EuroCrisis 101: Or, some questions for Paul Krugman and Joseph Stiglitz
In my day job I claim to be a political scientist. In my hobby time, I claim to be a political economist. Most materialists and institutionalists don’t really distinguish between the two fields, but in the current economic and financial crisis (2007 – ?), these fields are especially blurred. I’ve studied the current crisis quite in depth in the domestic context, but despite being an “International Relations” political scientist, I don’t have a really firm grasp on the international and institutional context of the situation in the Eurozone. So I have a bunch of questions for people who do; maybe Professor Krugman or Professor Stiglitz can answer them?
Reading the September 17, 2011, issue of the Economist precipitated these questions, especially their prescription for future Eurohealth [my additions in brackets]:
A rescue must do four things fast. First it must make clear which of Euorpe’s governments are deemed illiquid and which are insolvent [meaning which just need capital infusions to weather the storm, and which are unable to pay back their liabilities even if given capital infusions], giving unlimited backing to the solvent governments but restructuring the debt of those that can never repay it. [However, I agree with Felix Salmon that this is essentially a distinction without much of a difference.] Second, it has to shore up Europe’s banks to ensure they can withstand a sovereign default. Third, it needs to shift the euro zone’s macroeconomic policy from its obsession with budget-cutting towards an agenda for growth. And finally, it must start the process of designing a new system to stop such a mess ever being created again.
So I have institutional questions for someone more versed in this field than I. Assuming that we are slouching toward Mount Megiddo, and that informal institutions, conventions, norms, or constraints are basically out the window…
- Can the ECB ‘nationalize’ or even buy failing banks, either on the periphery (Greek, Portuguese banks, etc.) or in the center (Dutch, French banks, etc.)? Could the ECB go around the French or German governments and purchase French or German banks, if they deem it necessary? What are the legal issues surrounding such steps, laying aside the conventions that prevent such thing from happening (at least in the case of French or German banks).
- Presumably, the French and German governments could nationalize their banks at will. They are constrained by domestic politics from doing so. This seems obvious, but are there hard constraints that I am not aware of?
- I understand that the French and German banks are the most exposed to this crisis. But are there ‘southern’ banks that could be nationalized to head off the crisis, from reaching the ‘northerners’?
- Do you think its possible to create Eurobonds for past debt only, i.e. no future debts?
- If the ECB or another facility, or sovereign nations, bought or simply ‘nationalized’ the banks most in need, or created ‘temporary, one-time’ Eurobonds for past debts, could these new creditors demand as ‘collateral’ or conditions:
- a tariff on Greek (or other ‘defaulting’ sovereign) goods and services (perhaps a super VAT), triggered on a future inability or unwillingness to pay?
- a financial transaction fee on Greek (or other ‘defaulting’ sovereign) finances—private finances or public finances, with a similar trigger?
- conditional Greek (or other ‘defaulting’ sovereign) budget oversight/approval?
- Do you think such collateral or conditions would actually discipline the ‘southern’ governments and their (nontheless multinational) financial sector, and do you think that ‘northern’ governments and financial interests would view this as credible collateral? Would the Germans and the French, and their banks, go along with such a deal?
- To address a negative GDP spiral, can the ECB, the World Bank, or some other entity (which???) finance Keynesian stimulus in the shrinking Southern European economies, such as, say, high speed rail from Athens to Venice (spitballing), or some other infrastructure development? They could presumably require the labor to be local, and thus stimulate the local economies…
- How does Basel III fit in to future banking regulations? Does the EU or the ECB have a mechanism to tighten banking rules, to make banking more ‘boring’ as (Prof. Krugman has advocated), or is it just up to Basel III? Is there a failsafe for the Europeans? And does the push for more boring banking have to come from outside the EU?
And if we assume that the ECB is a free actor that isn’t under the control of the French and the Germans, how do these answers change? (I can imagine that panicking ECBankers might act without approval of their central governments, it that is even possible.)
Does anybody know the answers to these questions?
Update: Actually, Matt Yglesias might know too, given his careful study of these issues, as an institutionalist.