Lunatix3 EURO AREA SUMMIT STATEMENT 29 June 2012
RATIONAL EXPECTATIONS &
THE EU STATE / CAPITAL MARKETS INTERFACE
version 2.2 4th July 2012
POLICY & PROCESS RECOMMENDATION FOR BRUSSELS
TOWARDS A EUROPEAN STABLISATION BANK
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. The EFSF became known as the "Super-SP(I)V"! The EFSF proposal seems to be insufficient from a securities markets perspective as a solution to the Euro-Banking-Crisis simply because it is Financial Engineering and that has become thoroughly politically distrusted. The EFSF was chartered by those Commission Bright Sparks as an SPV (Special Purpose Vehicle); the cradle for contingent funding should sovereign default or banking system falure of Eurozone member states approach; the SPV concept is a dodgy legal concept, key to the structural failures of the Credit Crisis in facilitating off-balance sheet maneuvering; a paradigm of Financial Engineering designed to facilitate "bankruptcy remoteness"!
Thus the question arises now, what is the definition or metric of success of any proposal from the EU summit process. I have to say it must be a European Stabilisation Bank which takes power from the Commission and sits in a new European Financial Architecture, allowing the ECB to do its job and facilitating stabilisation of European Sovereign bond markets & banking systems.
If an unelected body of experts is to run our political lives and our banking system even for the next five years on a path to exiting this disastrous position we are in, is it not obvious that an institutional structure is necessary which clearly delineates functional responsibilities for that management process? Under the auspices of the European Commission ("Cion" is the self referencing code word) there are already European financial institutions which are state owned, this is not going to be a detailed discussion of European institutional structures so I am describing apocryphally a rough model for you to work with. The European Bank for Reconstruction and Development (EBRD) is located in London and The European Investment Bank (EIB) is located in Luxembourg; there are other related institutions but these two Lego bricks will suffice for my argument. Under a sort of "separation of powers" logic, which only applies to the ECB today, these institutions are constituted as distinct from Cion, autonomous, Cion manages them through the proposals it puts in front of ministers in Justus Lipsius, [process reference]
So right now if Cion wants anything done to influence capital markets, manage sovereign debt or influence credit supply it has to use the ECB to do it; pushing at the personal boundaries of that key institution and causing European tensions, serious ones. The ECB is big enough and powerful enough to talk back to Cion, up to a point since in the end if Merkel wants something done and she doesn't have the institutional framework to expedite it, then the ECB has to go along. This is what is killing the euro right now. See the Political tension palpable with LTRO [reference]. Central Bank independence is a fundamental requirement of rigorous management of the Monetary System. 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.
The poison at the centre of this systemic institutional dysfunctionality is the unwillingness of the EUROPEAN COMMISSION cadre to relinquish the power it maintains by fragmenting European state owned financial institutions other than the ECB and doing the right thing and proposing to ministers via the Justus Lipsius Committee process a new European Financial Institution which would in the first instance subsume EBRD and EIB, re-prioritize those balance sheets and then constitutionally charter that new institution to expedite those Financial Market responsibilities which the German chancellor is calling for.
Noone wants to see France peering over Holland(e)'s books (sic) but if we had a proper Bretton Woods style IMF for Europe, independent of member states and Cion then the requirement for atonomous backstop of European debt markets (both bank & sovereign [they were once interchangeable ' AAA '; might fly!! For me; in particular, sovereign debt issuance in Europe is so highly discredited today that it is a no brainer that we need a new European Financial Institution to manage that in cooperation with the ECB as a service to Cion and the member states, a financial institution which would be of sufficient scale to command world authority. The unbreakable link between sovereign and the bank (that 'feedback loop' which Shakespeare understood) entails that if the sovereign is no longer 'risk free' then the bank goes flying off the yield curve [reference] parabolically, pulling the sovereign with it!
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 (25?) months simply because Commission experts did not understand monetary economics nor capital markets & Cion internal power games were a greater priority than public service caused the total havoc, impacting the globe we saw in 2012? This 'meandering' by Cion eventually led to the EU being forced by markets to do what should have been done in the first place. But the delay 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 ('Rational Expectationally') I think that curve rises every day! Do remember the bigger picture (particularly Herr German voter) this European Stabilisation Bank proposition is a one-off capitalisation, 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 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 none of this wasteland of sovereign and banking system collapse would have occured? 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?
van Rompuy & the Experts
Raising this counterfactual does have a point; what the Cion "experts" missed was the Economic Policy theories of Rational Expectations; simply, central authorities have to talk to Capital Markets in the latter's language; to optimise their stewardship of public money, civil servants have to behave towards the private sector in a savvy rational way; give the markets clear rules & clear statements of economic expectations. What Cion, the European Council, the Eurogroup etc did through the summit process was narcissistically preen themsleves in front of the camera lights, political pontification; which gave away their hand to markets, summit after summit; every variable, every plan, laid naked ready to be shafted by the investment banking gorillas. Sheer stupidity by Cion and in particular by Van Rompuy at the head of the European Council whoose 'cabinet' was charged with coordinating the process.
It doesn't make sense to have the EFSF and/or ESM i.e. the super-SPV, the Systemic Risk Board, the Crisis Management Framework, the EU ratings agency, the EBA all established as separate and different processes and entities. Particularly entities emasculated from direct interaction with the Capital Markets; add to that the older EU institutions of the EIB & the EBRD all maintained as independent institutions all in the end responsible to the European Commission and eventually to the European Parliament. There is only one winner in that plethora of "nodal fragmentation" of authority, power and effort (never a good thing for effectiveness and the delight of bureaucracy, of course)!! But the looser is the European citizen.
CONCLUSION (RATIONAL EXPECTATIONS [MANAGEMENT])
It doesnt matter what you call this instituion a Stabilisation Bank or an EMF or whatever but this current process of politicians publicly revealling all of their thought processes drip by drip, ideas which are market sensitive is anti-rational. A institution like an EMF or a Stabilisation Bank would allow the EU; the Commission et al to draw boundaries between what are market facing activities or decisions and the promulgation of such (or not) and what are essentially political activites and decisions and the necessarilly public nature of those.
The market facing activities have to be managed rationally, optimally with a regard to the interface with capital markets. Whether the policy is Eurobonds or interest rate support or whatever it is the EU needs an institution distinct from the Central Bank to manage the process of facing off to world capital markets in a Rational manner; in a manner which can optimise securities issuance, pricing and timing for the EU. Van Rompuy shambling around making proposals in public which dont tie up with Barroso's rambling speeches (each of which we experienced regularly, ritually now; both of which in one way or another having an impact on European capital markets) is no way to manage a process of such importance. The EU policy making team need to take a step back & look at the landscape and instutional configuration necessary for them to achieve their objectives.