Tag Archives: Martin Wolf

“The Euro Zone Is Already a Transfer Union”

I belive Professor George Irvin is wrapping it up in cotton when saying the Euro Zone is “already a transfer union.” The harsh reality is rather that the Euro Zone as we know it today is gone – and nobody knows for sure what the future holds.

“Just as in the case of climate change, it’s too late to think that we can merely wish for the best and “muddle through.”

George Irvin

“All this boils down to a single basic point: Europe already has a central bank ‘transfer union’, but it is under growing threat. Either Europeans bite the bullet and accept the need for true fiscal union and economic governance, or they can stand aside and watch the euro zone disintegrate,” Professor of economics, George Irvin, writes in his last blog post.

Here’s the full post, as published at the EUobserver.com:

Five years ago I wrote a book supporting the euro, but saying inter alia that euro zone governance was fatally flawed and that a European Treasury was needed.

Although not taken very seriously at the time, this view has today gained wide currency.

Like it or not, a US-style Treasury is needed to guarantee states’ financial system and to effect fiscal transfers within the euro zone. Yes, the euro zone is a ‘transfer union’ and the sooner the rich countries face up to this reality the better.

The alternative could be collapse of the euro, followed by financial chaos.

In a series of excellent pieces in the Financial Times, Martin Wolf has spelled out a compelling case for fundamental reform.

The euro zone, Wolf reminds us, started life as a reincarnation of the gold standard.

Euro zone member states were meant to finance a trade deficit by borrowing abroad; ie, by emitting their own central bank bonds.

If markets were unwilling to buy these, a member-state would have no option but to find the money internally by means of a squeezing labour costs, or what is euphemistically termed ‘internal devaluation’.

There are two problems here.

One is that squeezing wages may have an unacceptably high political cost.

While it is true that cutting aggregate demand sufficiently will balance the books at some (very much) lower level of national income, the patient may stop breathing as a result.

(For example, Ireland has now experienced four years of recession and the young are emigrating in droves.)

The second problem is the banking system.

Since private credit died up after 2008, the ECB (and the Bundesbank) have acted de facto as the Eurozone’s lender of the last resort, both in buying the sovereign debt of the periphery’s Central Banks and helping Europe’s large private banks to do so.

Indeed, the accompanying figure illustrates the unnerving symmetry between Germany’s position as chief central bank creditor and the growing indebtedness of the euro zone periphery – unnerving because the Germans are indirectly financing the periphery through the banking system rather than through explicit fiscal transfers.

Although this has helped peripheral states to weather the storm, what happens if peripheral countries default?

Many commentators (including myself) believe that some form of default is now inevitable – but default could have dire consequences too.

The insolvency of periphery governments would almost certainly threaten the solvency of debtor country central banks, leading to large losses for creditor country central banks (eg, Germany), which national taxpayers would need to shoulder.

Doubtless this is a major reason for Signor Smaghi’s implacable opposition to default. And in the absence of support from the ECB and other creditor central banks, the threat of default by Greece or Ireland would hasten contagion and paralysis.

Banks would not want to rink continued lending to any potential defaulter, credit would seize up and, ultimately, the existing financial transfer mechanism would collapse.

The options for the euro zone are narrowing.

Either default will result in weaker countries leaving the euro zone – a lengthening list as contagion and financial collapse spreads – or the euro zone must undergo radical reform.

This means tearing up the current system under which Greece and its banking system depend on selling sovereign bonds to the market and establishing in its place a euro zone Treasury which would, like its US counterpart, guarantee the integrity of the Eurozone’s financial system as a whole.

Needless to say, other key reforms would be necessary (true e-bonds, smaller trade imbalances) which I shall not dwell on here.

George Irvin

All this boils down to a single basic point: Europe already has a central bank ‘transfer union’, but it is under growing threat. Either Europeans bite the bullet and accept the need for true fiscal union and economic governance, or they can stand aside and watch the euro zone disintegrate.

Just as in the case of climate change, it’s too late to think that we can merely wish for the best and ‘muddle through’.

By George Irvin

George Irvin is a retired professor of economics and for many years was at ISS in The Hague. He is now (honorary) Professorial Research Fellow in Development Studies at the University of London, SOAS.

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The New IMF Leader: Here Are The Candidates

The allegations against IMF boss Dominique Strauss-Kahn comes at the worst possible time. The euro zone’s contagious financial crisis constitutes the biggest threat to global financial stability today, and at a time when good  leadership is more needed the ever before. If the position as IMF leader is not filled immediately, we’re all in big trouble.

“I cannot imagine who could replace him.“

Martin Wolf

If it wasn’t a political crisis in Europe before last weekend, it’s certainly is now. The charges against Dominique Strauss-Kahn is a tragedy in several ways. It will be an extremely difficult task for anyone to step in and take over the management of the biggest economic rescue operation of our time. And I can’t really see any obvious candidates.

I’m not making excuses for Mr. Strauss-Kahn. He has to take what’s coming to him.

But the facts remain:

He is the only leader in Europe who seem to have some kind of oversight of the situation. He’s the only one who’s able to make compromises and come up with solutions that all the confused politicians in the divided union are able to accept.

What is perhaps not so much appreciated outside the euro zone has been the IMF’s political role in keeping the euro zone’s rescue strategy on track.

Mr. Strauss-Kahn was respected by both Angela Merkel and by George Papandreou, the Greek prime minister.

He supported the view, also held by the European Central Bank, that a euro zone member should not rush into default.

The euro zone clearly needed the IMF’s technical competences in dealing with its sovereign debt crises – a set of skills largely absent in the European institutions.

Mr Strauss-Kahn proved to be a bold decision-maker, an effective politician and a competent economist.

The highly respected commentator at Financial Times, Martin Wolf,  writes:

“Mr Strauss-Kahn was among the very few senior European policymakers to whom the German leadership, particularly Angela Merkel, the chancellor, paid attention. At crucial moments, he was able to bring Europeans together. Indeed, he even seemed able to bring a divided German government together. I cannot imagine who could replace him. When there exist so many divisions within Europe and the decisions ahead are so complex and fraught, his absence will be keenly felt.“

Martin Wolf also points out:

Mr Strauss-Kahn turned out to be the right man in the right job at the right time. Initially, I had my doubts about the appointment of yet another Frenchman and a politician, at that, to run such a central international institution. I was wrong. Mr Strauss-Kahn proved to be a bold decision-maker, an effective politician and a competent economist. This combination is very rare. None of the candidates under discussion is likely to do the job as well as he did during the worst of the global and then euro zone financial crises.

Read the full article by Martin Wolf at Financial Times.

A French, A Mexican or A Turk?

The Wall Street Journal have already – more or less – appointed the French minister of finance, Christine Lagarde as the new head of the IMF.

I wouldn’t bet on that.

Looking at the bookmakers charts, it seems most likely that Strauss-Kahn’s successor will be Turkish.

They hold former Turkish finance minister Kermal Dervis as the most likely candidate, with only 5 – 2 in odds.

Christine Lagarde, however, stands to a payout of 14 – 1 if she should get the job.

Here’s the full bookmakers list, provided by The Economist:


There are also several other good arguments against another European IMF leader.

Wolfgang Munchau at eurointelligence.com explain:

“So I wonder to what extent a highly competent Mexican central banker, for example, would be able to fulfil this role?

The various candidates mentioned as potential successors to Mr Strauss-Kahn are technically skilled, but in assessing their relative merits, we should take into account that the new IMF chief will deal with mostly European issues for most of his or her first term at the top level.

He or she will have to bang heads together in meetings of European finance ministers, and will have to converse effectively with some notoriously difficult heads of government and state.

Whoever is appointed should, in principle, be able to have the German chancellor’s ear. Mr Strauss-Kahn did.

A PhD in economics and an extensive experience in dealing with financial instability may be desirable qualities. But at a time like this, they are not sufficient. The game has changed.

Indeed, the game has changed. And will continue to change until we get a new set of regulations up and running.

Wolfgang Munchau continuous:

“The Europeans have monopolised this position. That must stop, and it will stop.

But now, and probably for the first time, we may actually need a European managing director – at least a director with some knowledge and experience of European affairs.

The Europeans would be foolish to let go of this position at a time like this.

There are plenty of excellent candidates, including Christine Lagarde, the French finance minister.

The reason is not an attempt to cling on to power. The reason is to ensure that the job gets done.

Related by the Econotwist’s:

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