Who ya gonna call…

Palm Beach, FL 5/29/12 (StreetBeat) -- If there’s sonethin’ strange in your Eurohood
Who ya gonna call…

The ECB, I’ll call the ECB, that’s who I’m gonna call to clean up this euro debt crisis. Hmmm, nobody’s answering at the central bank; that’s strange, their phone is on call forward to Euro Zone politicians.

We are living at a critical juncture in the history of the Union. The sovereign debt crisis has exposed serious weaknesses in the institutional framework; in this context, the difficulties in finding common solutions are having a negative impact on market valuations. The extraordinary measures taken by the ECB have gained us time; they have preserved the functioning of monetary policy.

But we have now reached a point where European integration, in order to survive, needs a bold leap of political imagination. It is in this sense that I have referred to the need for a “growth compact” alongside the well-know “fiscal compact”.

ECB President Mario Draghi spoke in Rome on May 24

ECB Governing Board member Jens Weidmann told Le Monde newspaper on May 25 that the central bank had “reached the limit of our mandate particularly” with unconventional measures. He said, in essence, call the politicos; “governments must take responsibility and not subcontract to monetary policy.” Or maybe call a rehab clinic; ECB cash injections “have helped save time but don’t solve the structural causes of the crisis. It’s like morphine: they relive the pain, but don’t cure the disease.”

He can’t mean that; maybe if I speak with him at his Frankfurt office to see if he can give Greece just one more break, help them to take just one more step in their twelve step program. The Bundesbank; that’s who I’m gonna call. Hmmm…automated phone system...hit five for Greece commentary…

Current developments in Greece are extremely worrying. Greece is threatening not to implement the reform and consolidation measure that were agreed in return for the large-scale aid programmes. This jeopardizes the continued provision of assistance. Greece would have to bear the consequences of such a scenario. The challenges this would create for the euro area and Germany would be considerable, but manageable give prudent crisis management. By contrast, a significant dilution of existing agreements would damage confidence in all euro-area agreements and treaties and strongly weaken incentives for national reform and consolidation measures. In such circumstances the institutional status quo comprising liability, control and individual responsibility of member states would be fundamentally called into question.

When the Eurosystem provided Greece with large amounts of liquidity, it trusted that the programmes would be implemented and thereby ultimately assumed considerable risks. In the light of the current situation, it should not significantly increase these risks. Instead, the parliaments and governments of the member states should decide on the manner in which any further financial assistance is provided and therefore whether the associated risks should be assumed.

Bundesbank Monthly Report, May 2012: The Current Economic Situation in Germany; current developments in Greece.

Well, I guess I’m gonna call some Euro Zone politicians, that’s who I’m gonna call; but who? French President Francois Hollande is the growth guy Draghi is looking for; he’s all in on the idea of euro bonds to fix what ails the Eurohood. The all-for-one-and-one-for-all-bonds in which everyone, from Germany down to Greece, back the securities with the combined power of all seventeen euro country balance sheets. Hollande likes it, but not all of his peers are with him; “Some countries are totally hostile,” he said after the EU summit/dinner, adding that others “can imagine them in the future, some can imagine doing them much more quickly. I was not alone.” It can be said that the appointed Italian boss Mario Monti is also a euro bond fan; it’s German Chancellor Angela Merkel who “totally” is not. Monti however thinks he can make Merkel see the light.

Maybe I should call Merkel, but then again euro bonds are not her call to make, no matter how she feels about them. Andreas Vosskuhle is the head of Germany’s Constitutional Court; last fall he nixed the joint bond idea, explaining to the Frankfurter Allgemeine, “The sovereignty of the German state is inviolate and anchored in perpetuity by basic law. It may not be abandoned by the legislature. There is little leeway left for giving up core powers to the EU. If one wants to go beyond this limit—which might be politically legitimate and desirable—then Germany must give itself a new constitution. A referendum would be necessary. This cannot be done without the people.” The court, Vosskuhle said, had given its blessing to the package of measures that have been agreed to so far, but “our judgment makes clear that the Bundestag cannot abdicate its fiscal responsibilities to other actors. And no permanent mechanism may be created that entails taking over the liabilities of other states,” and that includes euro bonds.

Maybe I should call Vosskuhle, but then again there’s a new idea being backed by a couple of German economists about doing a color coded bond system that they think will end run the Constitutional Court prohibition. This plan has group support bonds, and therefore lower interest rates, for debt burdens that fall inside the 60 percent of GDP allowance, as per the founding treaties; these are the blue bonds. The red bonds are for debt burdens that exceed the treaty parameters and this debt would be the sole responsibility of the countries that overstepped the spending guidelines; higher rates for some, Greece for instance, and lower for others, Germany, let’s say.

Well, maybe I should call the Greek Prime Minister to see what he thinks about the situation. After all, his country is the epicenter of the action, so maybe he has a good suggestion about how to fix what ails the Eurohood. OK, one ringy dingy…two ringy dingy…three ringy dingy…hmmm, I wonder why no one is picking up…four ringy dingy…

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