Two questions for Mr Mario Monti

A major network asked me to suggest two questions that might be put to Mr Mario Monti, Italy’s Prime Minister. Here are the ones I came up with. What do you think his answers will be?

Question 1: Italy and the ECB’s OMT program: Will it help you in the medium run?

Context: In the June EU Summit, you fought tooth and nail to save the euro from inactivity by having Europe’s bailout funds lend to the Italian and Spanish governments directly. Since then Mr Draghi, the ECB President, unveiled his OMT program (outright monetary transactions). Suddenly the markets calmed down, your borrowing costs tumbled and hope was restored.

Main Question: Are you now worried that your agenda-changing success, back in June, was short lived? That the strict conditions attached to the ECB’s OMT program are so onerous and demeaning for a proud country like Italy, indeed Spain too, that you will only apply for it when your situation has become too desperate? And since this is becoming common knowledge, will markets not turn against you soon, thus pushing you into such an unbearable program? Can your administration survive such indignity?

Question 2: Banking Union: Is Germany undermining your great success?

Context: In the same June Summit, you and Mr Rajoy played a major role in having Germany accept the notion that banking recapitalisation should be done directly from the Eurozone, rather than having heavily indebted governments like yours, Spain’s, Greece’s… borrow on the banks’ behalf. To do this however, it was agreed that all of the Eurozone’s banks should be supervised directly by the ECB. The German Finance Minister has since made it clear that he does not want to see the ECB supervise all banks. He wants it just to scrutinise around 20 or 30 large banks, leaving the rest to the national supervisory bodies. Given that most of the banking failures begin with the smaller banks (Northern Rock, Dexia, Bankia etc.), as well as the large banks’ affiliates, this would be inconsistent (A) with a genuine banking union under one supervisor (the ECB) and (B) with direct capital injections into the Eurozone’s banks (Spain’s in particular) that do not inflate the national debt of the countries in which they are domiciled.

Main Question: Do you fear that Mr Schauble’s suggestion that the ECB supervises only a small number of ‘systemic’ banks is a smart ploy for delaying, perhaps forever, direct recapitalisation of Spanish and Italian banks? Can Italy and Spain survive such a manoeuvre? Will you insist that all banks must be under the ECB’s watch?

20 Comments

  • Schäuble is speaking for the lobby of the small savings and coop banks in Germany (they are all very small and only in retail banking). However, it looks like he is not going to win this one and it surely isn’t a major issue or breaking point so I don’t really see how you can spin this into a German conspiracy against recapitalizing Italian and Spanish banks.

    • Who in Germany would put his money in the account of a bank that shares risk with ClubMed banks? Everyone would immideately take his money to a Swiss bank, American bank etc..

    • The only issue here is a common deposit insurance fond for all kind of banks, not the banking union herself. There are three different forms of common deposit insurance fonds in Germany for three different kinds of banks. If you combine those fonds, you create a big moral hazard problem because you invite the big banks to gamble at the expense of the smaller savings and coop banks. Would you like the savings of your children to be used to insure the deposits of the big gamblers and their customers? Moreover, the creation of a common deposit insurance fond would equal a situation in which you go to an insurance company and demand an insurance contract even though the damage does already exist. There are good reasons why you might end up in prison for such a behaviour.

      Mr. Varoufakis is either ignoring these problems on purpose since all he can think of is how Greece’ banks can socialize their debts or he has simply no clue about the banking system in the Euro zone. You choose.

    • Exactly. It’s no coincidence that the big banks are in favour of a banking union for all banks whereas the small regional banks are not.

  • Dear Mr Varoufakis,
    Regarding the 2nd question, how come the notion of a central banking union not transgress the national sovereignty of the EU members? Are you moving towards the idea of a federal union, which you vehemently rejected in the past? Please forgive any misunderstanding from my part.

  • Monto can stop counterfeiting money and violating treaties and statutes. The Euro will crash, break, die or whatever you want to call it.

  • Good questions; but does anyone here believe that Yanis will get any form of public recognition that the questions have been read; let alone, an answer?

  • Q1 Answer – I think it showed how effective a co-coordinated response can be and I think it also showed how a centrally coordinated Euro can bring huge benefits to the people of Europe through increased stability and the leveraging of the power contained in the EZ.

    Q2 – I think are actions are showing the folly and fragility of nationally monitored markets and banks. As time progresses I expect the resistance to decrease as the benefits of a unified response become more and more clear.

    Also

    Yianis, I think your answers would be extremely close to what Monti will say. Even though the motives of your response and Monti’s will be diametrically opposed.

  • “are so onerous and demeaning for a proud country… indignity”

    Hehe! This tells us more about your psyche than about economics or Mr. Monti. Please tell me where I can find a creditor which isn’t deciding the lending conditions but let’s the debtor decide freely, I’d like to go to that fool! 🙂 Btw, many Italians are deeply greatful for this conditionality, the conditions assure that necessary reforms continue even when Mr. Monti is not prime minister any longer.

    • Please let us know if you are aware of other CBs apart from the ECB that impose any kind of conditions to their respective governments.
      Because implying that ECB is just like any other creditor,is just absurd.
      Lets start from the basics….a CB cannot go broke even if its balance sheet implies negative equity.

      For the record here’s an interesting section from the Fed Act:

      “Nothing in this Act contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary. “

    • “a CB cannot go broke even if its balance sheet implies negative equity.”

      I recommend you William R. White and his research. You are right that a CB cannot go broke but it is not clear whether a CB can work despite negative equity or if it needs a capital increase. But it certainly needs trust and lending excessively or guaranteeing the “wrong” debts without proper collateral is not really a trust building measure.

      You cannot compare the FED with the ECB. There is no central treasury in Europe but in the US and that’s the reason why direct lending to governments is strictly prohibited. The FED does not lend to California or NY either. And the national CBs of 17 souvereign EZ countries, hence ultimatelly their tax payers are the shareholders of the ECB and bear its losses (also opportunity cost, don’t forget that). Moreover, tax payers pay inflation taxes and other crisis costs if asset inflation leads to another bubble which bursts etc. So of course tax payers have the right to demand guarantees since they stand behind those credits and wrong decision effect them negatively. Their governments and the Troika are their agents, lending conditions are their guarantees, no matter if they are right or wrong or if Mr. Varoufakis agrees with them. An OMT without conditionallity would mean that tax payers lend to the very same politicians which messed up before without getting guarantees. That would create a moral hazard problem which would let the EZ explode in the medium term the latest. He talks about indignity, but does he expect foreign tax payers to stand behind other countries’ debts unconditionally? Is that an honorable demand? I think it is absurd.

    • “I recommend you William R. White and his research.”
      Thanks.Any direct links?I dont know which research exactly you are talking about.
      You can also have a look for yourself at Marshall Auerback (whose opinion has been reposted on Proffesor Varoufakis’ blog: http://yanisvaroufakis.eu/2012/06/13/germanys-constitutional-conundrum-guest-post-by-marshall-auerback/) and also Bill Mitchell: http://bilbo.economicoutlook.net/blog/?p=19402

      “You cannot compare the FED with the ECB. There is no central treasury in Europe but in the US and that’s the reason why direct lending to governments is strictly prohibited.” Sure.But you can only be fine with this,if you accept that separating fiscal from monetary policy can be sustainable whille apparently it is not.You only highlight another flaw of the Eurozone than anything else.

      ” The FED does not lend to California or NY either. And the national CBs of 17 souvereign EZ countries, hence ultimatelly their tax payers are the shareholders of the ECB and bear its losses (also opportunity cost, don’t forget that).”
      Claiming that someone has to bear the ECB’s losses comes in direct conflict with what you agreed with me on, earlier: “You are right that a CB cannot go broke but it is not clear whether a CB can work despite negative equity or if it needs a capital increase.”
      The CB can actually recap itself,if the political constraints are set aside that is.But theres no operational reason why it could not.So obviously nobody have to bear its losses,and no, no inflation will acompany this procedure since the new recap funds will never enter circulation,pretty much like the existing capital of ECB has nothing to do with inflation.

      “So of course tax payers have the right to demand guarantees since they stand behind those credits and wrong decision effect them negatively.”
      Nobody stands behind those credits.ECB has unlimited capacity to create euros it doesnt need you and me to do it.Furthermore the ECB is a bit different than say ESM or EFSF etc. For only certain countries are ESM’s “shareholders” for example but all eurozone countries are ECB’s shareholders.So you are basically proposing that the ECB should screw up a part of its taxpayers so as to safeguard (from what? from something they dont have to be affected from in the 1st place?) another part of its taxpayers.Well this says something about your own psyche.

      “Their governments and the Troika are their agents, lending conditions are their guarantees, no matter if they are right or wrong or if Mr. Varoufakis agrees with them.”
      I think theres nothing else to discuss when you say that we have to accept the conditions no matter if they are right or wrong.Indeed they are wrong and thats why proff. Varoufakis disagrees with them.If the austerity in the periphery is not the reason for the EZ and EU economic slowdown then what is?

    • Crossover – Here we are again. A simple question. If Greece had a balanced trade account would it matter what the ECB was doing? Hypothetically speaking.

    • No it wouldnt.All other things equal you would be talking about a different country instead of Greece,that would have the very same problems.Imbalances in a fixed exchange rate regime are the norm.Just like not all regions inside a country have a balanced trade with each other.

    • “Thanks.Any direct links?” Search it yourself, please.

      “separating fiscal from monetary policy can be sustainable whille apparently it is not.” I beg to differ very much, look at Italy in the 1970/80 and learn something. The FED is not a role model since there is a permanent principal-agent-problem between her and the government if she focuses on growth or state financing instead of inflation/deflation and lets politicians off the hook. Current developments will certainly create new problems since there is no lack of liquidity in the entire global economy but a concentration of too much liquidity in the wrong accounts and countries.

      “So obviously nobody have to bear its losses,…”
      If Greece or another country defaulted, the ECB and her shareholders would have to bear losses if she had purchased souvereign bonds. If the ECB gets locked in due to such bond purchases and needs to buy bonds of a reform reluctant country forever in order to avoid default, sterilization will fail more likely, asset inflation (which we already have by the way) will follow first, in the medium term higher inflation in the real economy. One way or another, European tax payers can be negativelly effected and have of course the right to demand conditions and that’s what you witness at the moment. The best thing would be not to buy or guarantee any souvereign bonds since such programs cause legal, economic and democratic problems. Risk sharing should follow democratic decisions and not Central bankers’ decisions, shared risks and shared control belong together to avoid moral hazards and central banks should be apolitical. Nobody should expect to get loans unconditionally, neither from governments nor the ECB, that’s very ivory-tower as long as there is no central and democratically controlled EZ treasury.

    • “I think theres nothing else to discuss when you say that we have to accept the conditions no matter if they are right or wrong.”

      I don’t want to discuss the conditions in detail, I think some are necessary but the austerity measures are too much. But I also think that the recession wouldn’t be so deep if reform commitments had been fulfilled. But whatever, it is actually quite easy: Creditors and Greece are interested in success. If the conditions proove to be wrong, not only the borrower but also the lenders are harmed. It is the creditors’ risk to lend to the Greek government even though they can expect some reform reluctance due to vested interests. They carry the risk of having to increase the bail outs or to accept default losses. And if they demand some wrong conditions – what I think they do – they’ll also have to bear the costs. So no matter how you turn it, the creditors have the right to decide the conditions and Greece either accepts them or refuses the offer and bears the consequences as well. Expecting no conditions is ivory-tower.

    • “The FED is not a role model since there is a permanent principal-agent-problem between her and the government if she focuses on growth…”

      Nobody said the FED is a role model.Still, ECB is even further away from being a role model.But hey,at least the FED has a dual mandate and keeps an eye in unemployment along with inflation.

      “Current developments will certainly create new problems since there is no lack of liquidity in the entire global economy but a concentration of too much liquidity in the wrong accounts and countries.”
      If you are referring to QE and its ECB equivalent,then you definitely dont understand the mechanics.

      From ECB:
      “The occurrence of significant excess central bank liquidity does not, in itself, necessarily imply an accelerated expansion of MFI credit to the private sector … […]

      The adoption of the monetary easing framework by the Bank of Japan in 2001 resulted in a sharp increase in excess central bank reserves … This increase was accompanied by a reduction in the Bank of Japan’s key interest rates to zero and stopped the slowdown in broad money growth. Despite the increase in excess central bank reserves in 2001, there was no strong acceleration of either broad money growth or inflation, both of which remained at very low levels … In 2006, within a span of a few months, the Bank of Japan was able to reabsorb the significant amount of excess central bank reserves and to re-establish balanced liquidity conditions by not rolling over short-term liquidity-providing operations […]

      in an environment characterised by a stabilisation of economic activity at a low level, this is highly unlikely to translate into consumer price inflation. In any case, signs of a surge in inflationary pressure would be anticipated by a faster expansion in money and credit, which the ECB is well equipped to detect and address …” more here http://www.ecb.int/pub/pdf/mobu/mb201205en.pdf