07a euro book_francestrategie

Brunnermeier,James&Landau
The Euro &
The Battle of Ideas
Markus K. Brunnermeier,
Harold James &
Jean-Pierre Landau
France Stratégie Lunch Talk Paris, Sept. 21st, 2016

Overview
 Power shift & watershed moments
• 2010, May: EFSF, IMF involvement
• 2010, Oct: Deauville PSI: contagion
• 2012: Draghi’s “Whatever it takes” Speech in London
• 2013: Cyprus Bail-in
• 2016: Brexit
 Different economic philosophies
• Ideas versus interest
• Interests are interpreted through the lens of ideas ≈models
2

Overview
• 2016: Brexit
3
Rationale to focus on
France & Germany

Overview
• 2016: Brexit
4

Overview
• Rationale for focus on Germany and France
• Interests are interpreted through the lens of ideas ≈ models
5

Overview
• Shifts and even reversals are possible
6

Overview
• Shifts and even reversals are possible
 Maastricht’s Ghost: Monetary and fiscal stability
 Maastricht’s Stepchild: Financial stability
7

“French” “German”
1. Discretion Rules
2. Solidarity Liability
• Fiscal union No-bailout clause/rule
3. Liquidity/contagion Solvency
4. Keynesian Stimulus Austerity/Reform
Ghost of Maastricht “Rhine Divide”
9
Ideal types (Max Weber) White-black comparison to sharpen contrast

1. Discretion Rules
10

1. Discretion vs. Rules
Straitjacket commitment Safety/escape valves
 Active management ▪ Autonomous - no “ad hocery”
 current crisis management ▪ future crisis prevention
 Commit future to fix current crisis
• Commit not to default some debt restructuring
in order to keep current (not official debt)
interest rate low
• Commit to currency peg/
not to exit currency union
in order to discourage
currency attacks
but consolidate (later)
19
“Black-white” Organizing Principle

interest rate low
currency attacks
20

interest rate low
currency attacks
21
“Black-white” Organizing Principleinternational

interest rate low
currency attacks
22
Free
capital flow
Fixed ex-
change rate
Autonomous
Monetary Policy
international

interest rate low
currency attacks
Manage capital flows!
23

interest rate low
• Commit to currency peg/ floating exchange rate
currency attacks
Manage capital flows! Free capital flow
24

1. Discretion & Commitment Rules
• Illusion of default free bonds SDRM/insolvency procedures
33

• Illusion of default free bonds SDRM/insolvency procedures
34

• multiple equilibria E[NPV]>0, at what discount rate?
“big bazooka”
37
p
S
D

1. Discretion Rules
“big bazooka”
38
p
S
D

1. Discretion Rules
“big bazooka”
• amplification/spirals
 E[NPV bailout]>0
 E[PV bailout – PV no bailout]>0
contagion/systemic
Bail-out/LLR Bail-in
 Countries ▪ Fire-walls
 Financial Sector
40
p
p

1. Discretion Rules
“big bazooka”
• amplification/spirals
 E[NPV bailout]>0
 E[PV bailout – PV no bailout]>0
contagion/systemic
Bail-out/LLR Bail-in
 Countries ▪ Fire-walls
 Financial Sector
41
p
p

1. Discretion Rules
• fiscal union No-bailout clause/rule
Demand Supply
• Output gap unsustainable credit boom
• Reforms in boom Reforms in crisis (political economy)
42

1. Straitjacket Safety valves
Discretion Rules
44
Free
capital flow
Fixed ex-
change rate
Autonomous
Monetary Policy
international

Maastricht’s stepchild: Financial Stability
 Why was financial sector ignored?
• Large growth EU banks became global banks
• Whole-sale funding cross-border funding
 Systemic Risk
• Liquidity spiral on asset side of banks
 Fire-sales, …
• Disinflationary spiral on liability side of banks
 “Paradox of Prudence”
• Micro-prudent behavior can be macro-imprudent
• Like Keynes’ Paradox of Thrift but on risk dimension
 Saving lowers other income, and lowers overall savings
46

Role of Government bond
Special MoPo Role as safe asset
Default-free long-term gov. bond
 Interest rate policy leads to income/wealth effects
(not only substitution effects)
 Insurance role for extreme crisis states
Defaultable bond – contingent debt
 “French view”
• never default
(straitjacket commitment)
• Use diabolic loop
banks as hostage
Default in extreme situations
49
tension
 “German view”
• Default in tail events
• Limit banks’ sovereign risk
taking
• Banks provide insurance

The two “safe asset challenges”
 Challenge 1:
Safe asset + sovereign debt restructuring w/o diabolic loop
 Challenge 2:
No asymmetrically supplied safe asset
• German Bund
55
French IMF/Anglo-American/German

Cross-border flight to safety
 Today: asymmetric shifts across borders
• Value of German debt increases
 German CDS spread rises, but yield on bund drops (flight to quality)
• Value of Italian/Spanish/Greek… sovereign debt declines
 With ESBies: Negative co-movement
• Value of ESBies expands – due to flight to quality
• Value of Junior bond shrinks – due to increased risk
• Asset side is more stable
56

Solution: ESBies
 Today: asymmetric shifts across borders
• Value of German debt increases
 German CDS spread rises, but yield on bund drops (flight to quality)
• Value of Italian/Spanish/Greek… sovereign debt declines
 With ESBies: Negative co-movement across tranches
• Value of ESBies expands – due to flight to quality
• Value of Junior bond shrinks – due to increased risk
• Asset side is more stable
57
sovereign
bonds ESBies
Junior Bond
A L

Conclusion & Policy Implications
 Towards a European “Ideas UNION”
 “Insurance/transfers without Politics” automatic stabilizers
• Specify “tail events”
• Person to person instead of state to state insurance
• No transfer union that leads to rent seeking activities
 “race away from the bottom” – firewall emphasis
 ESBies as safe asset for Europe
• No joint liability & safety valve
 Wage bargaining: central bank communication
 European Banking charter
• Tax revenue for European budget
• European bailout
60

07a euro book_francestrategie

Recomendados

Recomendados

Mais conteúdo relacionado

Semelhante a 07a euro book_francestrategie

Semelhante a 07a euro book_francestrategie (20)

Último

Último (20)

07a euro book_francestrategie