Wednesday, 26 October 2011

Martin Wolf's open letter to Mario Draghi

"You must choose between two paths: the orthodox one leads towards failure; the unorthodox one should lead towards success.

The eurozone confronts a set of complex longer-term challenges. But the members will not get the chance to make needed adjustments and implement required reforms if it does not survive. The immediate requirements include putting Greece on a sustainable path; avoiding a meltdown in public debt markets of several large countries; and preventing a collapse of banks. Of these, it is the last two that matter."
You can read the rest of Martin Wolf's open letter to Mario Draghi here.


Per Kurowski said...

Mario Draghi, for God’s sake, first cut off the gas

The capital requirements for banks based on perceived risk and scarcity of bank capital is forcing banks out of anything that is becoming perceived as more risky and into what, for the time being is still perceived as less risky. This is making the financing of the already perceived as risky so much more difficult while at the same tome creating the excessive exposures that will finally turn the last standing absolutely not-risky into the mother of all risks. Mario Draghi… or whoever… this gas that feeds the fire needs to be cut off immediately.

Per Kurowski
A former Executive Director at the World Bank (2002-2004)

Paul Hunt said...

Chancellor Merkel has just confirmed in the Bundestag that, under no circumstances, will Germany consent to the ECB becoming the lender of last resort for sovereign debt. Indeed Germany wants its current limited activies to the stopped and reversed.

Goodnight, Europe.

Tom McDonnell said...

@ Per and Paul

It is certainly very difficult to be anything other than very pessimistic about the long term viability of the currency union. The need for having a guaranteed lender of last resort was well flagged in the theoretical literature and so it has come to pass in practice.

The status quo is simply dysfunctional and doomed to failure.

We are being badly led.

Paul Hunt said...


Agreed. This is fundamentally a political problem. More precisely, it is a problem of democratic legitimacy. We often hear of the EU's 'democratic deficit', but this isn't correct. All the necessary democratic institutions are in place. The heads of state and government in the European Council are democratically elected by their national parleiments or directly or indirectly by national voters. The Commission is appointed by and subject to the Council. Any powers it may have independent of the Council are derived from the treaties ratified by national parliaments or national electorates. The European Parliament is directly elected from national electorates.

However, in reality, national governments do their ‘horse-trading’ in the Council around the Commission’s proposals; the Parliament is eventually ‘squared’; national governments then rely on their executive dominance to whip the necessary enabling legislation through their national parliaments; and so-called ‘independent’ regulators (almost completely captured by those they are empowered to regulate) ensure implementation totally divorced from any requirement to demonstrate even the slightest measure of democratic legitimacy.

Paul Hunt said...


This is the process that delivered the Euro Area and it should be no surprise that it is in this mess. However, national parliaments are kicking back, in particular, in the Netherlands, Finland, Austria and Germany. (National parliaments, asseting their ultimate primacy over government, kept Denmark and Sweden out of the Euro.) Chancellor Merkel is constrained to bring the Bundestag along every step of the way. (The Bundestag had been brow-beaten and misled by her predecessors, Kohl and Schroeder, and is in no mood to be treated like this again.)

Most people seem to focus on the economic fault lines between northern and southern Europe, but more significant political fault lines have emerged. German voters and their Bundestag representatives simply do not believe the commitments of southern European politicians to mend their ways and, as a result, will not sign what they see as a blank cheque to bail them out.

It is, of course, totally unrealistic to expect them to behave like Germans over night and Germany itself needs to re-balance its economy to address its external imbalance. But German (and Dutch and Finnish and Austrian) voters feel they have been taken for suckers and they're damned of they'll allow it to happen again.

However, they were taken for suckers by their own politicans, banks and finacial institutions - and only to a very limited extend by souther Europeans who were more sinned against than sinning. So it is not suprising that their politcians are only very slowly revealing to them the extent to which they've been suckered and equally slowly revealing what is needed from them to get the show back on the road.

It'll be a long haul. But parliaments asserting their primacy over governments is the way to go at both the national and EU level. Ireland is further behind than most and this explains much of why we're in the mess we're in.