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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Rigid Theories and Adaptive Markets

It is no secret that the economics profession is struggling to learn the lessons taught by the recent crisis. Two new books show where that thinking is headed. The End of Theory, by Richard Bookstaber, emphasizes the importance of focusing analysis on the world as it is, rather than on a more formal universe that is easier to model.  Adaptive Markets, by Andrew Lo, explores how much we could benefit from learning to tap the potential of modern finance.

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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 Conflict over European Economic Policymaking

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.

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