The World Bank issued pandemic bonds in 2017 after the outbreak of the Ebola Virus in West Africa. They are a form of emergency aid to the health systems of the poorest countries eligible for funding from the International Development Association. However, as Bloomberg reports Pandemic Bonds these take a long-time to pay out and the sums are relatively small and nowhere near enough to deal with the scale of the crisis in third world countries.
What is required in developed nations now both for their own needs and to aid the poorest countries are Coronavirus bonds. These would be the equivalent of the war bonds issued in WW1 and WW2 and carry with them similar patriotic or altruistic incentives for savers and investors.
The funds would be deployed in three phases. Firstly, to ensure adequate funding for the immediate public health needs whether these be emergency hospitals, ventilators or personal protective equipment and economic support to furloughed workers and the self-employed during the lockdown and the phased relaxation of social distancing.
Secondly, to finance the fiscal stimulus required to reboot the economy primarily through the roll-out of a minimum income guarantee at subsistence level coupled with local authority administered job guarantees and placements for the unemployed aimed at alleviating staff shortages in health and social care services; warehousing and distribution; agriculture and the construction sector among others.
Thirdly, investment in the development of green infrastructure and acquisition of land for modern public housing required to accelerate the achievement of Zero carbon emission targets by 2030.
Crucially, the bonds can also serve as a store of value if they are index-linked as some pensioner bond issues have been until recently. Linking the coupon paid on these bonds to the Consumer Price Inflation Index gives pensioners and individual savers alike a relatively secure store of value that seeks to maintain the value of their savings in a way that tax-free Individual savings accounts (ISAs) cannot.
Coronavirus bonds have been discussed as a means of stronger Eurozone economies helping weaker European economies. But, with every country in the world experiencing a severe economic contraction, International policy coordination may not be enough to stave off a long-lasting depression. As worried consumers retrench and start to reduce spending and increase savings the paradox of thrift sets in. In these circumstances, each country will need to look to its own resources and national savings to rebuild economies sustainably and provide aid to the poorest countries.
Initially, National Income will fall and debt to GDP ratios will rise significantly. So too will interest costs increase on index-linked bonds and increased levels of borrowing. It is crucial that a sustainable economy is rebuilt on sold foundations. This requires major public and private investment and real rates of return on savings and capital that at the very least maintains the value of money.
It is only on this basis that we can have the public services and housing, natural environment, job security and social security safety net that are so badly needed.
* Joe is a member of Hounslow Liberal Democrats and Chair of ALTER.
Follow @libdemvoice.org on Bluesky
Like us on Facebook
Subscribe to our feed
Sign-up for our daily email digest
Elvis Costello and The Attractions: Watch Your Step
West End ward surgeries today #dundeewestend
Speculation over Labour's benefit cuts
Being a good conference guest
Simon R
Robin Bennett
Mike Peters
Tessa Skoczylas
33 Comments
@ JoeB,
Coronavirus bonds have been suggested for the eurozone. They are really no different from the previous suggestion of euro bonds. The idea is that the EU countries as a whole are responsible for them rather than just one particular country. Just as in the UK, the responsibility for issuing bonds (gilts) is taken jointly by Scotland, Wales, Northern Ireland and England. If you want to consider the USA as a collection of 50 states, they all share responsibility too.
But this idea doesn’t appeal to the Germans, the Austrian the Dutch and the Finns who have said Nein, Nee, and Ei.
So there is no real need to for “coronabonds” in the USA or the UK. I doubt we’ll see them. I suppose the Govt could issue something called Coronabonds if they wanted to. Possibly it might encourage some people to buy them who otherwise wouldn’t, although when many have lost their incomes I doubt the sales would be at all significant. In any case, they wouldn’t be functionally any different to the usual gilt issue.
Another way to look at this is to acknowledge that there really wouldn’t be any point anyone selling their Premium bonds to buy Coronabonds. Or even taking their money out of a term deposit in bank to buy them. The bank would probably just reduce their holdings of government gilts to match the withdrawals.
Peter Martin,
when these index-linked national savings certificates were last available to savers in 2010 there was a flood of applications from savers seeking refuge from inflation https://www.theguardian.com/money/2010/jul/19/nsi-withdraws-index-linked-savings
As the Guardian article notes, it was the first time since their launch in 1975 that the index-linked bonds have been closed to new business after NS&I saw a near-record £5.4bn inflow of money in the first quarter of the year.
War bonds in the UK were largely gilts but were marketed to the public as required for the war effort. In the US WW2 War bonds helped the government raise about $185 billion at the time, and were bought by over 84 million Americans.
Banks and other financial institutions will buy regular bond issues to replace the stock that the Bank of England can acquire in the secondary market without setting off a spike in inflation.
Would these bonds be purchased for commercial or charitable ends or for a mixture?
If purchasers aim to make a profit from C V bonds, where does the profit come from?
Is it the case that nations with the most efficient infrastructures cope best with CV?
Are nations with the most efficient infrastructures those with the best mixture of private and public enterprise in their mixed market?
Is there a free market anywhere in the world?
Not that I disagree with any of what you say Mr Bourke. However before we even get to that surely there’s a legal problem. I don’t see how Eurobonds pass A125 of TFEU.
At a minimum I guess the German and Dutch constitutional courts would refer the matter to the ECJ. Probably others too. The ECJ might be able to come up with something creative but that would carry a real domestic political price. They could try to change the treaty, but that would need referendums and the timing isn’t ideal.
In fairness to the northern states if I was Rutte or Merkel I’d probably be saying what they are saying. ESM is there for a reason. I suppose one route would be for all 19 EZ states to apply to ESM at once, that would lessen the ‘stigma.’ But even that might run into domestic legal and political objections.
The better criticism of the EU was always that it is neither one thing nor the other and it is showing now. It will muddle through but it’s not satisfactory and the single currency in particular will be under pressure given that all the principles underlying it are now gone.
@ Joe B,
As is often the case you seem to be prone to some confused thinking.
On the one hand you are saying:
“As worried consumers retrench and start to reduce spending and increase savings the paradox of thrift sets in”
Which is quite right. But, on the other hand this doesn’t tie in with:
“This requires major public and private investment and real rates of return on savings…”
Saving with the Govt, in Coronabonds or anything else, are risk free and aren’t investments in the economy. Govts should seek these savings and make them more attractive when they want to dampen down spending not when they are worried about the “paradox of thrift”.
Having said this, it is possible (but I’d say unlikely) that production will fall to the extent we could have an inflation problem due to the shutting down large sections of the economy in which case there would be a case for offering more attractive Govt bonds. If that’s what you mean, you should say so more clearly.
The ESM is not a bailout, it is a loan.
The last thing countries like Italy need is another loan. Worse than that, before the ESM will give you this loan, the country receiving the loan, must sign a MoU (Memorandum of Understanding)
A Memorandum of Understanding is a fancy EU way of saying:
Default on your repayments of this ESM loan and your Sovereignty, including your pensions, savings in your banks, and pretty much anything which is not nailed down is now the property of the EU
Utter madness. Greece was too small to fend off EU /German / ECB /IMF bullying. I think Italy and Spain, will prove too big a problem to intimidate so easily?
Peter Martin,
I think the article is clear enough for anyone willing to read it without bias “…with every country in the world experiencing a severe economic contraction, International policy coordination may not be enough to stave off a long-lasting depression. As worried consumers retrench and start to reduce spending and increase savings the paradox of thrift sets in.”
“Initially, National Income will fall and debt to GDP ratios will rise significantly. So too will interest costs increase on index-linked bonds and increased levels of borrowing. It is crucial that a sustainable economy is rebuilt on sold foundations.”
There is no such thing as risk-free savings, particularly where savings are subject to depreciation through inflation. Hence, the need and high demand for index-linked savings certificates.
Much damage has been done to the UK economy as a result of the 2008 financial crisis and a decade of near-zero interest rates inflating house prices and decimating the savings and pensions of retirees and those saving for retirement in auto-enrolment pension funds.
Intelligent investment in productive green infrastructure and public housing is what is needed to rebuild a sustainable economy. One in which people can have secure work and housing and save for the future safe in the knowledge that their weekly pension will buy more than a loaf of bread when they come to retire.
Steve Trevethan,
Would these bonds be purchased for commercial or charitable ends or for a mixture?
In the UK they would be issued as index-linked savings certificates by NS&I (National Savings and Investments), a state-owned savings bank in the UK that offers Premium Bonds and a range of other savings and investments, including Direct Saver.
If purchasers aim to make a profit from C V bonds, where does the profit come from?
Savers aim to preserve the purchasing power of their savings. The interest paid is equivalent to annual inflation. If the interest is reinvested the savings will compound so when they are withdrawn they will have an equivalent purchasing power value to the original sums saved.
Is it the case that nations with the most efficient infrastructures cope best with CV? Yes
Are nations with the most efficient infrastructures those with the best mixture of private and public enterprise in their mixed market? Yes
Is there a free market anywhere in the world? No
Little Jackie Paper,
there are a number of economists advocating capital transfers or risk-sharing across the Eurozone in the form of collective Eurobonds. However, clearly there is a big split between the more fiscally conservative Northern EU states and Mediterranean members on the issue and not without good reason.
My view is that individual EU countries should issue their own Coronavirus bonds in much the same way that US states issue municipal bonds and appeal to national solidarity rather than relying on the vicissitudes of International capital markets.
As Dilletante Eye notes the ESM loan comes with conditionality and countries like Italy could well find the Troika taking over the running of their budgets if they were to default.
Italy and Spain are both big economies with substantial household wealth invested in property and financial assets. At a time of crisis this is where one needs to look first,
The Dutch premier has offered direct aid to both Italy and Spain https://www.cnbc.com/2020/04/02/coronavirus-eu-latest-dutch-offer-as-death-toll-rises-in-spain-italy.html to cover the direct costs of the Covid 19 outbreak. It is a gift, not a loan or guarantee.
When it comes to the reconstruction of the economy as the outbreak is contained and people are able to return to work, longer-term investment may require a return to international capital markets (particularly for the refinancing of existing debt), but this should be on a foundation of national household savings.
@ JoeB,
The government has an inflation target of 2%. Therefore, to protect the value of savings, it could be argued they should never be offering interest rates below this level. But, rightly or wrongly, they do. Money is deposited at less than 1% and gilts do get sold at auction with yields that correspond to less than 1% too.
It’s always been like this since at least the end of WW2 with the briefest of exceptions. The Coronavirus hasn’t changed anything. Interest rates are lowered to encourage spending and raised to discourage spending. There are problems with doing this but that’s the way it is. You know very well that risk free doesn’t mean inflation proofed. If that’s what you want you’d have to store cans of baked beans in your garage.
” individual EU countries should issue their own Coronavirus bonds in much the same way that US states issue municipal bonds and appeal to national solidarity….”
The US doesn’t fund national emergencies through the sale of municipal bonds. It’s rightly the responsibility of the Federal Government. And they do a reasonably good job – picking up a lot of criticism from the economically illiterate about the extent of their spending, and the size of their deficits, in the process. If the EU is to mean anything at all, the issue of euro denominated bonds has to be the responsibility of the entire euro area. That’s the way a common currency has to work. If Germany and the Netherlands don’t want to be a part of it they should be the ones to leave.
@ Dilettante Eye
“The last thing countries like Italy need is another loan……..Utter madness. Greece was too small to fend off EU /German / ECB /IMF bullying. I think Italy and Spain, will prove too big a problem to intimidate so easily?”
Absolutely right!
The UK is not in the Eurozone but faces similar issues.
Gross national income (GNI) includes the final value of incomes flowing to UK-owned factors of production – irrespective of whether these are located in the UK or overseas. As such, it also records net income from abroad (NIFA). These capture the flow of income that is received on UK assets, net of income that is payable on UK liabilities.
GNI = GDP + NIFA
Savings (S) captures the difference between GNI and private (c) and public (g) consumption.
S = GNI- (C+G)
The current account records international trade, investment income and current transfers.
CA = (X-M) + NIFA
It is possible to re-arrange these national accounts identities, so that:
GNI = C + I + G + (X-M) + NIFA
GNI – (C + G) – I = (X-M) + NIFA
S – I = CA
This shows that the current account can be expressed in two ways:
it is the differences between the value of exports and imports, covering trade, investment income and current transfers;
it is also the differences between national savings and investment
Analysis of how much the UK is a net borrower from the rest of the world through the savings and investment relationship helps reinforce the concept that it is macroeconomic drivers that help explain movements in the current account.
UK exports are circa 30% of GDP and highly dependent on non-essential financial and business services, tourism and overseas students. UK imports are circa 32% of GDP and include essentials such as oil and gas, food and other commodities as well as large volumes of consumer goods.
As exports begin to fall far short of imports, the gap either has to be financed by greater levels of borrowing from abroad or reduced by lower consumption of imports and corresponding greater levels of national savings. The latter is preferable to reliance on volatile International capital markets and can be incentivised by maintaining low levels of inflation and providing reliable and safe national savings products for domestic savers.
@ Joe Bourke (@ Steve Trevethan)
“In the UK they would be issued as index-linked savings certificates by NS&I (National Savings and Investments), a state-owned savings bank……”
No-one is against savers looking to obtain the best rate of return on their savings, but why do those of a rightward political disposition, who normally recoil in horror at any suggestion that banks be nationalised and owned by the state, suddenly change their minds and start advocating that state owned banks can offer them a better deal than private banks?
Where do they think money comes from? Is it from the Magic Money Tree perhaps? 🙂
Peter Martin,
it is not only those of a rightward political disposition that understand that the Bank of England controls the rate of inflation and that private banks do not and must finance their lending with deposits and other borrowings on which they make a margin to cover the cost of their services.
The UK has issued not only index-linked National savings certificates but also large volumes of index-linked gilts for institutional investors https://www.dmo.gov.uk/data/gilt-market/index-linked-gilts/
Money circulates in the economy in the form of currency and demand deposits and functions as the medium of exchange, a unit of account and a store of value. Modern money is principally debt that is created when banks create new loans for private or public users and diminished as loans are repaid. The quantity of money in the economy at any point in time is regulated by the central bank through monetary policy and as part of its inflation targeting mandate.
@ Joeb,
Firstly the BoE doesn’t “control the rate of inflation”. This is primarily a monetarist, and therefore right wing, myth. They might try to by fiddling around with interest rates but that doesn’t necessarily affect the levels of spending in the economy in the way it might like. It certainly doesn’t control the level of Govt spending.
I’ve been taking a look at your algebra. That will probably put off quite a lot of people!
I’d have just started with the generally accepted Sectoral Balance equation:
(S-I)+(T-G)=(X-M)
Your term of NIFA doesn’t quite fit but, in descriptive terms “differences between national savings and investment ” only equals net exports when the Govt is running a balanced budget.
But, as I’m sure you’ve pointed out yourself, we can’t assume cause and effect from these kinds of indentities. So the question is if “the gap (is) financed by greater levels of borrowing from abroad” or is it the desire of those from abroad who wish to save with is creating the gap in the first place?
Of course I can’t prove it from these equations but I’d tend to favour the latter. The general desire of most countries in the world is to run a trading surplus. Therefore if countries like us take a relaxed view about our trade we’ll almost certainly be one of those who runs a deficit. When I put money into a bank I’m doing the lending and the bank is doing the borrowing. The bank isn’t though an active borrower in the same way I would be if I wanted to raise money for, say, a car. This is how it is for the UK govt too. It’s quite rare that they deliberately go out to seek a loan in this way. If they did thy’d have to pay a little more interest than they actually do!
Peter Martin,
whether you consider it a monetarist, and therefore right-wing, myth or not this is what the Monetary Policy Committee of the Bank of England is mandated to do. If they do not meet the target specified by the government in any month, the bank governor is required to write to the Chancellor explaining why and setting out when inflation will be returned to target.
You say “interest rates don’t necessarily affect the levels of spending in the economy in the way it might like”. I guess that depends on what targets it is trying to achieve. The Bank of England sets out how money is created in the economy https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy
The level of government spending is determined by budgeted national income at close to full capacity and what proportion of that projected income is allocated to public spending. The financing of government spending between tax collections and borrowings is a matter of actual cash flows in any given fiscal year.
In the National accounts, national savings means the aggregate of domestic savings and government surplus or deficit, It does not require running a balanced budget which rarely if ever happens.
The debt management office will only borrow what it needs to finance government spending and loan repayments on a day to day basis. The rates it pays are determined by gilt auctions where bidders determine the interest amounts. If there is a desire of those from abroad to invest in Sterling assets that are not satisfied by government borrowing requirements at any point in time (as is usually the case) they will look to foreign direct investment, portfolio investments in UK securities or shorter-term money market deposits that UK banks lend into the mortgage market or deploy elsewhere overseas.
Banks compete for deposits because this is a low-cost form of financing lending vis a vis other forms of borrowing. The name of the game is to keep “deposit costs” down while attracting enough deposits to finance the demand for bank loans.
@ Joe B,
Yes, you’re quite right about what the bank of England is mandated to do by Parliament. I suppose Parliament could mandate PI to be a rational number if they voted to do that. The legislature of Indiana came very close to actually doing that in the 19th century!
It doesn’t really change anything. The BoE should write back to the Chancellor and tell him to learn some useful macroeconomics. Maybe they could even include a copy of Prof Randall Wray’s book “Modern Monetary Theory” with the relevant chapters highlighted.
Thanks for the response!
Might these bonds be a form of bailout?
If so, would it have similar effects to those felt by Greece after its bailout?
Where would the money go?
Into the “real” economy to finance new direct investment, employment, rising wages and living standards and infrastructures such as health?
Into the financial sector?
https://www.counterpunch.org/2020/04/13/the-use-and-abuse-of-mmt/
Peter Martin,
the Chancellor would most likely quote the Palley paper https://www.tandfonline.com/doi/abs/10.1080/09538259.2014.957466?src=recsys&journalCode=crpe20
“MMT is a restatement of established Keynesian monetary macroeconomics and so there is nothing new warranting a separate nomenclature. MMT over-simplifies the challenges of attaining non-inflationary full employment by ignoring dilemmas posed by the Phillips curve, maintaining real and financial sector stability, and an open economy. Its policy recommendations take little account of political economy difficulties, while its interest rate policy recommendation would likely generate instability. On the plus side, MMT’s advocacy of expansionary fiscal policy is useful at a time when too many policymakers are being drawn toward mistaken fiscal austerity.”
MMT’s Job guarantees policy is an idea that predates and transcends MMT as a school of thought, with advocates among non-MMT economists and a history of support from unions. The basic concept being a minimum wage job with a local authority or Charity for any adult citizen who wants one.
Some on the left will criticize this aspect of MMT on the basis that job guarantees are workfare. However, as Pavlina Tcherneva, arguably the leading MMT researcher on job guarantee policy, writes. “The program is based on the principle of ‘fair work’ not ‘workfare,” “It does not require people to work for their benefits. It is instead an alternative to existing workfare programs.”
Steve Trevethan,
Where would the money go?
As per the article:
Firstly, to ensure adequate funding for the immediate public health needs whether these be emergency hospitals, ventilators or personal protective equipment and economic support to furloughed workers and the self-employed during the lockdown and the phased relaxation of social distancing.
Secondly, to finance the fiscal stimulus required to reboot the economy primarily through the roll-out of a minimum income guarantee at subsistence level coupled with local authority administered job guarantees and placements for the unemployed aimed at alleviating staff shortages in health and social care services; warehousing and distribution; agriculture and the construction sector among others.
Thirdly, investment in the development of green infrastructure and acquisition of land for modern public housing required to accelerate the achievement of Zero carbon emission targets by 2030.
@Joe B,
Sure we’ve had Job Creation schemes going back at least into the 19th century but its only recently that the JG has been assoaciated with an inbuilt inflation control mechanism. I’ve read Palley and either he doesn’t understand that or he pretends not to understand it. A typical misrepresentation tactic. Why bother with the difficult task of engaging with what MMTers are actually saying when you can spout on for page after page about reckless money printing, Zimbabwe, Venezuela etc?
It is often said that new ideas are initially often ignored. Then they are ridiculed. (hence the references to Zimbabwe), then finally they are grudgingly accepted with the proviso “but of course we knew that all along”. We still have a quite a bit of the ridicule but I notice you have approvingly quoted the “nothing new” remark! So we’re getting there.
Bill Mitchell has had a bit to do with the JG theory too as I’m sure Pavlina Tcherneva would acknowledge.
@ Steve Trevethan,
“Might these bonds be a form of bailout? ……..Where would the money go?”
There won’t be any index linked bonds on general sale. It’s possible there might be a limited number, say £2k maximum per person, issued as a PR exercise which might even be called Coronabonds. The effect will be neither here nor there in the wider scheme of things.
Most bonds won’t yield very much at all. They’ll likely be sold in the auction market with the bond traders being tipped off in advance that the BoE will be a player in the market. They’ll buy and resell quickly to make their return. It’s all a sham to avoid the stigma of the BoE buying bonds directly from the Treasury.
So the money is first taken by the Treasury from the bond traders and then the bond traders get the money from the BoE which they’ve just created at will. The bonds go on the the BoE’s balance sheet to offset against the created money. The Treasury spends the money on all the things that Treasury normally spends it on. That’s where it goes.
Peter Martin,
Pally is recognized as a talented economist and it not he who lacks understanding or engages in misrepresentation tactics. If you are really interested in understanding the weaknesses in MMT theory (that so many leading Keynesian economists like Simon-Wren Lewis, Jonathan Portes, Martin Wolf and Paul Krugman have pointed out) read Cullen Roche https://www.pragcap.com/mmt-good-bad-ugly/. He summarises: “…there’s a lot of good in MMT and I’ve always maintained that, but it’s foolish to think that MMT is a panacea for a period where people think mainstream economics hasn’t served us well. There is, after all, a lot more right with mainstream econ than most people want to admit and this “burn it all down” mentality is not constructive. That said, I am glad MMT is part of the new narrative, but I do hope they defend that narrative with more empirics and less combativeness.”
The NS&I currently offer Direct Saver accounts paying 1% interest (CPI is 1.7&) that you can save from £1 to £2 million and access without notice or penalty. Gilts (government bonds) and National Savings certificates amount to the same thing – the Government borrowing money off its citizens.
Index-linked savings Certificates are easy to understand and invest in and they also offer certain advantages: a fixed cash value (bonds vary in price over their lifetimes) and, crucially, a guaranteed positive rate of return for the Index-Linked certificates. The limit, when they were last available in 2010, was £15,000 per person. Today, if they were issued tax-free they would probably have a limit of £20,000 i.e. equivalent to an ISA and pay a coupon of 1.6% net.
For those with high levels of savings, gilts can be bought directly from the Government’s Debt Management Office or via a stockbroker (including online dealing accounts). There are about £336 billion of index-linked gilts (including institutional gilts) in issue at present.
The Bank of England and the Treasury announced on Thursday morning that its long-standing Ways and Means (overdraft) facility will be temporarily extended to enable the government to borrow as much as it needs to meet its commitments through the period of disruption from Covid-19 https://www.independent.co.uk/news/business/news/coronavirus-bank-of-england-treasury-ways-means-overdraft-borrowing-a9457071.html
@ JoeB,
I don’t want to go to the Palley paper in detail but I’ll just quote this:
“….. MMT recommends that government should create money and
spend until the economy reaches full employment and all workers who want a job are
employed. ”
This is simply not true. MMT does recognise that significant inflationary pressures will arise well before we reach full employment. That was always the problem in the 60s and 70s and it could well be even more of a problem now. This is where the JG comes in. So, as I said previously, Palley either doesn’t understand MMT or, more likely, he’s pretending not to.
PS Any chance of a reply to the questions I asked in my previous comment?
Peter Martin,
what specific questions are you referring to?
@ Joe B,
Sorry I was thinking it was on this thread but it’s on the “Rejoining the Party – Post Brexit”. 13th Apr ’20 – 7:48pm
There were a couple of links on my comment of about why the euro was a flawed idea from the start. One by Milton Friedman. I don’t normally agree with him but on this I would say he was spot-on. Just wondered what your take was?
Peter Martin,
Milton Friedman in his article wrote link https://www.project-syndicate.org/commentary/the-euro–monetary-unity-to-political-disunity
“Whether [a common currency] is good or bad depends primarily on the adjustment mechanisms that are available to absorb the economic shocks and dislocations that impinge on the various entities that are considering a common currency. Flexible exchange rates are a powerful adjustment mechanism for managing shocks that affect the entities differently. It is worth dispensing with this mechanism to gain the advantage of lower transaction costs and external discipline only if there are adequate alternative adjustment mechanisms.”
This is perfectly true. Following that experience of the Greek debt crisis, the EU council called for deeper integration in the Eurozone and proposed major changes in four areas. First, it called for a banking union encompassing direct recapitalisation of banks by the European Stability Mechanism (ESM), a common financial supervisor i.e the Single Supervisory Mechanism (SSM), a common bank resolution scheme i.e. the Single Resolution Machanism (SRM) and a deposit guarantee fund. Second, the proposals for a fiscal union included a strict supervision of eurozone countries’ budgets, and calls for eurobonds in the medium term. Third, it called for more integration on economic policy, and fourth, for the strengthening of democratic legitimacy and accountability.
The ESM, SSM and SRM are all in place.
The ESM has been made available for temporary financing of public health measures up to two percent of a country’s GDP without conditionality.
No agreement has yet been reached as to how much funding will be made available to support the recovery’.
The EU SURE program will backstop national unemployment systems with €100 billion in temporary loans together with €37 billion from money set aside for cohesion funds. And member state governments have committed what the Eurogroup describes as additional discretionary spending worth approximately three percent of European Union GDP.
When you add the loan guarantees from the European member states and the European Investment Bank into the mix, you get to a number close to the $2 trillion U.S. emergency package.
Maybe this crisis will finally force a conclusion to the measures required for deeper integration in the Eurozone including a European deposit insurance scheme and potentially some form of Eurobonds.
@ JoeB,
Your’re not quoting from the conclusion of the article which was written some 23 years ago!
Here the late Milton Friedman predicts:
“I believe that adoption of the euro would have the opposite effect. It would exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange rate changes into divisive political issues.
That seems a pretty good prediction.
If you want someone from a more Keynesian tradition, here we have the late Wynne Godley with a slightly different angle, but saying, in 1992, essentially the same thing. ie Don’t do it! Because it will never work.
” If a country or region has no power to devalue, and if it is not the beneficiary of a system of fiscal equalisation, then there is nothing to stop it suffering a process of cumulative and terminal decline leading, in the end, to emigration as the only alternative to poverty or starvation.”
I don’t think he’d be too impressed by your assertion that “internal devaluation” was a viable cure for poverty and starvation!
https://www.lrb.co.uk/the-paper/v14/n19/wynne-godley/maastricht-and-all-that
The other question was about quantifying the “Rotterdam Effect”. Can you put a figure on that?
:
Peter Martin,
the conclusion to Milton Friedman’s article reads “The drive for the euro has been motivated by politics, not economics. The aim has been to link Germany and France so closely as to make a future European war impossible, and to set the stage for a federal United States of Europe. I believe that adoption of the euro would have the opposite effect…”
Has the adoption of the Euro driven Germany and France apart? Here is President Macron https://www.reuters.com/article/health-coronavirus-ecb-france/french-president-macron-gives-full-support-for-latest-ecb-measures-idUSP6N2B201H
“Full support for the exceptional measures taken this evening by the ECB. It is now up to us, the European states, to step up to the plate via our budgetary interventions and to show a bigger financial solidarity at the heart of the euro zone,” and this is Angela Merkel in response https://www.reuters.com/article/us-health-coronavirus-germany/coronavirus-pandemic-is-historical-test-for-eu-merkel-says-idUSKBN21O17F
“The coronavirus is the European Union’s biggest ever challenge and member states must show greater solidarity so that the bloc can emerge stronger from the economic crisis unleashed by the pandemic. It will be about showing that we are ready to defend our Europe, to strengthen it.”
Germany would also support a post-crisis stimulus programme for the euro zone and the broader EU. “Here too, Germany is ready to make a contribution,” she said.
That does not sound like the opposite to the intended aim of linking link Germany and France so closely as to make a future European war impossible!
Almost every EZ member has seen stable growth and inflation since the creation of the Euro except Italy and Greece. Italy continues to struggle with Internal problems but these were there before it joined the Euro. It doesn’t take devaluation (internal or external) to resolve bank debt-related problems). Ireland (another EZ member) had a debt to GDP ratio of a little over 40% before the financial crisis of 2008 that trebled to 120%. They took decisive fiscal measures to clean up their banks and attract investment from US multinationals in particular. Their debt ratio has halved in five years. Italy, like Ireland, has a very large diaspora among the American business community and could equally attract such investment.
Peter Martin,
this is a discussion of the Rotterdam effect https://www.economicsonline.co.uk/Global_economics/The_Rotterdam_effect.html
The concluding paragraph notes:
“…another approach to establishing whether a Rotterdam effect exists. This method looks at trade values per head of similarly developed economies, with the assumption that these per capita trade values should, for countries at the same level of development, be very similar. On this basis, trade with the Netherlands on a per-capita basis is significantly higher that other EU countries, which again confirms that a Rotterdam effect does indeed exist. However, it appears that few analysts are prepared to stand up and declare what they regard the effect is.”
The basic conclusion is that a significant element of the Dutch trade figures are based on goods passing through Dutch ports for onward export to other counties; rather than exports by Dutch producers to other EU countries; and import/export documentation in many cases may not accurately reflect the origin or final destination of imports and exports.
@ Joe B,
I think most people would read it that the adoption of the euro would have the opposite effect to setting the stage for the Federal United States of Europe. The French want to move towards that quickly. The Germans and the Dutch are implacably opposed. So MF is quite right. Its not him saying that there is any real possibility of war between France and Germany. But somehow the powers that be in the EU do seem to have convinced themselves that its only the EU and an “ever closer union” which is going to prevent that. Then there is the matter of Brexit. If the EU and the eurozone had been functioning better I’m sure it would have been an easy win for Remain.
You’ve done your best to find fault with his prediction but it’s really pretty good considering when it was made. If I have one small criticism of both Friedman and Godley ( Have you read that yet?) it is that they link floating currencies with devaluation. That’s ignoring that fact that for every currency which moves down there is another which rises.
So you’re saying that you’re sure the Rotterdam effect is real but you’ve no idea of the size of it?
Peter Martin,
I think both Macron and Merkel are clear enough about the kind of support that will be required to stabilise the Euro. Whether enough EU states can be brought on board with the vast sums likely to be required this year remains to be seen. It won’t be easy and they don’t have the luxury of time. The forecasts from the IMF suggest a very deep worldwide recession https://www.businessinsider.com/imf-economic-outlook-great-lockdown-worst-recession-century-coronavirus-pandemic-2020-4?r=US&IR=T estimating that the eurozone would suffer a 7.5% decline before posting a similarly sized recovery in 2021.
Virtually every currency in the world has fallen against the dollar whether they are free-floating or nominally pegged to the dollar
https://www.poundsterlinglive.com/usd/12940-pound-to-dollar-rate-suffers-worst-loss-since-flash-crash-amid-shock-and-awe-inspiring-gains-for-u-s-greenback
“It’s not clear what exactly caused the sharp turn about in the Dollar although it came in another session when stock markets were truly hemorrhaging capital, with trading on many indices suspended owing to the severity of losses that reached double-digit percentages in many cases. This was as investors sold government bonds in Europe and the emerging markets while piling into North American sovereign debt. The result for bond markets was lower yields in North America and increases for everybody else.”
Thanks for responses!
Would such bonds have conditions for the recipients of the money which involve “Austerity” bits such as the sale of public goods and services to the private sector?
Steve Trevethan,
the article proposes savings certificates and bonds issued by national governments. The purpose is to alleviate capital flight (primarily to the USA) and to finance fiscal stimulus in the form of job guarantees and investment in productive green infrastructure and public housing to rebuild a sustainable economy that is not overly reliant on foreign investment that can be withdrawn overnight.
The OBR has released its calculation of the economic outlook for the UK https://www.ftadviser.com/your-industry/2020/04/14/obr-warns-economy-could-shrink-35-in-3-month-lockdown/ warning that “the economy could shrink 35% in 3-month lockdown, while unemployment would rise by more than 2m to 10 per cent.”
GDP would “bounce back quickly” however, according to the OBR, while unemployment would recover at a slower rate.”
This is a supply-side shock where output capacity is lost and aggregate demand will fall with it, notwithstanding the government measures to mitigate the loss of firms and jobs.
In the Eurozone the issue of national coronavirus bonds has a similar purpose in alleviating capital flight. There savers may also seek to transfer Euro funds to safer banks outside their home country e.g. Italian savers keeping deposits in German banks for fear of haircuts on their savings in their own country. Here again, the appeal is to national solidarity in a time of crisis and the repatriation of funds held abroad to bolster national needs. This will also be helped by a EU wide common bank deposit guarantee.
” There savers may also seek to transfer Euro funds to safer banks outside their home country e.g. Italian savers keeping deposits in German banks for fear of haircuts on their savings in their own country.”
If the euro was a genuine single currency, instead of a pretend one, then it would not matter in the slightest where Italian savers chose to keep their money. Just like it doesn’t make any difference whether US savers bank in NY State or California.
Having “haircuts” on savings undermines whatever confidence there might be in the euro. Haircuts and the freezing of accounts is a form of collective punishment. Imagine the outcry if the BoE ordered haircuts or the freezing of Scottish accounts in the event of a political dispute between Westminster and Holyrood.