Paul De Grauwe, who is an eminent economist on EMU, thinks the ECB can save the Euro (VoxEU), and the idea is making headway (Spiegel). At the same time, Barnier promises a banking union for 2013, that pools deposit insurance across all EZ states and puts the ECB in charge, its greatest expansion of power since its creation (Libé). Some pointers to help understand and questions about whether the taxpayer is getting a good deal out of it. This posts refers to our tutorial on central banking, 'Fed's printing press, fact vs fiction' (ECB-Watch).
To understand Paul De Grauwe's position, we have to introduce subtleties arising from the EZ's unique situation that are not in our tutorial, which assumes a US monetary set up where the Fed implements monetary policy trading US treasuries.
In the EZ gov bonds vary in credit quality across states. The ECB's OM operations are in the form of repo, that is it lends against collateral in the form of government bonds, which is not fundamentally different from the initial set up.
The contentious issue is that the ECB accepts some bonds as collateral (DE, FR), but not others (GR, ES etc.). By doing in so, it penalizes the second group of states. PDG argues it is neither fair nor efficient, and that the ECB should, in fact, even out credit spreads across the EZ. PDG rules out ESM because it has limited resources that will empty quickly. The market wants—you've guessed it—more 'firepower' and PDG thinks the ECB has it.
PDG's thesis has some merit, but, as with ESM, the debate is predicated on the assumption—wrong, I think—, that if we please the market, we will buy ourselves some peace. Bailouts, whether in the form of ECB support of taxpayer funded, have become a chronic disease instead of an emergency measure. It just exacerbates the debt overhang. For 08—11, the EU Commission approved €4.5T (37% EU GDP) bailout of financials institution (EU portal).
Banking union institutionalizes moral hazard
The proposed banking union is a dream come true for the market (pooling of deposit insurance throughout the EZ). There is little in the way of the reform. Banking resolution, debt-equity-swap included in the plan (took some notes) is not due for implementation until 2018 (as I recall) and has been dismissed for the current ES crisis. See our
Neither the break up of banks, nor the separation of commercial from investment banking are on the table. That, too, is a dream come true for universal banking. Barnier promised he would study it and failed to so, betting, correctly, no one would take notice.
It is all too obvious to me the EU Commission is controlled by financial interests, but not to progressives who fell under spell of sirens by believing 'risk sharing', 'solidarity', 'breaking between the contagion from banks to government', 'bigger firewall'. 'Bigger firewall' means exactly its opposite: it's putting the taxpayer on the hook for increasing levels of debt. 'risk sharing' is accepting to take abuse from creditors and bankers. etc.