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A European Monetary Fund/ EU Stabilization Bank / The Eurozone Problem and Proposed Solutions

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When asymptotix first developed a European Stabilization Bank proposal, our thinking was just “common sense”, maybe driven a little by some experience not only of capital markets but of Public Sector policy development and specifically of the EU. It is possible that when I myself first wrote “The Lunatix are on the Grass: A new Bretton Woods proposition for Europe” I was thinking in a sort of “Kydland & Prescott[1]” / “Political Economics” [2] way. I was schooled in all that stuff way back when in the Adam Smith School in Glasgow.  That blog led us into the Stabilization Bank (SB) paper; but really we were driven by only one method; Structured Common Sense! And with the blogs we are always in a hurry; “it’s just a blog after all” !?! In fact a lot of this blog post here, I have said before in summer 2010 or summer 2011; it is GroundHog Day  every day in Van Rompuy space! But in blog-land I have no editor!

Asymptotix made that stablisation bank proposal; that was me, supported by my two trusty and experienced colleagues both with deep  experience of Cion and of Monetary Economics but we were not the only ones; the table below shows you the evolution of the EMF or Stabilization Bank idea from 2010 thru 2012. The seminal paper is published ironically the afternoon of my early morning ‘Bretton Woods’ blog, called Lunatix [above]! (I couldn’t have read it). It’s now referred in “the business” as “Gros & Mayer” (see below); although the Schulmeister piece gives it a run for its money, hey they are all good.  The point is the SB is not rocket Science, its equivalent to an EMF (at asymptotix on the website we thrash out blogs, there are some more formal papers I know it’s hard to tell the difference); the table of references below evidences that there is a consensus as to what the solution to the Eurocrisis needs to look like.

The EFSF/ESM construct was the backstop for the EU member states’ sovereign bond markets. The point is the EFSF/ESM framework proposal was a) not credible at all, from the moment of announcement at 4am on 10th may 2010 & quickly became perceived as evidently unworkable as the summit process repeatedly refined the announcement through those Groundhog late nights and bleary dawns of Van Rompuy’s broken Summit record; 2010 thru 2012. The challenge is not to dig into the minutiae of that clearly politically compromised over elaborate construct or to crawl forensically over the entrails of the precise cause of death; it is to ask the question why did the EU not do the right thing? Now that there is clearly a consensus as to what the right thing to do is and given that those proposals have been around since the beginning, the question is why does the EU apparatus (Van Rompuy at the apex as spokesman and Head of Taskforce never mind Council President) not do the right thing? What is the problem?

HERE ARE THE REFERENCES WHICH ESTABLISH THE EMF/ESB CONSENSUS

DATE

TITLE

AUTHOR / Hyper-Link

 

 

 

Dec 2008

The financial and economic crisis - chronological overview - December 2008 ->

CION DG ECFIN

June 24, 2009

The Financial Crisis: Impact on and Response

by The European Union

James K. Jackson

Congressional Research Service

Feb 18th 2010

European Monetary Fund roundtable / Gross & Meyer

The Economist

09 March 2010

Merkel warns EMF would require new EU treaty

EurActiv

28/04/2010

Open Letter to European Policymakers: The Greek Crisis is a European Crisis and needs European Solutions

Open letter coordinated by the European Trade Union Institute

17 May 2010

Towards a Euro(pean) Monetary Fund

Thomas Mayer, Daniel Gros

Thursday, 27 May 2010

The Lunatix are on the Grass: A new Bretton Woods proposition for Europe

Friday, 11 June 2010

Asymptotix presents European Stabilisation Bank Proposal Booklet

September 27, 2010

Eurozone needs a permanent bail-out fund

Peter Bofinger, Henrik Enderlein, Tommaso Padoa-Schioppa and André Sapir; Financial Times

October 2010

The Eurozone Crisis

CIVITAS

21 October 2010

STRENGTHENING ECONOMIC GOVERNANCE IN THE EU

REPORT OF THE TASK FORCE TO THE EUROPEAN COUNCIL

EUROPA

17 November 2010

Reinforcing EU governance in times of crisis:

The Commission proposals and beyond

DIRECTORATE GENERAL FOR INTERNAL POLICIES

POLICY DEPARTMENT A: ECONOMIC AND SCIENTIFIC POLICIES

ECONOMIC AND MONETARY AFFAIRS

5 Dec 2010

Arguments for a big-bang solution to Eurozone problems

Daniel Gros

the Director of the Centre for European Policy Studies (CEPS)

VOX

Dec 17th 2010

No solutions, if they can help it

THE ECONOMIST

28 Feb 2011

A comprehensive solution for the euro crisis

Zsolt Darvas, Jean Pisani-Ferry, André Sapir VOX

4 March 2011

Germany’s Role in Crafting a Solution to the 2010 EMU Sovereign Debt Crisis

Matthias M. Matthijs

American University

School of International Service (SIS)

August 2011

The Eurozone Debt Crisis:

From its origins to a way forward

Diego Valiante /

a CEPS and ECMI Research Fellow

Wednesday, 17 August 2011

Lunatix Two: A European Stabilisation Bank & the Dysfunctional European Commission Economic Policy development process

September 2011

10 Questions about the Eurozone Crisis and whether it can be solved

Wendy Carlin

Professor of Economics

UCL Department of Economics

 

October 20, 2011

The European Monetary Fund

Stephan Schulmeister

Austrian Institute of Economic Research

November 2011

Governing the EU: Critical Perspectives and Alternative Solutions to the Eurozone Crisis

Transnational Institute

NOVEMBER 2011

Why stricter rules threaten the eurozone

Simon Tilford and Philip Whyte / the Centre for European

Reform.

Nov. 4th 2011

The eurozone does not need IMF help

Kenneth Rogoff / The FT

2011/11/13

The eurozone and its experts

reszatonline /

Jan 23, 2012

Germany Proposes Combining Rescue Funds

BLOOMBERG

May 6, 2012

The only solution to the eurozone crisis

 

Wolfgang Münchau The Financial Times

05 June 2012

There’s no easy way for Europe

Bundesfinanzministerium

26 Jun 2012

A solution to the euro debt crisis: Back from the future

Rafael Doménech, Javier Andrés VOX

JULY 11 2012

A European federation of states

Simon Glendinning – LSE European Institute

16 July 2012

Unholy compromise in the eurozone and how to right it

 

Stefano Micossi

Director General of Assonime, Visiting Professor at the College of Europe in Bruges, Member of the Board of Directors of CEPS and Chairman of the Board of CIR Group.

July 17th 2012

European Monetary System

 

Emmanuel Mourlon-Druol – University of Glasgow

July 20th 2012.

The European Debt Mutualization Options Matrix

 

ZEROHEDGE

 

ORIGINAL ASYMPTOTIX COMMENT (edited version) of 9th November 2010:

Since we at asymptotix first published our consolidated proposal for a European Stablisation Bank here the German government has in the autumn semester led the way towards the concept generally referred now as a "Permanent Crisis Mechanism (PCM)" for the EU. It is today clear, particularly in the case of Ireland, that the EFSF is not functional in regard to European debt markets. This would be obviously resolved if the EFSF were to be established as a financial institution (bank) and a normal participant in such markets as we originally envisaged. I think it is fair to claim that we at asymptotix were the first in the world to make this proposition backed by the appropriate analysis. The Task Force led by Council President van Rompuy is taking the initiative to implement a blueprint. The German Govt.’s press release of its ideas for an EMF are now a 404 error.

What is expedited now in regard to the EFSF and what will inevitably out-turn to be some form of European Stabilization Bank (by any other name) will impact European (indeed global) fixed income markets and thus all capital markets. All that the asymptotix Stabilisation Bank idea is (was) about was to establish a kind of firewall in the transmission mechanism to allow the EU to buy time to engage in the Fiscal Union process. Instead we got the half cocked EFSF. The question that YOU should be asking yourself is; if the cadre (group) of people who designed the EFSF and left themselves exposed to criticism such as asymptotix can make but more than that caused this leg of the global financial crisis; if that set of people could not get the simpler step of establishing the monetary firewall right (mainly because they did not see it would be necessary) then could you trust them to architect EU fiscal union!

Given the consensus that an “EMF” structure is the answer, then a lot of the crisis in Europe is self inflicted. The European Commission has been in charge & it has had the right answer in its toolbox (arguably since the beginning) but with the powerless lop-sided and non-functional EFSF/ESM structure it has enraged global capital & created Armageddon. There has to be an answer to why?

But! What is the cost of failing to do the right thing at the time required? Did the Commission miss a crucial market-expectational window in May 2010 when it could have created institutional 'shock and awe'? Is it the case that letting things drift for another 15 months simply because Commission experts did not understand monetary economics nor capital markets & internal commission power games were a greater priority than public service and thus being forced by markets to what should have been done in the first place is going to cost European tax payers an additional half a trillion euros that otherwise would NOT have been necessary? I believe this to be the case. And I think that curve rises every day! Do remember the bigger picture (particularly Herr German voter) under this proposition it's a one-off capitalization, not an open-ended fiscal blank cheque. It's a Monetary Solution to a Capital Market problem but it takes some grasp of both of these complex domains to make a proposition like the EMF/ESB which actually might work. Is it the case that had an ESB been developed as a policy proposal at the moment those Lunatix went tripping on that grass in May 2010 with the EFSF. Would implementation of an ESB then (as advised here) have cost a half if not a quarter what its INEVITABLY going to cost today or whenever "Europe" gets around to its inevitability and thus any further delay is simply going to entail that the costs of the inevitable and obvious solution simply rises inexorably?

 

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