Thread by @GeneralTheorist

@ExanteData Well, it certainly looks like it will be a difficult summer for the euro. It feels similar to 2015, with Greece threatening to jump ship, but ultimately choosing not to. As then, it will be a political decision—and as then, Merkel is pivotal to decision-making.

@ExanteData The most likely path is the cooperative route. 90 days from 5 May (GCC decision) is 3 Aug, so by end-July there has to be three things happen.

@ExanteData 1. ECB produce a Proportionality Review. 2. German government and Bundestag must “clearly communicate their legal view.” 3. ECB has to pass a revised Decision on PSPP.

@ExanteData Most people are focussed on 1, where ECB somehow delimits monetary policy from e.g., fiscal policy and ESM. But act 2 will be crucial, there cld be fundamental disagreement. If there is agreement, it has to pass the ECB Governing Council—which will itself be spilt on the matter.

@ExanteData Weidmann will be crucial, of course. He basically sits on both sides of negotiating table, as member of GC and, per Article 13 of Bundesbank Law, as advisor and attendee of Federal Government deliberations on monetary policy.

@ExanteData What does Weidmann think? Well, on the occasion of the retirement of Austria’s Govenor Nowotny last October, following Draghi’s last major intervention in setting perpetual asset purchases, he was clear that clear purchase limits and capital key are crucial.

@ExanteData Moreover, “in a monetary union where Member States enjoy fiscal autonomy, it is vital to ensure that the line between monetary and fiscal policy does not become blurred.” This is straight out of GCC playbook.

bundesbank.de/en/press/speec…

@ExanteData So Weidmann will be pushing for clearer limits on asset purchases, to ensure monetary policy does not infringe on fiscal sovereignty, and allow ESM to perform its function of restoring debt sustainability through conditionality where appropriate.

@ExanteData Of course, the decision will fall to the govn, and Merkel in particular. She indicated last week they will have to act responsibly and creatively, that deeper political integration is now called for, and that potential changes in the European Treaties should no longer be taboo.

@ExanteData This amounts to resolving the fundamental contradictions within the euro by end-July. There might be slippage, of course. If so, Buba might be forced to halt asset purchases for at least a short time to meet GCC requirements.

@ExanteData But if resolving these issues requires Treaty change—so a technical fudge cannot be magicked—then every government will be asked to contemplate fundamental changes to their relationship with Europe—perhaps giving up fiscal autonomy.

@ExanteData Of course, this would improve the functioning of the euro, but it’s not clear this will be popular—even if Merkel can carry the Germans, it’s not clear the Dutch, Finns etc. will be so enthusiastic.

@ExanteData In this context, EU Commission debt sustainability forecasts this month are worth recalling. They have debt-to-GDP in Greece in 2030 below Italy—the latter close to 140%. And to achieve this fiscal adjustment of 5% of GDP in Italy is assumed from 2022 onwards.

@ExanteData Why would the Core accept the responsibility of the debt now and not in 2010?

END. @jnordvig