Tag Archives: Trade

Why The Monetary Union Is A Failure

Over the last months it’s become quite clear that Europe‘s monetary union (EMU) is – more or less – a failure. So, what happened? And what do we do now? In this article professor Kevin O’Rourke provide a comprehensive explanation of the why’s and how’s, and put forward some suggestions for possible solutions of the greatest crisis in modern European history.

“Whether EMU can survive in the long run if the status quo persists is an open question.”

Kevin O’Rourke

“In order to understand why EMU happened, we often turn to the familiar Mundell-Fleming monetary policy trilemma. Given intra-European capital mobility, the decision by a subset of EC members to move to EMU was a logical, if radical response to the challenges posed by this trilemma. However, the institutional framework of EMU is seriously flawed,” Kevin O’Rourke writes.

Kevin O’Rourke is Professor of Economics at Trinity College Dublin, a co-organiser of the CEPR’s Economic History Initative, a Research Fellow of the National Bureau of Economic Research, and a Member of the Royal Irish Academy.

He received his PhD from Harvard in 1989, and has taught at Columbia University, UCD, Harvard, and Sciences Po (Paris).

He is currently serving as President of the European Historical Economics Society, and an Editorial Board member of World Politics.

Here is professor O’Rourke’s recent article, syndicated by www.eurointelligence.

A Tale of Two Trilemmas

For decades economists have argued that fiscal union was a desirable, and perhaps indispensable, complement to EMU.

What we now know is that a common euro zone framework for regulating financial institutions, and dealing with the consequences of their failure, is equally important.

We have a monetary union with neither of these complementary institutions, and it is clear that this architecture is not fit for purpose.

How did we end up here, and what happens now?


To answer these questions it is helpful to turn to what Dani Rodrik has labelled the “fundamental political trilemma of the world economy”. Rodrik argues that “we cannot simultaneously pursue democracy, national determination, and economic globalization.

“If we want to push globalization further, we have to give up the nation-state or democratic politics. If we want to maintain and deepen democracy, we have to choose between the nation-state and international economic integration.”

And if we want to keep the nation-state and self-determination, we have to choose between deepening democracy and deepening globalization” (Rodrik 2011, pp. xviii-xix).

The argument is that “deep globalization” involves a commitment to not just open commodity and capital markets, with the constraints that these imply, but also to a competition for mobile factors of production that makes it difficult for national governments to adopt regulatory standards or other interventionist policies, even when their populations want this.

The solutions are either to allow popular opinion to manifest itself through supra-national mechanisms, or to ignore it.


EMU solves the political trilemma by abandoning national monetary policy-making, and delegating it to a technocratic Central Bank.

The fact that this has occurred without fiscal union, or common banking policies, can be well understood within the trilemma framework.

Regarding fiscal policy, the combination of the nation-state and democracy has prevented deeper political union: German voters (among others) do not want a transfer union, while Irish voters (among others) do not want a common tax system.

When it comes to banking regulation, on the other hand, the combination of deep economic integration and national policy-making has made it very difficult to respond to the clear demands from citizens for far stricter banking regulation.


It seems that EMU is stuck between two trilemmas, one economic and the other political. Where do we go from here?

There are several features of EU politics which are relevant in thinking about this issue.

The first is the question of governance: how decisions should be made at a supranational level is a contentious issue, which can again be illustrated by means of the trilemma. For most people, ‘democracy’ involves direct elections to parliaments which legislate.

One could leave European decision-making to the European parliament, but the nation-state remains the basic focus of political identity and authority, and national governments remain centrally involved in the process.

One solution would be to prioritize national parliaments and the nation-state: one could then have intergovernmental cooperation, but this would involve national vetoes, and it is hard to see a particularly proactive EU emerging in such a scenario.

The other solution is what we have: an essentially intergovernmental mode of decision-making that gives rise to accusations of a ‘democratic deficit’. This has created a constituency in Europe that is hostile to further integration.


The second relevant feature of EU politics is the international cleavages that exist regarding EMU. In particular, German citizens were opposed to it at the time, and this has political implications today.

The third feature is the existence of sharp intra-national cleavages in opinion regarding the EU in general, and EMU in particular.

The unskilled and the poor tend to be opposed to both, while the skilled and the rich tend to be in favour. The potency of these divisions was illustrated in the 2005 and 2008 referenda in France and Ireland, where voters divided largely along class lines.

Superimposed upon these long-run political cleavages are the effects of the global crisis of 2008-9, and the present banking crisis.

In principle, the global financial crisis could have led people to view the EU as a port in the storm, and there is an element of this in the Irish referendum approving the Lisbon Treaty in 2009. On balance, however, Eurobarometer surveys indicate that attitudes towards the EU have become more negative during the crisis, while there has been a fairly dramatic deterioration in trust in the institutions of the Union.

The interaction between a sharp economic crisis in several countries, and underlying class-based or national hostility to EMU, could turn out to be a potent one.

Even more serious could be the mishandling of the banking cum debt crisis. The decision of the ECB to veto the new Irish government’s desire to impose burden sharing on private bank bondholders is extraordinary, and provides Irish eurosceptics with an extreme example of the democratic deficit in action.

Meanwhile, taxpayers in Finland and elsewhere are revolting against the notion that they should bail out their profligate partners – recognising that this is a European banking crisis that needs a European solution might help change perceptions.

So would recognise that an end to regulatory competition in the financial sector would be a more logical concession to be sought from the Irish, in return for cutting interest rates, than an increase in their corporate tax rate.

Whether EMU can survive in the long run if the status quo persists is an open question.

Governments have tended to muddle between the stark trade-offs implied by the political trilemmas, but this crisis may force them to confront those trade-offs head-on.

What happens then is anyone’s guess.

By Kevin O’Rourke

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Finally, Trichet Show Some Fire Power

As expected, the ECB had a pivotal role in determining spreads direction today. However, it didn’t turn out quite as smooth as the market was expecting. The  surprise followed soon after Jean-Claude Trichet‘s  press conference.

“It soon became clear that central banks were aggressively buying bonds, bringing to mind Trichet’s recent warning not to underestimate the ECB.”

Gavan Nolan


ECB president Jean-Claude Trichet did confirm that the ECB would delay its exit from its non-standard liquidity measures;  the three-month LTROs would remain in place until at least Q1 2011 and the other MROs until at least April 2011. This was welcomed by the markets, but it would have been a major surprise if wasn’t announced. The real surprise followed soon after the press conference.

The first reaction to Jean Claude Trichet‘s press conference was one of disappointment after the ECB president failed to provide a firm indication that the central bank was to step up bond purchases.

But soon it became clear that central banks were aggressively buying bonds, “bringing to mind Trichet’s recent warning not to underestimate the ECB,” credit analyst Gavan Nolan writes in Thursday’s Markit Intraday Alert.

“Portugal and Ireland government bonds were the main focus of the buying, with reports of some purchasing of Greek bonds also in circulation.” Nolan points out.

And the actions of the ECB caused the Markit iTraxx SovX Western Europe to whipsaw violently in a frenzy trading session.

The index was as tight as 182 basis points this morning, before widening sharply to 190 bp’s in the immediate aftermath of Trichet’s words.

Then rallied sharply to 180 bp’s when the scale of ECB bond buying became apparent.

“The rally in banks was even more emphatic, with the Markit iTraxx Senior Financials index reaching 145 bp’s, some 17 bp’s tighter than yesterday’s close,” Nolan reports.

Iberian banks, which have underperformance of late, were among the strongest tightening credits. This pulled the Markit iTraxx Europe tighter in a corporate market where only a few defensive names widened.

“The focus will now turn to tomorrow’s economic data, with non-farm payrolls, Markit PMIs and ISM Services,” Nolan concludes.

Adding: “But the ECB’s actions haven’t solved the sovereign debt problems, and some investors will already be wondering when the issue of solvency, rather than liquidity, will be addressed.”

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  • Markit iTraxx Europe 106.5bp (-6.5), Markit iTraxx Crossover 473.5bp (-30)
  • Markit iTraxx SovX Western Europe 180bp (-11)
  • Markit iTraxx Senior Financials 145bp (-17)
  • Sovereigns – Greece 885bp (-43), Spain 290bp (-26), Portugal 450bp (-32), Italy 214bp (-16), Ireland 550bp (-20), Belgium 182bp (-10), France 92bp (-4)

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Here's The Best Place For High Frequency Trading

If any of you oil company executives get a phone call from a financial trading firm who want to rent an oil rig, don’t be surprised. A recent analysis concludes that the best place for high frequency trading in the near future probably is in the middle of the Atlantic Ocean.

“Simply owning or having sovereignty over a certain position on the Earth might turn out to be financially interesting.”

Alexander Wissner-Gross

To exploit the 50-odd milliseconds it takes for information to cross the Atlantic, it turns out that the sweet spot isn’t always at the stock exchange’s door. The best places for extreme high-frequency trading might be an empty lot in Uzbekistan, a barge anchored miles off Chile’s southern coast or on a floating device in the middle of the Atlantic Ocean, according to the analysis.

The analysis,  to be discussed at High-Frequency Trading Experts Workshop 2010 organized by Golden Networking in November and December, tries to pin point the precise locations between the world’s major securities exchanges for gaming at the speed of light.

In today’s markets, computers search for and act on relevant information in a flash, sending orders through fiber optic cables at nearly the speed of light. By buying or selling shares split seconds ahead of the rest of the market, holding stock for mere moments and then doing it all again, high-frequency traders are turning fractions of pennies into piles of dollars, UltraHighFrecuencyTrading.com writes.

To trim the time lapse in this extreme markets, firms will even buy space for their computers as close as possible to an exchange’s computers, a practice called “co-locating” that cuts data travel time, giving some traders an edge.

But to exploit the 50-odd milliseconds it takes for information to cross the Atlantic, it turns out that the sweet spot isn’t always at the exchange’s door. For some assets sold on more than one market, such as the New York and London stock exchanges, the money-making spot is in the middle of the Atlantic Ocean, researchers report in a paper to appear in Physical Review E.

The team figured out primo locations for performing particular trades on the world’s 52 major securities exchanges.

The analysis considers the speed-of-light delay between exchanges, and characteristics of the exchanges themselves, such as volume and frequency of trades.

“‘One surprising feature is that a lot of these optimal positions are in the ocean or other poorly connected areas,” says study coauthor Alexander Wissner-Gross of the MIT Media Laboratory.

“Simply owning or having sovereignty over a certain position on the Earth might turn out to be financially interesting.”

But some choice of spots, such as Los Angeles, are already well-connected, says coauthor and mathematician Cameron Freer of the University of Hawaii at Manoa. For trading some stocks sold on both the New York and Tokyo exchanges, the ideal location is probably already wired.

However, even for hot spots with preexisting infrastructure, it’s unlikely anyone will take advantage of this money-making map anytime soon, according to computational finance expert Michael Kearns of the University of Pennsylvania in Philadelphia.

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