Great article, but from a German perspective this transfer of credit is highly unpopular and considered unconstitutional by the German Federal Constitutional Court; one of the main reasons why it upheld the PSPP in 2020 was the capital key to prevent an open financing of member states by the ECB, which is prohibited under the EU Treaties.
Thanks for the link. I am a German law professor and have been researching on ECB instruments for several years. The paper only presents the view of the ECB in reframing selective state financing as a tool to make monetary policy effective. I am very sceptical on the merits of this argument based on my reading of the PSPP judgement of the German Constitutional Court.
Oh! Then there is definitely nothing I know that you wouldn't regarding this. Let me know if you have any good readings though, I'm definitely interested but it can be hard to follow as outsider/American
I find it amusing that anybody thought the tpI would be anything other a dressed up way for the ECB to buy BTP's and sell Bunds to close the spread. In fact, the whole point of the sterilization is to have a mechanism to sell Bunds.
I am not so optimistic that the Europeans will reach any true agreement to either federalize or mutualize their sovereign debt until such time as the euro is on the cusp of disintegration. I fear the bigger problem is that it won't be the weaker countries that will be looking to leave, but the Germans as they will get tired of funding the rest of the continent. this will be especially true if Russian natural gas stops flowing and Germany falls into a deep recession.
the euro has a very steep wall of worry to climb in my view, at least until the Fed blinks and all the hawkishness leaves there. At that point, the only certainty seems that market volatility across asset classes will rise dramatically.
thanks for your analysis, which is always clear and on point
I don't think, as currently constructed, it will end the bond crisis. But I think the TPI can reduce the likelihood of the kind of rapid, total collapse in faith that occurred in the Euro Crisis, and an expanded version of the TPI could definitely close spreads and largely end the risk of sovereign debt crisis once and for all.
Greece has other problems, but IS known for political stability. No comparison with Italy. 2012-2015 was tormentous due to terrible (by any historical standards) austerity, but these period is certainly not the rule.
I do not think that the generally higher unemployment rate in Southern Europe would be a cyclical difference or a monetary thing. This is quite persistant and relating to some cultural or structural thing.
One thing that irks me about the euro is that it only really gets a pass from economists and moderate centrists politicos for two reasons:
A) Unraveling the monetary edifice would probably be pretty painful
B) It's large component of the dream of European integration, a dream shared by most highly educated types on both sides of the Atlantic
The actual benefits from monetary integration have been tiny and in all likelihood more than matched by the downsides. But that's fine, because we are all cosmopolitans and having the euro makes further integration easier.
It's good that the economic integration that can finally make the euro broadly beneficial is picking up some steam, but it's still a bet and probably a pretty risky one. Integration is not a one-way street, as the UK shows. Germany, the most important member of the euro, remains angsty about giving Greece and Italy access to the punchbowl. More political pressures could easily unravel an architecture that, in the best case scenario, will still need decades to approach anything like what actual nation states take for granted (ie fiscal union). That's years and years of poor prospects for millions of people, possibly wasted. I've been to Athens, it's a very sad image.
In other words, the euro is the anti-nuclear power stance equivalent for macroeconomics. A bad idea with a bunch of powerful friends.
EDIT: amusingly, Angela Merkel gets a pass for being awful at both those things! I do wonder if being a neoliberal hero simply boils down to frowning a lot and wearing suits / pantsuits sometimes.
Yes, I think that given the pain induced by Euro crisis it's pretty clear that the monetary union has had a net negative effect, though I do think the crisis was more avoidable than a lot of people believe. But fundamentally I think the only way forward for the bloc is to make the best of the Euro as it currently stands and take the slow move towards more coordination. Anywho, thanks for commenting and I'm glad you enjoyed!
Thanks Mr. Politano for a a comprehensive article! I understand this new tool could help to reduce spreads, I am however very concerned that on balance it will still mean monetary expansion. Is there a way to measure if money supply is more reduced by the 0,5% rate hike or increased by the new tool?
Context is that for none home owners there has been a financial crisis already for years. If homes appreciate by 40K EUR per year (as in my home country) there is no way to get on the property ladder. Young people have been getting depressed, not able to start families because housing is unaffordable. Honestly I see aggressive monetary contraction as the only solution and have been for years awaiting the day when there is finally an economic crisis, the sooner the better.
The goal for the TPI seems to be to ensure that on balance there is no monetary expansion, and I imagine given the tighter attitude of the ECB they will stick to that (though monetary aggregates alone are not the best way to measure monetary policy).
I'm sorry for your situation, and I empathize given the high (and rising) prices faced by many younger Americans like myself. Unfortunately I don't think TPI is going to help much on this front, beyond the fact that if you live in a periphery economy you might enjoy faster wage/income growth. The core problem of housing in many western countries comes down to an unwillingness to build, and unfortunately the only way out would likely come from encouraging construction and reforming the building process.
How did you get to the conclusion that the rate was too high for Italy and not too low for Germany? A negative rate of 0,5% by EZB, how could it get lower then that. This was way too low for Germany and could not be lower then this historic lows for Italy. Acording to the charts Italy has never in its history owed more money the now and is relativ to other Euro members in a quite bad position. You paint a picture of fiscal restraint and surplus?
The key metrics to judge the relative tightness/looseness of monetary policy are nominal growth in GDP/wages/spending etc and then by proxy inflation. By those metrics yes policy in Italy has been too tight! And yes, Italy does owe a lot of money, but that debt is exacerbated by policies that increase spreads and reduce growth--and the actual burden of that debt has been decreasing (https://apricitas.substack.com/p/an-international-comparison-of-national)
Ok, but lets make a thought-experiment. I am old enough to remember the lira time. If lira still exists Italy would pay even more interest in international markets and be more restraint in the level of debt. They could print lira, but that would bring the high inflation lira did have back and the lira would devaluate a lot. The income measured in USD would tank. I fail to see a better situation then now. Even with high spreads now Italy has cheaper access to money then with lira. Printing lira is not cheap.
Access to cheap credit is demotivating for the oain needed structural reforms. It was mentioned. As long as that problem is not fixed it looks like a "you cant eat the cake and have it too" situation. Having access to cheap credit without the disadvantages of fixing the structural problems and unifying the tax system in Europe sounds like trying to invent the perpetum mobile.
* unified taxes like the federal taxes in the USA and unified healthcare and social benefits. You cant explain a German why an Italian has more savings then a German in average and pays in reality much less tax. Mention something which smells only remotly like transfer payments or the like and you will get political unrest and/or a German government pulling the plug ( I am not German but close between Itsly and Germany )
Great article, but from a German perspective this transfer of credit is highly unpopular and considered unconstitutional by the German Federal Constitutional Court; one of the main reasons why it upheld the PSPP in 2020 was the capital key to prevent an open financing of member states by the ECB, which is prohibited under the EU Treaties.
Yes—I definitely think the legal issues will be critical to watch (though I am admittedly not an expert, hence whey I didn't bring it up). I found this piece pretty interesting though: https://www.dezernatzukunft.org/rechtliche-fragen-rund-um-einen-transmission-protection-mechanism-faq/
Thanks for the link. I am a German law professor and have been researching on ECB instruments for several years. The paper only presents the view of the ECB in reframing selective state financing as a tool to make monetary policy effective. I am very sceptical on the merits of this argument based on my reading of the PSPP judgement of the German Constitutional Court.
Oh! Then there is definitely nothing I know that you wouldn't regarding this. Let me know if you have any good readings though, I'm definitely interested but it can be hard to follow as outsider/American
I find it amusing that anybody thought the tpI would be anything other a dressed up way for the ECB to buy BTP's and sell Bunds to close the spread. In fact, the whole point of the sterilization is to have a mechanism to sell Bunds.
I am not so optimistic that the Europeans will reach any true agreement to either federalize or mutualize their sovereign debt until such time as the euro is on the cusp of disintegration. I fear the bigger problem is that it won't be the weaker countries that will be looking to leave, but the Germans as they will get tired of funding the rest of the continent. this will be especially true if Russian natural gas stops flowing and Germany falls into a deep recession.
the euro has a very steep wall of worry to climb in my view, at least until the Fed blinks and all the hawkishness leaves there. At that point, the only certainty seems that market volatility across asset classes will rise dramatically.
thanks for your analysis, which is always clear and on point
Thanks! I'm glad you enjoyed
So, how in practical terns will this end the Italian bond crisis. You said basically there is no such thing as a free lunch listing some conditions.
I don't think, as currently constructed, it will end the bond crisis. But I think the TPI can reduce the likelihood of the kind of rapid, total collapse in faith that occurred in the Euro Crisis, and an expanded version of the TPI could definitely close spreads and largely end the risk of sovereign debt crisis once and for all.
Greece has other problems, but IS known for political stability. No comparison with Italy. 2012-2015 was tormentous due to terrible (by any historical standards) austerity, but these period is certainly not the rule.
I do not agree that "USA is great" thanks to Fed and QE policies. In fact, USA is worse due to "socialism for the rich" policies and government interventions. https://glibe.substack.com/p/dollarzone-and-eurozone-failures
Some solutions for the Eurozone area are
- Monetary dividend / helicopter money during financial crises periods
- Basic income or annual dividend instead of QE and easy credits
- More fiscal federalism, regarding EU- and national levels decision-making
- Openness to cryptocurrencies and decentralisation
I do not think that the generally higher unemployment rate in Southern Europe would be a cyclical difference or a monetary thing. This is quite persistant and relating to some cultural or structural thing.
One thing that irks me about the euro is that it only really gets a pass from economists and moderate centrists politicos for two reasons:
A) Unraveling the monetary edifice would probably be pretty painful
B) It's large component of the dream of European integration, a dream shared by most highly educated types on both sides of the Atlantic
The actual benefits from monetary integration have been tiny and in all likelihood more than matched by the downsides. But that's fine, because we are all cosmopolitans and having the euro makes further integration easier.
It's good that the economic integration that can finally make the euro broadly beneficial is picking up some steam, but it's still a bet and probably a pretty risky one. Integration is not a one-way street, as the UK shows. Germany, the most important member of the euro, remains angsty about giving Greece and Italy access to the punchbowl. More political pressures could easily unravel an architecture that, in the best case scenario, will still need decades to approach anything like what actual nation states take for granted (ie fiscal union). That's years and years of poor prospects for millions of people, possibly wasted. I've been to Athens, it's a very sad image.
In other words, the euro is the anti-nuclear power stance equivalent for macroeconomics. A bad idea with a bunch of powerful friends.
EDIT: amusingly, Angela Merkel gets a pass for being awful at both those things! I do wonder if being a neoliberal hero simply boils down to frowning a lot and wearing suits / pantsuits sometimes.
Sorry for that; rant over.
Good post as always, Joey.
Yes, I think that given the pain induced by Euro crisis it's pretty clear that the monetary union has had a net negative effect, though I do think the crisis was more avoidable than a lot of people believe. But fundamentally I think the only way forward for the bloc is to make the best of the Euro as it currently stands and take the slow move towards more coordination. Anywho, thanks for commenting and I'm glad you enjoyed!
Thanks Mr. Politano for a a comprehensive article! I understand this new tool could help to reduce spreads, I am however very concerned that on balance it will still mean monetary expansion. Is there a way to measure if money supply is more reduced by the 0,5% rate hike or increased by the new tool?
Context is that for none home owners there has been a financial crisis already for years. If homes appreciate by 40K EUR per year (as in my home country) there is no way to get on the property ladder. Young people have been getting depressed, not able to start families because housing is unaffordable. Honestly I see aggressive monetary contraction as the only solution and have been for years awaiting the day when there is finally an economic crisis, the sooner the better.
How would the TPI impact me and others like me?
The goal for the TPI seems to be to ensure that on balance there is no monetary expansion, and I imagine given the tighter attitude of the ECB they will stick to that (though monetary aggregates alone are not the best way to measure monetary policy).
I'm sorry for your situation, and I empathize given the high (and rising) prices faced by many younger Americans like myself. Unfortunately I don't think TPI is going to help much on this front, beyond the fact that if you live in a periphery economy you might enjoy faster wage/income growth. The core problem of housing in many western countries comes down to an unwillingness to build, and unfortunately the only way out would likely come from encouraging construction and reforming the building process.
This was a great article. Thanks for sharing.
Thank you! I'm glad you enjoyed
How did you get to the conclusion that the rate was too high for Italy and not too low for Germany? A negative rate of 0,5% by EZB, how could it get lower then that. This was way too low for Germany and could not be lower then this historic lows for Italy. Acording to the charts Italy has never in its history owed more money the now and is relativ to other Euro members in a quite bad position. You paint a picture of fiscal restraint and surplus?
The key metrics to judge the relative tightness/looseness of monetary policy are nominal growth in GDP/wages/spending etc and then by proxy inflation. By those metrics yes policy in Italy has been too tight! And yes, Italy does owe a lot of money, but that debt is exacerbated by policies that increase spreads and reduce growth--and the actual burden of that debt has been decreasing (https://apricitas.substack.com/p/an-international-comparison-of-national)
Ok, but lets make a thought-experiment. I am old enough to remember the lira time. If lira still exists Italy would pay even more interest in international markets and be more restraint in the level of debt. They could print lira, but that would bring the high inflation lira did have back and the lira would devaluate a lot. The income measured in USD would tank. I fail to see a better situation then now. Even with high spreads now Italy has cheaper access to money then with lira. Printing lira is not cheap.
Access to cheap credit is demotivating for the oain needed structural reforms. It was mentioned. As long as that problem is not fixed it looks like a "you cant eat the cake and have it too" situation. Having access to cheap credit without the disadvantages of fixing the structural problems and unifying the tax system in Europe sounds like trying to invent the perpetum mobile.
* unified taxes like the federal taxes in the USA and unified healthcare and social benefits. You cant explain a German why an Italian has more savings then a German in average and pays in reality much less tax. Mention something which smells only remotly like transfer payments or the like and you will get political unrest and/or a German government pulling the plug ( I am not German but close between Itsly and Germany )