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EUROZONE SUMMIT: METRIC OF SUCCESS

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Understanding what a Central Bank is for / The Boundaries of European Financial Institutional Architecture


WHAT IS THE METRIC OF SUCCESS OF THE FINAL EUROZONE SUMMIT CONCLUSIONS ?

 

To make a decision on what your definition of success or failure of the Eurozone Summit conclusions tomorrow evening (Wednesday 26th October 2011) it is first necessary I believe to understand the boundaries between the institutions which construct the public sector elements of European financial architecture. The key boundary to understand I think is the limit of proper activity of a Central Bank. If a Central Bank is to remain the 'guardian of a currency' then the limit of its activity is in Monetary Policy; it cannot engage in Fiscal or quasi fiscal activity; that is an over-simplification but boundaries need to be specified clearly. The reason for this (again oversimplified) is that Fiscal activity impacts Money Supply with a lag (balloons it); so if the Central Bank is the guardian of the currency it cannot at the same time act as an instrument of activity which undermines that currency.

 

During this financial crisis the European Central Bank has through its SMP (Securities Markets Programme) acted to support the banking system and then latterly Sovereign Securities issuance in direct counterpoint to its mandate to maintain the integrity of the Euro. As Trichet has argued repeatedly these are 'exceptional measures' and cannot become the norm. But it seems that a great many commentators and experts have become habituated to this exception and have forgotten the rules of operation of a Central Bank. Indeed President Sarkozy became very comfortable with the SMP. Even inside a crisis we must maintain perspective on what the rules are, what is normal and what is exceptional. One could construct an argument that the conflation of both 'currency-integrity' and 'fiscal-support' functions or mandates in the US Federal Reserve is what directly led to the recent decline in the value of the dollar, as yet that has not happened to the euro but in my view, that is hanging by a thread.

 

Given the above then & accepting that the European Commission cannot itself directly act as an agent in securities markets; via a confused and badly thought out process (well documented and explained here & here on asymptotix);the Commission arrived at the EFSF. Initially and again more recently the EFSF was referred as the Super-SPV! The 'Bond Insurance' proposal for the EFSF initiated by Allianz, although first class Financial Engineering seems now to be insufficient from a securities markets perspective as a solution to the Euro-Crisis simply because it is Financial Engineering and that has become thoroughly politically distrusted. Thus the question arises what is the definition or metric of success of the proposal from the summit tomorrow. I have to say it must be a European Stabilisation Bank which takes power from the Commission and sits in the new European Financial Architecture, allowing the ECB to do its job and facilitating stabilisation of European Sovereign bond markets. For me at least creation of a Stabilisation Bank is the only metric of success for tomorrow's result and whatever happens, tomorrow is final.

 

Asymptotix Stabilisation Bank proposal is here. Our full diagnosis and sequential logic is here. Below are some further references from the asymptotix site on the role and function of a Central Bank. Our Politic0-Economic review of Crisis Management in Brussels of late is here - correct dear reader we don't hold out much hope, the Lunatix are on the grass (unfortunately)!

 

REFERENCES

 

ECB The euro, its central bank and economic governance (Understanding what a Central Bank is for)

Stamp Memorial Lecture by Jean-Claude Trichet, President of the ECB
at the London School of Economics and Political Science
London, 13 June 2011

 

ECB Risk Management in Central Banking

Speech by Lorenzo Bini Smaghi, Member of the Executive Board of the ECB, 
International Risk Management Conference 2011, 
Free University of Amsterdam, 15 June 2011

 

ECB wants to unload its PIIGS debt to EFSF

 

Trichet: The ECB's exit strategy

Speech by Jean-Claude Trichet, President of the ECB
at the ECB Watchers Conference
Frankfurt, 4 September 2009

 

Juergen Stark, ECB - European Financial Stability Facility EFSF Could Buy Bonds

 

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