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.
Economic governance is in the eye of the beholder. The French want discretion, flexibility, and effective crisis management; the Germans want rules, discipline, and effective crisis avoidance. The euro as a single currency reflects both tendencies. There are aspects of Europe’s macroeconomic framework that are flexible and responsive (like the European Central Bank) and aspects that are more rigid and formulaic (like the ‘six pack’ and ‘two pack’ of policy coordination procedures that strengthen the ‘Stability and Growth Pact’). The challenge for Europeans is to find a sustainable balance. Too much of either tendency is not only unacceptable to one side or the other in the Franco-German partnership, it is also unlikely to work in stabilizing either the euro as a single currency or the European Union as a political project.
The surprise victory of Donald J. Trump in the United States (US) presidential elections briefly pushed the euro, the Swiss franc, and the Danish kroner up against the dollar. It also pushed down the yields on high quality sovereign debt and it temporarily sent equity markets into the red. This was all to be expected. Like almost everyone, market participants thought Hilary Clinton would gain the White House alongside a predominantly Republican Congress. They placed their bets to take advantage of another four years of competent administration and legislative logjam. A Trump victory upset that calculation and so some of those market participants were trying to safeguard their capital until they could get a better sense of what is happening. The assumption they made was that Europe can act as a safe-haven. Unfortunately, that assumption is mistaken.
The European Central Bank (ECB) announced a raft of policy measures on Thursday, March 10, intended to give a further boost to euro area economic performance. Most of these measures were unconventional and yet still precedented. The ECB lowered its main policy rates, accelerated the pace of its asset purchases, and widened the pool of assets eligible to be included in its purchasing program. It also renewed its program for targeted loans to banks that extend credit to the non-financial sector. The only new element was the rate of interest that the banks would pay to access credit that they could lend for investment. The question is whether that new wrinkle will make much of a difference. As is often the case, the answer depends less on the mechanics of monetary policy than on the magic of market ‘confidence’.
Europe’s Orphan: The Future of the Euro and the Politics of Debt. By Martin Sandbu. Princeton: Princeton University Press, 2015. 313 pp. $29.95. ISBN: 978-0-691-16830-2 (cloth).
The euro did not cause Europe’s economic crisis; policymakers did. By focusing too much attention on debt, by demanding that existing obligations be met in full (and creditors made whole), and by doing so against a backdrop of coordinated macroeconomic tightening, Europe’s policymakers ensured that the downturn in European macroeconomic performance would be deep, long, and destructive. These same policymakers only narrowly avoided disaster when they began to loosen monetary policy and to accept the need for some debt restructuring. Nevertheless, these efforts did not come soon enough, they were no comprehensive enough, and they were not applied consistently enough to prevent Europe from coming to the edge of disaster as elite macroeconomic ideology finally collided with the requirements for democratic legitimacy in Greece (and Germany) during the summer of 2015. This is the diagnosis Martin Sandbu offers to explain what went wrong.
There are three divergences in the art of central banking. The most obvious is between the monetary tightening expected in the United States and the loosening expected in Europe. A second divergence is between the prudential oversight of the banking system and the conduct of macro-economic demand stabilization – particularly quantitative easing. A third divergence is between the communication of forward looking policy intentions and the practice of monetary policy decision-making. Each of these divergences acts as a constraint on the conduct of monetary policy; the juxtaposition of all three increases the risk of significant market volatility.
Roughly nine thousand members of the global finance community gathered in Singapore last week at a conference devoted to ‘market infrastructures’ – meaning the plumbing (communication, clearing, settlement, depository) that makes finance work. On one level it was a very geeky affair with its own confusing jargon. The name of the conference, SIBOS, refers to another acronym, SWIFT. There was a whole forum devoted to standards – which are precise definitions for how things should look and work. If you wanted to fill a room, all you had to do was shout ‘block chain’ or ‘distributed ledger’. But the buzz was not only about technology. You could pack the room talking about China’s strategy to internationalize the renminbi just as easily. Market infrastructure is about power as well as plumbing. More important, the power and the plumbing tend to work at cross purposes.