign debt and bank equity markets on Tuesday, 29 June, is a stark reminder that the potential for another crisis is real, even if not imminent.  Important parts of the firewall that separates banks from sovereigns remain incomplete – and central bankers remain vulnerable to political influence as a consequence.  Two recent books help illustrate why.  One, by former Cypriot Central Bank Governor and Leicester University Professor Panicos Demetriades, reveals the limits of central bank independence.  The other, by University of Denver Professor Rachel Epstein, explores the interaction between banks and markets.

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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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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 ‘Wormhole Community’ of Central Bankers

The United States is not the only country where the consensus on central bank independence is in trouble; central bankers across the formerly communist world are facing sustained political challenge as well. The difference in the formerly communist world is that central bank norms, practices and policies never fit as well in the institutional context of regimes in transition and the consensus spread only weakly outward from the central banks themselves. This is the argument Juliet Johnson makes in her brilliant book on the role that central bankers played in the transformation of the post-communist world.

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Italy’s Referendum and the Future of the EU

Italians head to the polls on Sunday, December 4, to approve or reject a series of constitutional reforms that will redirect policy competence from the regions to the state, that will transform the Senate into a council of regions, and that will concentrate power in the Chamber of Deputies and the national government. Italian Prime Minister Matteo Renzi argues that these reforms are necessary to equip Italy with the flexibility needed to compete in the global economy of the 21st Century. His opponents counter that changing the constitution this way will eliminate critical checks and balances and so make the country vulnerable to authoritarianism if not dictatorship.

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