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1. 8. Policyactions to combat the crisis 1. Financial supportmechanisms and packages 2. Adjustmentpolicies in crisiscountries 3. Debtrestructurings 4. Fiscalrules and governance 5. Economicpolicycoordination 6. Economicpolicies of triple A countries 7. Actionsby the ECB
2. Management of the currentcrisis: anothertrinity Debtrestructurings AdjustmentCo-financing(ESM/ECB) NB: Allthreeneeded + appropriatebalance: lessadjustment, morefinancing (with conditionality) and moredebtrestructuring (e.g. Greece, Spanish, Cyprioticbanks) AND maximallyexpansionary ECB policy (+ lessausterity in the North)
3. 1. Financial supportmechanisms and packages 1.1 Financial assistancemechanisms: EFSM = the European Financial StabilityMechanism, financialcapacity 60 bn euro, Commissioninstrument, based on implicitguaranteeby the EU budget EFSF = the European Financial StabilityFacility, temporaryfinancialassistancemechanism (within the framework of a macroeconomicadjustmentprogramme), max. capacity 440 bn, issuesbondsguaranteed (on a pro rata basis) by the EA memberstates ESM = the EuropeanStabilityMechanism, permanentfinancialassistancemechanism, max. lendingcapacity 500 bn, graduallyreplacesEFSM and EFSF. ESM memberstatescanapply for a bailoutby ESM if in financialdifficulty (orif the bankingsectorneedsrecapitalization). One precondition is the signing of a Memorandum of Understanding (MoU) on the adjustmentpoliciesagreed with the Troika(ECB, Commission, IMF). ESM lendingwillincreasinglyforesee PSI (privatesectorinvolvment) or ”bail-in”, meaningthatcreditorswillsufferlosses on theirbondholdings (and possiblyeven on deposits, cf. Cyprus) . To facilitatethis , allissues of bonds as of July 2013 shouldincludeCACs (collective action clauses) spelling out that the instrumentmay in somecircumstanceschangecharacter (betreated as equity).
4. Debtrestructuringsmayscarefinancialmarketsbutbailoutscertainlyangercitizens and causemoralhazard in banks and politicians.
5. (cont.) 1.2 Financial packages Greece, firstpackage(May 2010) Total size 110 bn of which 80 bn in the form of bilateralloansfromother EA memberstates and 30 bnfrom the IMF Ireland(December 2010) Total size 85 bn of which 22.5 bnfrom the EFSM, 17.7 bnfrom the EFSF, 22.5 bnfrom the IMF and 17.5 fromIreland (pensionfunds!) as well as 3.8 bnfrom the UK, 0.6 bnfromSweden and 0.4 bnfromDenmark Portugal (May 2011) Total size 78 bn of which 26 bnfrom the EFSF, 26 bnfrom the EFSM and 26 bnfrom the IMF Greece, secondpackage(March 2012) Total size 130 bnor, includingundisbursedfundsfrom the firstpackage, 164.5 bn of which 144.7 bnfrom the EFSF and 19.8 from the IMF Also PSI (privatesectorinvolvment): almostall of roughly 200 bn in privatelyheldbondswereexchanged to new bonds with 53,5 % loss in facevalue (and biggerloss in netpresentvalue) Easing of terms of officialloans: lowering of interestrate, lengthening of maturity etc. Spain (July 2012) A package of 100 bnwasagreed with a view to recapitalizing Spanish banks (notusedyet) However, lendingsofarwillgothrough the state (affects the debtburden of the Spanish sovereign)
6. (cont.) Cyprus(March 2013) Total sizesome 10 bn, of which (presumably) 2/3 from the ESM and 1/3 from the IMF Russiaexpected to softenterms on earlier 2.5 bn loan to Cyprus PIS: owners, bankbondholders and big depositors (depositsabove 100.000 euro) loose money in the context of a bankrestructuringsettingup a badbank (Laiki) and recapitalizing the other big bank (Bank of Cyprus) Cyprusimposestemporaryrestrictions on depositwithdrawal and capital movements ECB continues to provideELA-loans (EmergencyLiquidityAssistance), guaranteedby the state of Cyprus Ithasalsobeenagreed to soften the terms for officialloans to Portugal and Ireland (lowering of interestrates, longermaturities). NB thatfinancialsupportmayalsoemanatefrom the ECB (cf. below) through the ECB buyinggovernmentbonds (in the secondarymarket) orby the ECB extendingloans to banksthatbuygovernmentbonds. NB that the financialsupportpackagesviolate (the spiritifnot the letter of) the No bailoutrule of the treaty, whichinsiststhatmemberstates in distressshallnotbeaidedbyothermemberstatesor the EU. PSI thereforeimportant. Commitmentsby Finland (loansorguarantees) amount to morethan 20 bn euro (plus an amount of similarmagnitudethrough the centralbank), of whichsome 7 bnhasactuallybeenused (bilateral loan to Greece plus Finland’sshare of guaranteesgiven to EFSF for money raised plus share in other EU and in IMF commitments). NB that Finland received ”collateral” in the context of the secondpackage for Greece and in the package for Spain; thiscollateral is in the form of tripleA-bondslocated in an international bank, and thiscollateralcoversroughly 40 % of the maximumrisk.
7. 2. Adjustmentpolicies of crisiscountries: austerity plus structuralreform Financial support is givenwithin the framework of a macroeconomicadjustmentprogramme, as set out in a Memorandum of Understanding (MoU) agreed with and monitoredby the Troikka. The programme is multiannual and foresees an adjustmentpaththatshouldbringdownpublicdebt to a ”reasonable” orsustainablelevel and makeitpossible for the crisis country to regainitscreditworthiness and comeback to the bondmarket. The details of the programmewilldepend on the specifics of the country, buttypicalelementsinclude: cuts in publicexpenditure (often of significantsize, includingexpenditure on publicwages and transfers) taxincreases, preferrably on consumption, realestate, wages (ratherthan on companies); in Cypruscompanytaxes and capital incometaxeswillberaised (fromverylowlevels) structuralreforms of variouskinds, including the pensionsystem (lowerbenefits), labour markets (moreflexibility), social policy (reducedtransfersthatmayharmincentives to workorinvest), moreeffectivecompetitionpolicies (liberalization of professionsoreconomicactivity in particularsectors), privatization of publiccompanies (to improvecompetition and to generatepublicrevenues), reorganization of taxcollectionsystems to makethemmoreeffectiveetc reorganization and downsizing of bankingsystemsmaybepart of the programme (e.g. Spain, Cyprus) Disbursement of fundsfrom the financialmechanismsareconditional on the Troikka approvingthatsufficientprogresshasbeen made in terms of fulfilling the conditions of the adjustmentprogramme. Manycountrieshavefailed to live up to theirprogrammecommitments and havebeengivenmoretime to reach the targets, reflecting the assessmentthatfailure to performpartlyreflects the worsethanexpected international environment and morenegativeeffectsthananticipated of the austeritypolicies. The problem is thatausterity (contractionaryfiscalpolicy) weakenseconomicgrowth and therebyweakensalso the budget and thatittakestime for the beneficialeffects of structuralreform to materialize (whileshorttermeffectsmaywellbenegative).
8. Austerity is painful Fiscalcontractionwillshift the aggregatedemand curve to the left and the level of income c declinesfrom Y1 to Y2. The fiscalcontraction YD’ YD improves the budgetbalancebut the decline of incomeoffsetspart of thatimprovement. NB that the negativeeffectmaybesmallerif austerityincreasesconfidence in public finance sustainability. NB alsothat the fiscalmultiplier is big because the centralbankrate is not lowered (can’tbereally) and as manyfirms and householdsarelikely to beliquidity Y2 Y1 Y constrained (sothatspendingmirrorsincome).
9. Austerity and cumulative GDP growth in 2009-2012(austerity = change in cyclicallyadjustedbudgetbalance) Austerity is bad for growth, at least in the timespanhereconsidered IRE GRE
10. NB thatitcanbeverydifficult to break a spiral of increasingindebtednessifthere is greatpoliticalresistance to cuttingexpenditure, ifit is difficult to raise (or to collect) taxes, if the interestratepaid on governmentdebt is high, ifgrowth of the economy is weakornegative and if the debtlevel is high. The change in the level of indebtednessor the ratio of governmentdebt to GDP, v = D/Y , canbewritten as = /Y) - (D/Y)(/Y) Assumingthat the change in debt is equal to the budgetdeficit (leavingasidevaluationaspects) = G – T + rD This allows the change in the debt ratio over time to be written as = (G – T + rD)/Y - vy = g – t + (r-y)v Where g =G/Y is government spending (excluding interest payments on government debt) to GDP, t = T/Y is the gross tax ratio, v = D/Y is the debt ratio, y = /Y is the rate of growth of GDP in nominalterms and r is the (nominal) rate of interest on governmentdebt. The difference g - t is oftenreferred to as the deficit on the ”primary” balance (i.e, the deficitexcludinginterestpayments). So, whatdoyoudoif g cannotbecut, t notraised and if r is high, v is high and y low and hard to raise?
11. 3. Debtrestructurings A country facing a liquidityproblem, reflected in fundingdifficulties for the sovereignand/or the banks, mayusefullybehelpedbyfinancialassistance, givingtime to adjustpolicies and regaincredibility in markets. However, the country mayalternativelysufferfrom a solvencyproblem, meaningthat the debtlevel is toohigh to besustainable (whatever the policies; cfabove and chapter 5). Itdoesnotthenmakesense to lendmore money to such a country. Instead, the debtlevelmustbecutbywritingpart of itoff (easing the debtburden) in onewayoranother: imposing a haircut on bondholders, reducing the interestrate and lengthenmaturities, orcutting the netpresentvalue of the stream of interestpayments and amortizations in someotherway. The distinctionbetween a liquidity and a solvencyproblem is importantbutdifficult to make in practice, as a liquidityproblem, ifnoteffectivelymanaged, canturn into a solvencyproblem. This is the justification for conditionalfinancialsupport (cf. above) as well as for centralbank action with a view to reducing the risk of interestrates on governmentbondsbeingstuck at an unsustainablelevelbecause of self-fulfillingexpectations (”multipleequilibria”). Imposinglosses on creditors (”privatesectorinvolvment”) helps to countermoralhazardbymakingitclear to investorsthattheyneed to consider the quality of borrowers, and it is in line with the No bailoutrule. However, imposinglosses on creditorsruns the risk of contagion: bondholdersmoregenerallymaybecomeafraid of having to facelosses, whichmaytriggersales of bondsthatraiseinterestrates and worsen the situations of otherdebtors. Thiscontagionmayalsocrossborders and mayaffectbankdepositors in addition to holders of bondsissuedbysovereignsorbanks. (Thishappenedafter the ”Dauvilledeclaration” of Merkozy in 2010.) Sofardebtrestructuringshavebeenresorted to concerningGreece (governmentbonds in the context of the secondfinancialpackage), Ireland (bankowners and junior bankbondsbutnot senior bonds), Spain (junior bankbonds) and Cyprus (junior bankbonds and, for the firsttime, senior bonds and depositsabove the 100.000 euro ceiling)
12. Public debt no longer available as engine for growth Erkki Liikanen
13. 4. Fiscalrules and governance The treatyobligesmemberstates to coordinatetheireconomicpolicies (article 121) and forbids ”excessivebudgetdeficits” (article 126). The mostrecenttreaty (the ”Lisbontreaty”) alsoallows for stricterruleswithin the euro areathanotherwise (article 136). The requirements of the treatyarespelled out and made moreprecisebyregulations and directives. The set of fiscalrulestherebycreated is oftenreferred to as the ”Stability and GrowthPact” (SGP), but the part of the rulespertaining to the handling of a situation with excessivedeficits is alsoreferred to as the ”excessivedeficitprocedure” (EDP). The first version of the SGP wasadopted in 1997. Itstatedthatmemberstatesshouldaim at balanceorsurplus in theirbudget in the medium term and avoidexcessivedeficits (general governmentdeficitexceeding 3 % of GDP and grosspublicdebtexceeding 60 % of GDP). The pactforesaw a procedure with monitoring, warnings and the possibility of sanctions for violations of the pact (in the form of interest-freedepositsorfinesup to 0.5 % of GDP). Therewasrepeatedcriticismthat the pactwastoorigidorsimplistic. Anyway, the SGP wasrepeatedlyviolated, notablyby Germany and France in 2003, and the pactwasrevised in 2005. The second version was, however, moresophisticatedbut at least as lax as the previous version. Itdidnotpreventmemberstatersfromviolating the rules in the yearsbefore the eruption of the globalfinancialcrisis, and subsequently, notably in 2009-2010, the euro areahasfaced ”specialcircumstances”, whichmayallowsomeflexibility in the implementation of the pact. Morerecently, manyactionshavebeentaken with a view to strengthening the SGP and budgetdiscipline (a main requirementnotablyby Germany). NB: Operating the SGP involvesmanyproceduralsteps and reports, notablyannualStabilityProgrammes producedannuallybyeachmemberstate and setting out the fiscalplans and scenarios.
14. (cont.) Six-pack. Thisrecentlyadoptedpackageof onedirective and fiveregulationsstipulates, inter alia, that Memberstatesshouldhavehighstandards for proceduresrelated to budgetarypolicies (accounting, statistics, forecastingmethods, numerical and proceduralrules, medium-termorientation, publicsector as a whole) The importance of the debtcriterion is strengthened and made moreoperational: 1/20 of debt in excess of 60% shouldbeeliminated per annum (debt = 60 % thenrequires an deficit of 2 % ratherthan 3 % of GDP as a minimum) Corrective action in the case of excessivedeficitshouldbetakenfasterthanearlierstipulated Decisions on finesaretaken on the basis of the Commissionproposalunless a qualifiedmajority of memberstatesopposes (”reversedmajority”; earlier the Commissionhaditswayonlyifbackedby a qualifiedmajority) The medium termobjective (MTO) for the fiscalbalance is to bedefined in structuralterms (eliminatingcyclicalfactors, which is technically a bitcomplicated) and itshouldaim at close to balanceorsurplus (with somescope for cross-countryvariation); at least, the structuraldeficitshouldnotgobeyond 0.5 % of GDP (or 1 % ifdebtbelow 60 %) Fines for violations of the rulesaregraduated: up to 0.2 % (of GDP) deposit with interestrate for failing to abideby the rules of the ”preventivearm” (whennot in excessivedeficit), up to 0.2 % depositwithoutinterestrate for violations of the ”punitivearm” (whenrunning an excessivedeficit) and evenup to 0.5 % fineifpersistentviolation. In addition, an ”ExcessiveImbalancesProcedure” wasintroduced, whichgivesearlywarning for improperdevelopmentsbased and Commission/Councilrecommendations as well as the possibility of sanctions for failing to abide with the recommendations (max.fine 0.1 %). Thisprocedure is based on developments of 10 indicatorsmonitoredby the Commission (seebelow) Separately, the EU has set up a mechanism for ”macroprudential supervision” of the financialsystem, including the ”EuropeanSystemicRisk Board”, chairedby the ECB, and having the task of monitoringfinancialdevelopments in the EU with a view to detectingrisks for the systemicstability of the financialsystem (ratherthan the safety of individualfinancialinstitutions, which is the task of traditionalfinancial supervision).
15. (cont.) Two-pack. Thispackage of twodirectivesoutlinesprocedures for the national setting of MTOs and timetables for national budgetplans. It is alsoforeseenthat the Commissioncouldask for governments to makechanges to their national budgetaryplansif the Commissionsodesires. Itmustbepossible for Eurostat to verify the statistics in case of doubt. Memberstatesareobliged to specifyCountriesrelying on financialassistanceareobliged to define national adjustementprogrammes (submitted for approval to the Council). Also, eachmemberstate is to set up a ”fiscalcouncil” to monitorbudgetarydevelopments. Fiscal compact. Mostimportantly, memberstatescommit to introduce in their national legislation in someform the rules of the EDP and the SGA, and theyshouldinclude in national legislation an atuomaticmechanism for achieveing the MOT (of at most a deficit of 0.5 % of GDP). Also, decisionswihtin the excessivedeficitprocedurecannowadaysbetakenby a ”reversedmajority” (the Commissionproposal is adoptedunless a QM of memberstatesobject, seeabove). However, the treatyforeseesthat the existence of an excessivedeficit is decideduponby a qualifiedmajority of memberstates. Memberstates of the euro areahavetherefore made an intergovernmentalagreement to the effectthattheycommit to vote for the Commissionproposal UNLESS a QM is against. Thisensuresthat the ”reversedmajority” willapplyalso to the decision on the existence of an excessivedeficit. The set of fiscalruleshasnowbecomeverylarge and complex, but the ruleshavealsobeen made tighter. Itremains to beseenhow the ruleswillbeapplied in practice. Sofar the difficultyhasbeenthatmemberstateshavebeenunwilling to implement the rules in a tough manner. In practice, it is noteasy to punish a country in difficulties with fines. (And itseemsoddif the country is at the sametimereceivingfinancialassistancefrom a financialmechanismlike the ESM.) Itmayalsobenotedthatallthesedecisionsrecentlytakendolittleifanything to resolve the currentcrisis. The point of theserules is ratherthatthey, hopefully, willprevent the euroa areafromrunning into new crises in the future. The broadening of economicpolicycoordination in the form of the EIP (the ”ExcessiveImbalanceProcedure”) seemseminentlyjustified in the light of recentexperience (e.g. Irelandor Spain, wherebudgetdeficitswerenot the problemoriginballybutratherexcessiveprivatecreditexpansion).
16. 5. Economicpolicycoordination Memberstateshaveagreed on the ExcessiveImbalanceProcedure (EIP), meaningthat the Commissionmonitorsdevelopments in memberstates on the basis of a number of indicatorssupposed to reveal the risk of ”imbalance”. Some of theseindicatorsrefer to the externalsituation and competitiveness: the currentaccount, netforeignassets/liabilities, relativeprices in a common currency, marketshare of exports, nominalunit labour costs. Otherrefer to the internalsituation of the country: houseprices, privatecreditexpansion, privatdebt, publicdebt, unemployment. The Commissionmayissueearlywarnings and the Councilcanissuerecommendations. If the country concerneddoesnotheed the advice, a non-interestbearing of 0,1 % of GDP canbedecidedupon. Ifviolation of recommendationscontinues, the depositcanbeturned into a fine. Thereare a number of otheragreements and proceduresaimed at enhancingeconomicpolicycoordinationorimprovinggrowth in memberstates. Theseinclude the Europe 2020, which the Commissioncharacterizes as the union’sgrowthstrategy. Itpromises to turn the EU into ”a snart, sustainable and inclusiveeconomy” and setsobjectives for employment, innovation, education, social inclusion and climate/energy. Anotheragreement is the Euro Plus Pact , whichfocuses on competitiveness, employment, stability and taxcoordination. Theseprocesseshavelittle ”teeth” as theymostlydeal with matters of national competence. The mostimportantcoordinationprocecss is the one in the area of financialinstitutions and markets. ItincludesEU-levelauthorities in the area of banking, insurance and securitiesmarkets, whichaim at harmonizing the implementation of EU legislation in financialmatters. Of particularsignificance is the EuropeanSystemicRisk Board, chairedby the ECB, whichaimsmonitoring and curtailingsystemicrisks in the financialsystembysocalled ”macroprudential supervision”.
17. Economicpolicycoordination in the EA/EU: main structure Public finance sustainability EDP &SGP + fiscal compact ESRB EIP EIP Public finance sustainability: The ExcessiveDeficitProcedure (EDP) and the Stability and GrowthPact (SGP); main actorsare the Council (Eurogroup), the Commission and memberstates. The EDP is roughlyabout action to prevent and cureexcessivedeficits, the SGP is about the pathtowards the MTO (medium termobjective). The fiscal compact mainlycomplements the otherrulesbyprescribingfiscalpolicydomesticarrangements in memberstates. Macrostability: Economicpolicycoordinationincludessurveillance, recommendation, peerpressure, possiblysanctions, the aim is to preventmacroeconomicorotherproblematicimbalancesfromarizing; ExcessiveImbalanceProcedure (EIP) Financial stability: Committees and EU-levelauthorities (bodies with permanentstaff) enhancingcooperation in the fields of banking, insurance and securities. And the EuropeanSystemicRisk Board with responsibilities for macroprudential supervision. NB that national authoritiesmay, in case of need, stipulateceilings for share of debt in housepurchasesorimposeotherrestrictions to reduce the risk of a bubbleemerging. Financial stability (systemic) Macro- stability
18. 6. Economicpolicies in the triple A states The EMU is an asymmetricconstruction in twosenses. First, it is a ”currencywithout a state”, it is a federativeconstruction in the area of monetarypolicybutotherpoliciesaremostly the competence and responsibility of memberstates. Also, it is asymmetric in the sensethat the adjustmentburdenfall on countries with deficits: the crisiscountriesareobliged to cutspending, raisetaxes, reducecostsetc, but no obligationsareimposedupon the countrieswithoutexcessivedeficits. Yet, the interdependencemeansthat, for instance, Spanish or Italian currentaccountdeficitsarenotindependent of Germancurrentaccountsurpluses. Also, competitiveness is a relativeconcept: ItalymaybelackingcompetitivenessbecauseitscostsarehighorGermancostslow. To ease the strains in Europe itwouldarguably help ifwagecostswere to risefaster in the Northerncountries at the sametimethatwagesshouldfallornotrise in the South. Also, overalldemand in Europe mightholdupbetterif the strongcountriespursuedexpansionaryfiscalpolicies to compensatesomewhat for the decline in demandassociated with austeritypolicies in the South. However, empirically (according to estimatedmacroeconomicmodels) the cross-countryeffects of fiscalpolicyseemmodest: fiscalexpansion in Finland oreven in Germany doesnot help much the Greekor the Portugeseeconomy. Risingwagecosts in Germany shouldneverthelessmakeitsomewhateasier for the crisiscountries to restoretheircompetitiveness as measuredbyrelativeunit labour costs (and wageincreasesarenowaccelerating in Germany). As emphasizedby, e.g., Paul Krugman, the economycanhardlyreviveifallcountriespursueausterity. The privatesector in the South hastoohighdebts and tries to reduce the debtburdenbyreducingconsumption and investment. Butalldebtsare at the sametimesomebody’sassets. Therefore, if the privatesector in the South is to reduceitsdebtburden, then the netdebtmustincrease for anothersector. This is not the publicsectorbecause the austeritypoliciesaregeared to reducingpublicdeficits. The otherpossibility is that the counterpart of an improvedfinancialsurplus in the privatesector in the South wouldbe a improvedcurrentaccount (reducingnetassets of foreigners) butsuch a developmentwouldrequirebettercompetitiveness. If a fall in privatedemand is notaccomodatedbyfiscalpolicy (a biggerdeficit) or the external side (a strongercurrentaccount), then the main consequencewillbe a fall in domestic output and higherunemployment (as hasbeenseen in the South).
19. There is a problemifallsectorswant to strengthentheirfinancialbalances Output = demand = privatedemand + publicdemand (netexports?) Privatesectordelevering is OK iffiscalpolicy is expansionary (moregovernmentspendingor lesstaxes) or at leastneutral: privatedebtdeclines, publicdebt increases (left). Privatedelevering is more of a problemif the publicsector simultaneouslywants to reduce itsdeficit and indebtedness. Thenspendingdeclinesmore, as does output, income and taxrevenues (right). Needless to say, the government mayhave no choice (cf. Greece…) Highprivatedebtlevel Highprivatedebtlevel Cutspending Cutspending Overalleconomy is OK Overalleconomyshrinks Expansionaryoraccomodatingfiscalpolicy Contractionaryfiscalpolicy Public debtincrease Wish to reducepublicindebtedness
20. 7. Actionsby the ECB The TARGET system is an international paymentsmechanismrunby the ECB and the national centralbanks of the euro area (the Eurosystem). Memberstates with a currentaccountdeficitor capital outflows de facto finance much of thatbetheirbanksrunningupdebts to theircentralbanks, whichthen show up as debts of the NCB (national centralbank) to the ECB. Conversely, othercountriesareaccumulatingclaimsbytheirNCBs on the ECB. Currently, the crisiscountrieshave a cumulativedebt of some 600 bn euro, whichroughlycorresponds to the claims of the Bundesbank. The ECB hastakendownshortterminterestrates to lowlevelsbysettingitsovernightdepositrate at 0 and the lendingrate at 0.75 %. Also, the ECB hasrepeatedlybeenprepared to lend to banksunlimitedamounts at a fixedinterestrare for periods of 3 months and up to 3 years (long term repo operationsorLTRO). Thishasgreatlyhelpedbanks to managetheirliquidity in spite of problems, at times, in the interbankmarket. The ECB hadearlier a programme of buyinggovernmentbonds of distressedcountries in order to support the markets for suchbonds in theirfunctionin (securitiesmarketprogrammeorSMP,nowdiscontinued). The ECB hasdeclareditsreadines to buybonds of lessthan 2 yearsmaturity in unlimitedamounts, ifneedbe, to supportcountries with problems, providingthatthesehave an agreedadjustmentprogramme with the Troikka (outrightmonetarytransactionsorOMT). Thiscommitmenthascalmedmarketsthoughithasnot led to anyconcrete action sofar. In particular, thisshould help avoidmisguidedexpectationsfrombecomingself-fulfilling (avoiding ”bad” equilibria). The ECB is the keyactor in the monetaryunionbecauseithas, for practicalpurposes, ulimitedresourcesthatitcandrawupon (ithasaccess to the printingpress). Also, the ECB cantakedecisions with a simplemajority in itsgoverningcouncil (where Malta has as much of a votingweight as Germany!), whereas the political side faces the difficulty of coming to unanimity for most of the decisions. (NB: the original idea wasthat the euro areawouldnotneeddiscretionarypoliticaldecisionsbecauseeverybode is abidingby the rules, therebymakingdiscretionarydecisionssuperfluous. However, thisdoesnotwork in a crisis.) The ECB has, likeothercentralbanks, beendoing ”quantitativeeasing”, byingsecurities in financialmarkets, notonlygovernmentbondsbutalso ”coveredbonds” (bonds with collateral) of the privatesector.
21. Questions Whatareorhavebeen the main means of combating the crisis? Whatare the ESM and the EFSF? Whichcountrieshavereceivedfinancialsupportpackages? Whataretypicalelements of an adjustmentprogrammedesignedby the troika (and what is the troika)? Why is itsodifficult to break the governmentdebtspiral (in the light of itsproximatedeterminants)? What is the stability and growthpact? How are the fiscalrulesstrenghtenedby the six-pack and the two-pack? What is the ”excessiveimbalanceprocedure”? What is the OMT by the ECB?
22. Why is itsodifficult to get out of the mess? reducingdebtleveragetakestime (Reinhart & Rogoff) lack of willingness to face the bankingproblem (cf. the US) numerousnegative feedback loops (includingbetweenbanks and sovereigns, self-fulfillingexpectations?) action hasfocussed on preventingfuturecrises, notthisone (reform of the SGP with 6-pack and 2-pack and fiscal compact, economicsurveillanceetc) the ”legacycost” is difficult to deal with (e.g. Spanish banks) there is a chickengamegoing on between North and South? lack of leadershipinherent in the construction (which MD tries to deal with) politicianscaught in a difficultcrossfire (markets, citizens)