Europe's "Hamiltonian Moment" Must Be Now! A short thread.
EU econ forecasts are quickly being revised to the Covid19 reality of maybe 15+% drops in GDP in 1H 2020. This from a perfectly exogenous shock that no member state had any culpability in, invalidating any claim of 1/n
EU econ forecasts are quickly being revised to the Covid19 reality of maybe 15+% drops in GDP in 1H 2020. This from a perfectly exogenous shock that no member state had any culpability in, invalidating any claim of 1/n
"legacy issues" or moral hazard. The fiscal costs of #covid19 are instead coming from a shared - to quote Macron - "war experience" across Europe. This makes this moment in European history quite similar to the US in 1790, as Alexander Hamilton struck a deal to let the 2/n
new US federal government assume the debts of the US states, which had almost all been incurred in pursuit of the shared endeavor of the US War of Independence against the UK. It was this political fact - costs of a shared experience and not decades of an individual US state 3/n
mismanaging its finances - that allowed for the famous US debt consolidation. That situation now exists in Europe, too! Not for the introduction of general eurobonds, but for credible (i.e. potentially unlimited) cost sharing among EA (or even EU) member states of the costs 4/n
integration" would prevail will have been proven wrong and have to adjust our long-term forecasts for the euro and the "European project". 2) Because #Covid19 is a shared experience beyond the control of any MS, the existing particular EA crisis fighting tools from 2010-2015 6/n
are politically inappropriate today. The various ESM tools from program to credit lines, and the ECB OMT are all designed to address both the lack of a shared political union in the EA and moral hazard. Consequently, they - appropriately for the type of crisis they were 7/n
designed for rely on country-specific "policy conditionality" from any recipient MS. Attempting this in the current crisis would be fatal - it is simply politically inconceivable that any (even the most pro-EU) Italian (or soon other country leaders) political leader could 8/n
entertain beginning a political process framed around "conditionality" when hundreds are dying daily. Insisting on relying on such policy tools would be tantamount to wanting to start the disintegration of the euro area. Europe's unprecedented situation calls for new tools! 9/n
3) The EA (or EU) must therefore manage to design crisis tools that are general in nature and applicable/available to any member state addressing #Covid19 related fiscal costs. Given the magnitude of the forecast economic decline, it is IMO not credible that such instruments 10/n
do not explicitly include the ECB (other EU national CBs). There are numerous routes - a European institution can issue a potentially very large number of new joint "Covid19 related (project) bonds" to help finance MS virus expenses and these bonds can in time be bought by 11/n
the ECB/NCBs. Or the ECB/NCBs can simply - with explicit political backing from the EU Council - initiate the purchase of these MS bonds to the extent required to facilitate MS fiscal sustainability.
In short - #Covid19 will not bring about #Eurobonds, but MUST see the 12/n
In short - #Covid19 will not bring about #Eurobonds, but MUST see the 12/n
adequate amount of European targeted fiscal solidarity in some form or other emerge to address #covid19. The future of the "European project" depends on it. ENDS
PS: One possible solution for how to do it is here: piie.com/blogs/realtime…
