Germany supports pan-European banking regulator
Germany’s Der Spiegel has cracking story this morning, that the German government appears to be supporting a report which calls for an EU-level supervisor for the large cross-border banks. (Other newspaper also report the story, but the articles did not contain this particular important detail). The report was written by group headed by Otmar Issing, and includes Bill White, formerly of BIS, Jan Pieter Krahnen of Frankfurt University, as well Jorg Asmussen, deputy finance minister, and Jens Weidmann, Merkel’s economic adviser. Tucked away in the penultimate paragraph of a long article, the Spiegel quotes from the Issing report that such changes were necessary to create integrated financial market in the EU, and to secure the euro’s future.
The report contains a long list of proposals which Merkel will put to the G20 summit this weekend. The most important is that all financial companies, whether banks, hedge funds, or banking departments in companies, have to come under a supervisory umbrella, as do all financial products, including CDS, CDO etc. The Issing group also proposes that each bank should hold capital of at least 5% of all its lending (bringing back the spirit of Basle I into Basle II). They favour a global credit register, which the report says would be very easy to establish, given that the necessary data are all available at national level. Furthermore, they propose that management salaries should be linked to medium-term objectives, through the introduction of negative bonus payments – i.e. repayments - though they reject any intrusive regulation. They want more cooperation between central banks and global financial institutions, and national regulators. They reject proposals to turn the IMF into a global financial policeman. There is lots more in the report.
(We do not agree with the general tenet of the article that this would be an explicit confrontation with France, simply because France has different proposals. There are significant problem in the Franco-German relationship, no doubt, but at least German is now finally recognising the need to regulate cross-border banks at a European level. France and Italy would welcome this. What we find very strange, however, is that Merkel did not take this proposal to last week’s EU summit to work out a common European position.)
The Financial Times has a useful pre-summit overview, in which it becomes clear that there will be no big agreement on the weekend, and that the outgoing US administration will reject any proposals it considers inconsistent with its free-market views. President Bush said we should not allow a few month of crisis to destroy economic freedom.
Germany’s 10 year bond auction flopped
Now this would be the main headline news on most days. A German government bond auction flopped – something that has been unheard of. The FT writes that this is merely extraordinary in its own right, it is also a setback for hopes that government can quickly raise large sums for economic stimulus packages. This is particular important for countries such as Italy and Greece, where bonds have come under pressure recently. The report also talks about the conundrum that as supply of bonds increases, which one would expect to lower their price, the opposite is happening, as yields are falling amid expectations of a long drawn out recession, and even deflation.
Draghi calls for enlargement of Financial Stability Forum
Writing in the FT, Mario Draghi, in his function as chairman of the Financial Stability Forum, says that the forum, which was created after the Asian financial crisis, should be widen to cover all the world’s leading economies, including the larger emerging markets. He said there is no big moment behind the FSF’s 60 odd proposals from April, which include new rules for supervision, transparency and rating agencies. He also says one priority is to damp the forces that amplify cyclical booms and busts, including a management of the interaction of valuation rules and leverage.
Steinmeier endorses French vision of gouvernement economique
This is going to be interesting. Germany’s foreign minister Frank-Walter Steinmeier says we need more macroeconomic co-ordination within the euro area, a long-standing French demand which has been hitherto rejected by Germany. In particular he endorses more co-ordination between the eurogroup and the ECB. Merkel’s spokesman says this initiative was not co-ordinated with Merkel, who remains opposed to giving the euro area any more formal identity for fear of splitting the EU. Steinmeier has recently been picked as the SPD’s candidate for chancellor for the forthcoming elections in 2009.
Les Echos on Merkel
Les Echos has an interesting comment this morning from Eric Le Boucher, who wonders whether Merkel has become to Sarkozy, what Thatcher used to be to Mitterrand: “Madame Non”. He says Germany is clearly and visibly recoiling at everything France does. Sarkozy is partly to blame because of his diplomatic style, but the more fundamental reason is a strategic anti-federalist reorientation of Germany, which is looking increasingly like 1980s UK, with a main emphasis not on what the EU can do, but on how much it costs Germany. This fundamental difference does not necessary lead to divorce, but it certainly has triggered an estrangement between the two countries.
Beres on the European Commission
Writing in Le Monde, Pervanche Beres has a very critical article about Europe’s inadequate response, and criticised in particular the inaction by EU Commission president Jose Manual Barroso, and financial commission Charly McCreevy. The Commission has failed to provide any leadership during this crisis, the result being a total lack of economic co-ordination, and predominately national approaches to save the financial sector.
Harold James on the IMF
In a Project Syndicate column, published in FT Deutschland, Harold James says the Bretton Woods architecture is still broadly functional, but needs to be extended to incorporate private global capital flows. This could be relatively easily accomplished by an extension of the IMF’s mission, which would reduce the need for global exchange rate interventions.
Thomas Fricke on Bretton Woods
Also writing in FT Deutschland, Thomas Fricke advocates a new Bretton Woods system with semi-fixed exchange rates, adjustable under some clearly defined criteria, such as gaps in short-term interest rates, rather than through political decisions as during the original Bretton Woods system. He argues that the wild exchange rate movements of the yen, or the Hungarian forint, or the euro/dollar rates do not reflect any economic fundamentals, but largely speculative capital flows.
What the UK should, and should not do
Martin Wolf, writing in the FT, argues that the last thing Britain should do now is to join the euro. The system has worked well, and the crisis now gives the BoE sufficient flexibility to cut interest rates down to zero, and for the government to use fiscal policy for an economic stimulus that might result in an temporary 8% of GDP deficit. If sterling had been in the euro area, it would at the very least not have enjoyed a combined monetary and exchange rate boost.
Buiter on UK and Iceland
Willem Buiter asks the questions whether the UK might face a similar predicament than Iceland, a small island, relative to the world economy, with a large and overexposed banking sector, and its own currency. While Iceland is clearly more extreme, the UK outside the euro area displays many of the same characteristics, and the country is vulnerable to a run on the financial system, which it does not have the capacity to withstand.
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