Friday, November 4, 2011

Rogoff and Eurojunk

Kenneth Rogoff weighs in to the debate surrounding the G20 (The eurozone does not need IMF help) in the FT today.

As well as rehearsing a few well known arguments about the inadequacy of the Eurozone's governance arrangements, he tellingly suggests that

it is hard to see much benefit in (the IMF's) involvement, aside from providing a fig leaf for large-scale European Central Bank purchases of euro sovereign junk bonds

And this gets to the nub of the matter. The only plausible way of keeping the Eurozone together is for the ECB to do what any national central bank would do when faced with a sovereign debt crisis - print money to buy the debt. This is off the table, for political reasons. But it is the only way out, and we will have to get there at some point. So how?

One way is the IMF route suggested by Rogoff, another messier, but more likely, route is that the money will be printed to bail out European banks when the default actually happens. Strangely, in the weltanschauung of the current global leadership, it makes more sense to bail out banks than states. The logic is the same, but of course the damage (political as well as economic) is greater.

There is a pattern in this whole saga. The policies that might work economically don't work politically, and viceversa (the now famous Eurovenn). But when the politically palatable policies fail, we edge towards the economically viable ones, albeit having raised their costs and created a lot of damage along the way.

A set of arrangements designed to have as little democratic legitimacy and executive efficacy as possible is proving catastrophic when faced with a serious crisis. The EU has to become something radically different, or jump back to the 1970s.