Friday, 30 September 2011


... is alive and well, and writing the script for Russian news anchors. I was in New York yesterday, to give a talk about anti-Semitism at NYU. To make the most of my time there, I gave an interview to  Russian TV about the European bailout package, release 2.0. Or so I thought. All was well for the first minute or so... until someone must have handed the wrong sheet to the girl, who promptly proceeded to quizz me about oil prices, Obama, and the Arab spring. There is always a risk of something going wrong on live television, but this was a curved ball I didn't see coming at all. You can see my flabbergasted expression about 1.10 into the clip over at youtube. It's funnier after the fact than when it happens... It gets slightly better after that:

Sunday, 25 September 2011

EFSF leveraging - a miserable accounting trick

The Euro rescue fund, known as EFSF, could be made bigger at no extra cost to the tax payer - or so leading Eurocrats seem to suggest. To me, this looks like a bad accounting trick. Currently scheduled to top out at a lowly €440 bn, the fund could be allowed to leverage itself by borrowing from the ECB. In that way, it could, say, get 5€ for each € of capital, and really get going on ... buying Italian, Spanish, and Greek sovereign bonds. Overall, the EFSF's firepower could amount to a cool 1.5-2 trillion €. Surely, that would be enough to banish the default genie back into its bottle?

I have no view on whether 2 trillion would do the trick. Eventually, once almost all public debt of Southern Euro member states is owned by either the EFSF or the ECB, politicians can safely ignore what the markets say. A couple of trillion help, but they won't last for more than a year or two. Leveraging the EFSF reminds me of one of Private Baldrick's cunning plans (link here), of Captain Blackadder fame. The reason is simple -- the leveraging is simply a silly accounting stunt. If the EFSF buys a euro of government debt, and it goes bad, who pays? The EU taxpayer. If it leverages that investment, by borrowing from the ECB 5 euros, and the investment goes bad, who pays? Exactly. Either the Euro taxpayer (by underwriting the leveraged loss of the EFSF) or the Euro taxpayer (by having to recapitalize the ECB after it loses a ton of money). If politicians feel they cannot, in good conscience, explain more than €440 bn in rescue funds to their voters, then they cannot justify the idea of leveraging.

Of course, the idea of going for broke shows just how fundamentally flawed and unworkable the system of ever-greater rescue packages really is. The alternative? Let the Greeks default. Nationalize and recapitalize the banks that lose their shirts - and use this as a golden opportunity to cut the banks down to size, by selling the nationalized banks in sizes that are 1/10 of their size today. That way, we also reduce the risk of a major financial meltdown every time a bank gets into trouble.

RAC1 interview

You can listen to my words of wisdom about the future of the Euro (and about who is more useful - astrologers or economists) over at RAC1 [in Spanish - program intro is in Catalan].

As part of the media reaction to my Spiegel interview, there is also a bit more over at CNN's excellent background piece on the origins of the Euro crisis, and interviews with European news service EURACTIV with Austrian newspapers Kleine Zeitung and Salzburger Nachrichten

Friday, 16 September 2011

Tuesday, 13 September 2011

Facebook revolutions

The Arab spring and London riots created a lot of media hype about how the internet and cellphones can create mass movements. I was a bit sceptical, not least because Jacopo Ponticelli and I (in our paper on Austerity and Anarchy) didn't find much when we looked at media penetration and the likelihood of demonstrations, riots, etc. Now, Navid Hassanpour has a new paper on "Media Disruption and Revolutionary Unrest". He looks at what the effect is of cutting off cell phone service. Here is the abstract:

Conventional wisdom suggests that lapses in media connectivity - for example, disruption of Internet and cell phone access - have a negative effect on political mobilization. I argue that on the contrary, sudden interruption of mass communication accelerates revolutionary mobilization and proliferates decentralized contention. Using a dynamic threshold model for participation in network collective action I demonstrate that full connectivity in a social network can hinder revolutionary action. I exploit a decision by Mubarak's regime to disrupt the Internet and mobile communication during the 2011 Egyptian uprising to provide an empirical proof for the hypothesis. A difference-in difference inference strategy reveals the impact of media disruption on the dispersion of the protests. The evidence is corroborated using historical, anecdotal, and statistical accounts.

It's a really nice study - cleanly identified, detailed, and timely. Let's see what the media make of it.

Saturday, 10 September 2011

talk about the euro

It was my first time on a TV talkshow - last week, German ARD had an hour-long program "Menschen bei Maischberger" on "The Euro Crisis - Never-ending horror?". The other guests included the parliamentary secretary at the German Economics Ministry, Peter Hintze, the SPD elder statesman Klaus von Donanyi, Tissy Bruns, Chief Political Correspondent of the Berlin daily Tagesspiegel, Anja Kohl, ARD stock market expert, and Heinz Kammerer, representative of the German banking association. It was certainly educational for me. About half the time, Hinze highjacked the occasion with long sermons about the importance of Euro rescue packages for the political future of the EU. He is an ex-pastor, after all, and uplifting rhetoric that is long smooth phrases and short on analysis comes easily to him; how theology qualifies him to be a major player in German economic policy-making I will never know (compare that to the qualifications of Alan Krueger, serving in a similar position at the US Treasury). Von Donanyi impressed me the most; sharper than many people half his age, at age 83, he had read everything and thought about everything, down to the latest Reinhardt-Rogoff book. I still differed with his conclusions, but he was in a different league from from Hintze... having served in the same capacity under Helmut Schmidt, in the 1970s. Someone should write a bit about the decline and fall of the German political class.

Friday, 9 September 2011

Europe after the End of the Euro

[this is the English original of my article published in Le Monde]:

Europe after the Death of the Euro

For years, countries struggled to defend the rigid link between their currencies. Speculators attacked; country after country implemented austerity programs to make debts sustainable, to win the trust of international investors. At the same time, the economic downturn deepened. Unrest became more common; political systems buckled under the strain of more cut-backs, surging unemployment, and unsustainable debts. And still, the common currency was widely regarded as the best way to assure stability. Without it, no trust in governments, in economic management, no end to economic turmoil, or so the refrain went. And then it all disappeared, almost overnight. Countries abandoned the common currency. And the earlier they did so, the faster their recovery. None of the terrible predictions about the end of the world as we know it actually turned out to be true.
            The time? The early 1930s. The common currency? The gold standard. What sounds like a description of modern-day Europe is actually very similar to the drama played out some 80 years earlier. Cutting the link with gold turned out to be the single best policy measure politicians could take. Britain left early – in 1931 – and only suffered a mild downturn, compared to the US which stuck with gold at the old parity until 1933, or France, which hung on even longer. Where the link with gold was severed, deflation and austerity measures came to an end, debts became more sustainable, growth recovered, unemployment fell. And when people looked back at the interwar gold standard, they soon asked – how could we be so wrong? Sacrifice so much for such a misguided policy?
            Europeans after the end of the Euro will ask the same questions. Why did they waste more than a decade with interest rate policies that were too high for some, too low for others, creating boom and bust as well as unsustainable debt burdens and banks that eventually implode? How did they stomach all these austerity programs and bailout packages, for so little gain? Presented to electorates as a policy without alternative, the Euro is actually a poorly designed currency arrangement that was always more about political symbolism than about sound economics. Today, member countries of the EU have eleven currencies – the euro and ten national ones of members states that have not joined EMU. The European Union will not fall apart if eleven currencies become twelve or fifteen. The Euro can only survive if the German, Austrian, Dutch and Finnish taxpayers are willing to sign a blank cheque; or if economic reforms and austerity packages on a truly frightening scale are implemented. Neither option is politically feasible. It may take a few more rescue packages and a few more years for politicians to finally realize this, but electorates in Europe are already growing restless. Once the true economic and political costs of “rescuing the Euro”, again and again, are fully understood, it will need to be abandoned.    
With the Euro gone, we will see a return to the currency world before 1999. Some countries will follow German monetary policy, either by sharing a currency or by copying everything that Frankfurt does. This is the future for Holland, Finnland, Austria, perhaps the Scandinavian countries. The southern European countries will probably stick with a rest-Euro. Interest rates will be set appropriately; growth recovers; unemployment falls; asset price bubbles become less likely. Some countries may default, and banks in several countries may need to be nationalized, as they were in Scandinavia in the early 1990s. The euro will devalue against the new Deutschmark; exports from Italy, France, and Spain will be more competitive, and German export surpluses will shrink, reducing economic imbalances in the European Union. At the same time, vacations by the Mediterranean, French wine and Italian cars become cheaper for the Dutch, the Danes, and the Germans. This is not a vision of economic apocalypse – it is the way rebalancing should work.
What does this mean for Europe’s political future? Surprisingly little. To be sure, many prominent European politicians will have a lot of egg on their faces. Megalomaniac fantasies about the “United States of Europe” will be laid to rest. The so-called bicycle theory – that Europe has to move ahead or crash – will be forgotten. We will have more pragmatic policy-making, with Brussels starting to look out for the things that actually matter, and trying much harder to make them work. What matters are the single market – free trade, freedom of movement, intellectual exchange, fair play for European companies trying to compete for government contracts elsewhere, or trying to buy another firm.
Instead of the grand visions and grand pronouncements, Brussels will have to focus on the hard, boring, beneficial nitty-gritty. Implementation of existing rules and schemes is important, and Europe currently leaves much to be desired. The single market works only in part; mutual recognition of degrees, for example, is often only a legal fiction. My dubious Oxford PhD cannot be validated in Spain, for “technical reasons”. Don’t ask why it needs to be “validated” at all. Germans are not allowed to buy holiday homes in Denmark; European governments often stop the sales of companies to foreign buyers for no good economic reason; and so on. European integration should be guided by what is good for its citizens and companies.
Sharing the same pieces of paper in the wallets of Europeans turned out to be a bad idea. It has failed at its only conceivable purpose, making the lives of Europeans better than they otherwise would be. Giving up the Euro now will do less damage to the European project than several “lost decades” of unemployment, stagnation, austerity, and riots. The European Union is much more than monetary union, and Europe is so much more than the EU. European citizens know this, but politicians need reminding that this prestige pet project is not the same as Europe’s future.

Monday, 5 September 2011

talkshow entertainment

Tomorrow night, you'll have a chance to see yours sincerely on German TV -- over at ARD-1st German Television, in a talk show called "Menschen bei Maischberger".