In an interview to Repubblica‘s financial supplement of 15 February Giuliano Amato proposes to “turn the current European crisis into an opportunity – by founding a European Monetary Fund”. Giuliano Amato was twice Italian Premier in 1992-93 and 2000-01, four times Treasury Minister, once Minister for Institutional Reform and Minister of the Interior; he is a distinguished academic, Professor of Constitutional Law, and has just been appointed Senior Advisor for Italy by Deutsche Bank. His generous proposal has vision and must be taken seriously.
Regional solutions are a step forward when global solutions are not there, but conditional financial assistance to governments experiencing imbalances in their external accounts or public finances is already being provided by the IMF. All EU and EMU members are both shareholders and clients of the IMF in any case. Giuliano Amato says “Those who are keen on the europeanisation of economies feel that something is lost if we are not capable of resolving our own problems ourselves”. Why does he endorse these views? If we set up a European Monetary Fund, should we then want to set up a European Health Organisation next to the WHO, a European Trade Organisation next to the WTO, a Bank of European Settlements next to the BIS?
Giuliano Amato does not regard the European Union as simply another regional organization, albeit of considerable scale. More than once he has defined the EU as a “hermaphrodite”, combining lasting traits of international organization with traits that used to belong exclusively to states. Therefore he believes that it was a mistake to build the single currency with a mere coordination of national economic and fiscal policy. A European Monetary Fund would give the single currency the instruments necessary to offset asymmetric shocks within the European Union. However, even someone sharing his hermaphrodite characterization of the Union might draw from it the diametrically opposite conclusion - that it should evolve more in the direction of a federal or unitary state than in that of a regional grouping (with its own regional Monetary Fund).
Apart from this, the proposal for a European Monetary Fund presumes that the operational criteria of this Fund would be different from those of the IMF, otherwise why bother? But if the EMF criteria were more severe than those of the IMF the Union cannot prevent its own members from applying for IMF assistance; if EMF conditions were less severe the Union might first try and negotiate with the IMF less stringent conditionality in general at least for its own members. It would only be worth setting up an EMF if, say, its conditions were more grounded in social and political consensus, more geared to what is left of the European Social Model, less US-centered and US-inspired.
Except that, in the financial crisis of 2008-2009 the IMF has been capable of providing the necessary leadership for implementing a global fiscal and monetary intervention against the crisis, while European institutions limped behind their various deflationary regional rules and traditional constraints.
Imagine a small group of tennis players (Giuliano Amato is a very fine tennis player), all fee-paying members and shareholders of a tennis club that works satisfactorily, who propose to found a second, exclusive club for the provision of tennis facilities identical to those already provided by the pre-existing club, simply to be able to call it their own. There would be no point - unless the game was played under different rules, but this possibility has not yet been illustrated.
Showing posts with label conditionality. Show all posts
Showing posts with label conditionality. Show all posts
Thursday, February 18, 2010
Thursday, October 29, 2009
Last Rites
On 2 October the IMF General Director Dominique Strauss-Kahn, in Istanbul ahead of the 2009 Annual Meetings of the World Bank Group and IMF, gave a speech at the Central Bank of Turkey entitled “Making the Most of a Historic Opportunity”. “Countries are diverse, but civilization is one, and it is necessary to participate in this single civilization for the progress of the nation”, he said, quoting a magnificent but very ambiguous sentence uttered 75 years ago by Kemal Atatürk, the founder of the Republic of Turkey. One could argue that civilization's progress is the result of different countries and cultures sorting out their differences in peaceful dialogue, and that the best path for civilization can only be assessed afterwards by results.
In his speech, Strauss-Kahn takes – rightly – a positive view of the global macroeconomic policy response to the current crisis, and outlines “three principles that can frame our efforts to re-shape the post-crisis world…: First, international policy collaboration is essential. Second, financial stability demands better regulation and supervision. And third, the international monetary system must be more stable, and anchored by a global lender of last resort.” No question about the soundness of the first two principles. The third principle – which naturally envisages the IMF taking on the expanded role of “International Lender of Last Resort”, is so sketchy as not to mean very much at all.
Traditionally a National Central Bank acts as a Lender of Last resort by providing unlimited liquidity on demand, in the currency it manages, to banks within its currency area, at a penal rate against good quality financial assets. Thus for instance on Black Monday (19 October 1987) the Fed immediately announced its readiness to act in that capacity. Or, the Bank of England made the same announcement in July 1991 at the time of the BCCI (Bank of Credit and Commerce International) collapse. The statements alone were sufficient to calm down financial markets.
More recently the Governor of the Bank of England, Mervyn King, in his letter to the Treasury Committee on 12 September 2007, discussed the rescue of Northern Rock in these terms:
“Central banks, in their traditional lender of last resort (LOLR) role, can lend “against good collateral at a penalty rate” to an individual bank facing temporary liquidity problems, but that is otherwise regarded as solvent. The rationale would be that the failure of such a bank would lead to serious economic damage, including to the customers of the bank. The moral hazard of an increase in risk-taking resulting from the provision of LOLR lending is reduced by making liquidity available only at a penalty rate. Such operations in this country are covered by the tripartite arrangements set out in the MOU [Memorandum of Understanding] between the Treasury, Financial Services Authority and the Bank of England. Because they are made to individual institutions, they are flexible with respect to type of collateral and term of the facility. LOLR operations remain in the armoury of all central banks.”
It should be immediately clear that “Lender of Last Resort” is an inappropriate label for any role that the IMF might take in providing global liquidity in a crisis. Presumably it would provide finance denominated in the currency basket known as Special Drawing Rights. But to whom? To commercial banks throughout the world (as the label suggests), including investment banks, and hedge funds, or only Central Banks, and/or governments? And against what? Government paper, illiquid but marketable assets, toxic assets, or in the form of an unsecured loan? If against nothing, on what scale? At what interest rates and, above all, subject to what conditionality? Clearly before even beginning to talk about an international lender of last resort there is a very great deal of detail that need to be considered and settled. As we all know “The devil is in the detail.”
In his speech, Strauss-Kahn takes – rightly – a positive view of the global macroeconomic policy response to the current crisis, and outlines “three principles that can frame our efforts to re-shape the post-crisis world…: First, international policy collaboration is essential. Second, financial stability demands better regulation and supervision. And third, the international monetary system must be more stable, and anchored by a global lender of last resort.” No question about the soundness of the first two principles. The third principle – which naturally envisages the IMF taking on the expanded role of “International Lender of Last Resort”, is so sketchy as not to mean very much at all.
Traditionally a National Central Bank acts as a Lender of Last resort by providing unlimited liquidity on demand, in the currency it manages, to banks within its currency area, at a penal rate against good quality financial assets. Thus for instance on Black Monday (19 October 1987) the Fed immediately announced its readiness to act in that capacity. Or, the Bank of England made the same announcement in July 1991 at the time of the BCCI (Bank of Credit and Commerce International) collapse. The statements alone were sufficient to calm down financial markets.
More recently the Governor of the Bank of England, Mervyn King, in his letter to the Treasury Committee on 12 September 2007, discussed the rescue of Northern Rock in these terms:
“Central banks, in their traditional lender of last resort (LOLR) role, can lend “against good collateral at a penalty rate” to an individual bank facing temporary liquidity problems, but that is otherwise regarded as solvent. The rationale would be that the failure of such a bank would lead to serious economic damage, including to the customers of the bank. The moral hazard of an increase in risk-taking resulting from the provision of LOLR lending is reduced by making liquidity available only at a penalty rate. Such operations in this country are covered by the tripartite arrangements set out in the MOU [Memorandum of Understanding] between the Treasury, Financial Services Authority and the Bank of England. Because they are made to individual institutions, they are flexible with respect to type of collateral and term of the facility. LOLR operations remain in the armoury of all central banks.”
It should be immediately clear that “Lender of Last Resort” is an inappropriate label for any role that the IMF might take in providing global liquidity in a crisis. Presumably it would provide finance denominated in the currency basket known as Special Drawing Rights. But to whom? To commercial banks throughout the world (as the label suggests), including investment banks, and hedge funds, or only Central Banks, and/or governments? And against what? Government paper, illiquid but marketable assets, toxic assets, or in the form of an unsecured loan? If against nothing, on what scale? At what interest rates and, above all, subject to what conditionality? Clearly before even beginning to talk about an international lender of last resort there is a very great deal of detail that need to be considered and settled. As we all know “The devil is in the detail.”
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