European Court Of Justice Deferred Again To Big Government

Posted: 12/11/2018

For lack of time, I will not go into details here, but refer the reader to e.g. Source 1 and to do some research. The facts of this case have been well covered in the media for a number of years.

On December 11, 2018, the European Court of Justice decided it was OK for the European Central Bank to purchase Euro trillions of various government bonds over several years. Unfortunately, the Federal Reserve central bank also engaged in similar purchases.

This is just another example how the highest possible court (in this case the European Court of Justice) in a legal dispute about government policies rubber stamps government policies.

Clearly, this massive purchase program of government bonds is a form of government financing, which obviously contravenes the no bail out clause in European agreements about the single currency.

One can also safely assume that these justices have very limited understanding of economics.

Sources:

1. The ECB’s PSPP programme for the purchase of government bonds on secondary markets does not infringe EU law. It does not exceed the ECB’s mandate and does not contravene the prohibition of monetary financing (official press release; 12/11/2018)
2. EUGH-URTEIL : EZB-Anleihenkäufe sind rechtens (12/11/2018)

The European Union Has Failed

Posted: 4/24/2017

This will be a concise, brief post!

The European Union has failed, because:

1. The believe an ever larger European Union (United States of Europe) could become a countervailing power to the U.S. was misguided and delusional from the beginning
2. The super fast enlargement to 28 countries over a span of few decades was daring
3. Too many major European agreements were seriously violated in order to continue and without repercussions and regret
4. The monetary union and single market was imposed irresponsibly
5. The once so much heralded subsidiarity principles was recklessly abandoned
6. Countries that do not play along have been either bullied or receive vast amounts of money
7. The heavy handed top down approach to form a unitary superstate has reached its limits
8. Historically, the Europe was special because of its enormous variety and the many competing powers from city states to nation states. This important lesson was ignored
9. What did I forget?

European Banking Union - A Big Government Takeover

Trigger

The German Institut der deutschen Wirtschaft (Institute of the German Economy, an industry sponsored economic research institution) just released a study on the European banking union titled “Es geht auch ohne Schulden-Vergemeinschaftung” (in German language, title is somewhat misleading, therefore no translation).

A Hot Topic

How to implement a European Union banking union is a hot topic for some time, but latest since the Financial Crisis of 2008.

Central Planners Busy At Work

To avoid future bailouts of banks and the socializing of such losses, the authors of the above report suggest to create 17 funds for each country and one central European fund to restructure/resolve failed banks. These funds have to be coordinated etc.

The European Central Bank is to supervise only the 120 largest, system relevant banks in the European Monetary Union (EMU). The remaining several thousand banks are to be supervised by national agencies.

First, a central bank should not be tasked with bank supervision for reasons of conflict of interest and others.

Second, the distinction between system relevant (systemic risk) banks and other banks is very controversial. It creates most likely artificial distinctions and distortions. As if other banks could not be the cause of the next financial crisis.

Living Will

Of course, the European central planners love the absurd idea of a living will for banks, which has to be updated every year. Way too much control and costly bureaucracy for private businesses!

Alternatives

Would it not make more sense that governments are committed to reduce their far too high levels of indebtedness to let’s say below 50% of GDP.

Would it not make more sense that government central banks make sure that the key interest rates are never below inflation rate plus productivity growth (or some markup) to prevent or reduce credit booms and speculation.

Of course, these alternatives would require too much self-discipline and restraint from our incompetent  and profligate elected representatives.

Lasting Large Government Bond Yield Spreads In The Euro Zone

Larger Spreads Are Good News

I think large spreads of government bond yields of southern Euro Zone countries like Greece, Italy, Spain, and Portugal versus Germany will remain for the foreseeable future which is a good thing. Finally, the capital markets are working again as they should by more realistically pricing risk. Profligate politicians will be reminded that credit has a price.

The Mirage Of Tight EMU Spreads From 1999 To 2007

If my memory serves me well then those spreads narrowed dramatically with the introduction of the Euro in January of 1999 and stayed within a tight range of roughly 50 basis points in the following years until 2007. In hindsight, this was clearly unrealistic. Just because a monetary union came into being all the risk factors that had affected individual member countries for decades all of a sudden did not seem to matter anymore. Incredible.

Higher Spreads Less Indebtedness

For instance, had Greece to pay a more realistic, higher interest rates on the issue of new government bonds it probably would not have accumulated as much debt, because Greece would have been unable to pay its obligations.

France And Germany Are Determined To Do Everything To Protect The Integrity Of The Euro Zone

Excerpt from a joint statement by the German chancellor and the French president released on 7/27/2012.

More Breaches Of European Agreements

Grandiose words indeed. Sounds heroic like fighting to the last bullet or to the last drop of blood! Does this include more breaches of European agreements and more violations of the no bailout clause? I think these European political leaders have already done enough damage.

Merkel Adieu

The good news is between September 1 and October 27, 2013 will be the next federal elections in Germany. Ms. Merkel has served as chancellor since 2005. Time for a new chancellor. Unfortunately, her presumptive challenger from the Social Democratic Party, Sigmar Gabriel, is another mediocre German politician.

Underground Economies In OECD Countries Or How The Government Burden Is Underreported

About Underground Economies

It has been known for decades that high tax developed countries have also developed a substantial underground (aka informal, unobserved, black market, hidden) economies measuring anywhere from a few percentag points up to 40% of GDP. One of the main motivations is evading taxation or regulation. An underground economy is not to be confused with criminal activities, but consists of largely legitimate economic transactions that escape statistical measurement and taxation, although there are likely grey arreas.

A Recent OECD Study

According to an article published originally in the Neue Zuericher Zeitung (NZZ) and republished by the Swiss think tank Avenir Suisse titled “Staatsquote ist nicht gleich Staatsquote” (the article is in German) on 7/1/2012 by Gerhad Schwarz, international comparisons of GDP are complicated by the fact that some countries officially or inofficially include some measurement of their underground economy to boost their GDP. The details of the procedures appear to be murky.

This article refers to a 2011 OECD study, but does not give details as to the source. Thus, I was not able to identify the underlying study.

Italy

For decades, Italy has been known to have an extensive underground economy. Italy has been a textbook case. Officially, Italian government statistics include about 16% of GDP as contributed by the underground economy. Other, conservative estimates are about 26% of Italian GDP. According to the above mentioned article, Italy supposedly introduced some upward corrections of national GDP at the time of its accession to the European Monetary Union (EMU) to meet the so called Maastricht criteria. Very convenient.

Key Economic Indicators Become Less Reliable

Measuring the underground economy is difficult at best. Arbitrary or ulterior intentions creep into government statistics.

The share of government in the economy becomes deceptive or at least underreported. The official economy is under a much more severe government burden when the share of the underground economy is large.

The share of government taxation becomes deceptive or underreported.

Solution

Instead of mixing the observable economy and the underground economy by hard to understand means it is better to have a separate national account statistics for the underground economy. More honesty would be better.

Big Government: European Banking Union

First A Monetary Union – Now A Banking Union

If a monetary union does not work in times of a deep recession, would a banking union fare any better? Just the terminology does not sound reassuring.

A Common Rescue Fund To Bail Out Failing Banks

Without knowing all the details, it appears official proposals for a European banking union include a common rescue fund financed by levies on banks to assist banks in future emergencies.

Media commentators praised this common fund as it would alleviate tax payers from paying for future bail outs.

Such a common fund is a stupid idea:

a) It implies too big to fail continues, whereas it should be abolished

b) It incentivizes banks to be more risky

c) In reality, taxpayers will pay for this fund anyway in form of higher fees etc.

d) Banks are financial intermediaries in the economy. Why would only banks have to contribute to such a fund?

If such funds were a good idea, free markets would have created them voluntarily a long time ago.

Socialism is dead, long live socialism!