Comments on transport weakness, Draghi comments, Japan exports to US, new home sales,PMI and Fed indexes chart, Dallas Fed, Richmond Fed, Consumer confidence

Transport Is Saying Consumer Spending Should Slow Further

By Steven Hansen

When one analyzes the economy, there are always some sections which do better than others. When the economic growth is weak (like currently), several segments can be in contraction while others are expanding.

Everything but the needed fiscal relaxation:

ECB’s Draghi urges euro zone to unite for economic reform

May 23 (Reuters) — “The current situation in the euro area demonstrates that this delay could be dangerous,” ECB President Mario Draghi said while acknowledging progress had been made, for example with banking union. But private risks need to be shared within the euro zone, with financial integration improving access to credit for companies and leading to a complete capital markets union, Draghi said. Countries should observe common standards when implementing structural reforms but also take a country-specific approach, as part of a process of “convergence in the capacity of our economies to resist shocks and grow together”.

Looks like our trade deficit is still on the rise:

“Exports to the United States rose 21.4 percent in the year to April, keeping the pace of gains in the previous month with brisk shipments of cars and vehicle engines.”

Chart not looking so good:

United States : Durable Goods Orders
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Up a bit after a dip in March but not much different from the Q1 average so hard to say Q2 is doing better than Q1 from this report:

United States : New Home Sales
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Highlights
New home sales bounced back solidly in April, up 6.8 percent to a 517,000 annual rate that is on the high side of Econoday expectations. Strength is centered in the South which is the largest and important housing region and where sales rose 5.8 percent, this however fails to reverse the region’s 11.8 percent drop in the prior month.

Supply rose slightly in the month, to 205,000 new homes on the market, but supply relative to sales fell to 4.8 months from 5.1 month. Low supply should encourage builders to bring more homes on the market but at the same time low supply hurts current sales. Price readings are mostly favorable led by a 4.1 percent rise in the median price to $297,300 for a strong 8.3 percent year-on-year gain.

Readings in this report are always volatile month-to-month but the gains for April underscore the recent surge in housing starts & permits and help offset last week’s disappointing weakness in existing home sales. The housing sector is still trying to get off the ground but indications, taken together, are improving.
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Again, doesn’t look like Q2 is doing any better than Q1 here either:

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This is notable as my narrative is about the end of the energy capex that was chasing $100 oil that had been keeping total US GDP positive in 2014. This key indicator of that energy investment is showing the deep cuts have not stabilized but are continuing to take their toll, and the drop in total spending and income necessarily ripples out to the rest of the US and global economies. And note the continuing reports of weakness in exports, as the foreign sector drop in oil capex reduces their ability to import:

United States : Dallas Fed Mfg Survey
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Highlights
Contraction in the energy sector continues to pull the Dallas Fed report into deeply negative ground, to a headline minus 20.8 vs minus 16.0 and minus 17.4 in the prior two months. Production shows a turn for the worse, at minus 13.5 vs April’s minus 4.7, as does employment, at minus 8.2 vs plus 1.8. New orders remain deeply negative, at minus 14.1 vs minus 14.0. Prices paid also fell further though the decline is easing, to minus 1.7 from minus 11.2.

The regional Fed reports all point to another slow month for the manufacturing sector which is struggling with energy contraction, especially evident in this report, as well as weakness in exports.

Dallas Fed: Texas Manufacturing Activity Contracts Further

Texas factory activity declined again in May, according to business executives responding to the Texas Manufacturing Outlook Survey. … The general business activity index fell to -20.8 in May, its lowest reading since June 2009.

Labor market indicators reflected employment declines and shorter workweeks. The May employment index declined 10 points to -8.2, after rebounding slightly above zero last month. Twelve percent of firms reported net hiring, compared with 21 percent reporting net layoffs. The hours worked index fell from -5 to -11.6.

United States : Richmond Fed Manufacturing Index
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Highlights
Regional Fed reports on the manufacturing sector continue to be soft with Richmond’s at only plus 1 for May following two prior months of declines. New orders, after three straight declines, did rise but only to plus 2. Backlog orders, however, remain deep in the negative column at minus 10.

Employment growth is down while shipments are in contraction for a 4th month. Price readings are flat except for wages which show a big 11-point gain to 20. Wage pressures are a trigger for an FOMC rate hike and this reading, though isolated, will get the attention of the hawks at the Fed.

First it was Empire State, then the Philly Fed, then Kansas City, all showing weakness this month and now including Richmond. Data from the Dallas Fed, also released this morning, is especially weak. The manufacturing sector is having a tough time gaining momentum, held down by weak exports and contraction in the energy sector.

This is one man one vote, not one dollar one vote, and is another indicator where Q2 isn’t doing as well as Q1:
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Railcar traffic, Draghi statement, NY manufacturing survey, Industrial production, Consumer confidence

Rail Week Ending 09 May 2015: Data Still Not Pretty. Rail Softness Continues.

(Econintersect) — Week 18 of 2015 shows same week total rail traffic (from same week one year ago) declined according to the Association of American Railroads (AAR) traffic data. Intermodal traffic improved, which accounts for half of movements – but weekly railcar counts goes deeper into contraction.

This analysis is looking for clues in the rail data to show the direction of economic activity – and is not necessarily looking for clues of profitability of the railroads. The weekly data is fairly noisy, and the best way to view it is to look at the rolling averages which generally are in a weak growth cycle.

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A summary of the data from the AAR:

The Association of American Railroads (AAR) today reported U.S. rail traffic for the week ending May 9, 2015.

For this week, total U.S. weekly rail traffic was 551,034 carloads and intermodal units, down 2.3 percent compared with the same week last year.

Total carloads for the week ending May 9, 2015 were 273,433 carloads, down 7.9 percent compared with the same week in 2014, while U.S. weekly intermodal volume was 277,601 containers and trailers, up 3.8 percent compared to 2014.

Four of the 10 carload commodity groups posted increases compared with the same week in 2014. They include: motor vehicles and parts, up 8.9 percent to 18,997 carloads; petroleum and petroleum products, up 6.1 percent to 15,464 carloads; and miscellaneous carloads, up 3.6 percent to 9,220 carloads. Commodity groups that saw decreases during this one week included: coal, down 16.1 percent to 93,691 carloads; metallic ores and metals, down 12.1 percent to 23,572 carloads; and grain, down 11.2 percent to 17,959 carloads.

For the first 18 weeks of 2015, U.S. railroads reported cumulative volume of 5,043,559 carloads, down 1.8 percent from the same point last year; and 4,679,513 intermodal units, up 1.7 percent from last year. Total combined U.S. traffic for the first 18 weeks of 2015 was 9,723,072 carloads and intermodal units, a decrease of 0.1 percent compared to last year.

North American rail volume for the week ending May 9, 2015 on 13 reporting U.S., Canadian and Mexican railroads totaled 368,931 carloads, down 7.5 percent compared with the same week last year, and 350,845 intermodal units, up 3.2 percent compared with last year. Total combined weekly rail traffic in North America was 719,776 carloads and intermodal units, down 2.6 percent. North American rail volume for the first 18 weeks of 2015 was 12,681,610 carloads and intermodal units, up 1 percent compared with 2014.

Here we go. This kind of thing previously had caused the euro to fall vs the dollar. If it doesn’t happen this time there’s a serious problem brewing. And right now the euro is up on the day…

Draghi helps stocks

Aside from individual stocks, sentiment received a boost from the ECB on Friday. Draghi said Thursday that the central bank will “implement in full” its bond-buying program and it will stay in place “as long as needed.”

“While we have already seen a substantial effect of our measures on asset prices and economic confidence, what ultimately matters is that we see an equivalent effect on investment, consumption and inflation,” Draghi said, according to the text of a speech delivered in Washington.

“To that effect, we will implement in full our purchase program as announced and, in any case, until we see a sustained adjustment in the path of inflation.”
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Empire State Mfg Survey
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Highlights
The first indication on May conditions in the manufacturing sector is soft, as indications have been all year. The Empire State index came in at 3.09, below what were already weak Econoday expectations for 5.00. Shipments look respectable at 14.94 but are way ahead of new orders, at only 3.85, and even further ahead of backlog orders which are in deep contraction at minus 11.46. Employment growth is down as is the 6-month outlook, both pointing to a lack of optimism.

Price readings in this report stand out, pointing to even less pressure than in April with input cost inflation very subdued, down nearly 10 points to 9.38, and with virtually no price traction at all for finished goods, at only 1.04.

The manufacturing sector, hurt in part by weak exports, looks to be more and more of a drag at a time when economic growth is supposed to be on a springtime rebound. Next indication on the May manufacturing sector will be next Thursday with the Philly Fed report. Later this morning the industrial production report will offer the first definitive data on the April manufacturing sector.

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This is bad too:

Industrial Production
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Highlights
Industrial production is stalling, down 0.3 percent in April for a 5th straight monthly contraction. Factories are cutting back with capacity utilization down 4 tenths to 78.2 percent. And the manufacturing component, which has been flat to negative all year, is unchanged. All these readings are at or near the Econoday low-side forecasts.

Among manufacturing subcomponents, consumer goods output fell 0.3 percent with business goods down 0.4 percent. Construction supplies rose only fractionally but at 0.1 percent the reading is the best all year (this a reminder of how weak construction and housing has been). A positive is a second strong month for auto output, up 1.3 percent on top of March’s 4.3 percent surge, but whether output increases further will depend on auto sales which, in yesterday’s retail sales report, turned lower in April.

The two other main components in today’s report show even greater weakness with mining, hurt by oil & gas, at minus 0.8 percent for the 6th contraction in 7 months and utilities at minus 1.3 percent for a 2nd straight decline.

The industrial economy remains flat and is holding down what is supposed to be the economy’s springtime bounce. The news from the factory sector, including this morning’s Empire State report, won’t be pulling forward expectations for the Fed’s first rate hike.
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Even this has suddenly broken:

Consumer Sentiment
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Highlights
Consumer confidence had been holding, as the FOMC assured us just a couple of weeks ago, at high levels, but perhaps less so now with the consumer sentiment index at 88.6 which is nearly 5 points below Econoday’s low-side forecast. Both components show weakness with current conditions down 7.2 points to 99.8 and expectations down 7.3 points to 81.5. These are the lowest readings since October and November of last year.

At the same time that confidence is going down, inflation expectations, reflecting rising gasoline prices, are going up. Expectations 1-year out are up 3 tenths to 2.9 percent while expectations 5-years out are up 2 tenths to 2.8 percent. Despite the turn higher, however, these are still low levels.

The drop in current conditions hints at softness in this month’s jobs market while the drop in expectations is a downgrade for the outlook on jobs. The hawks at the Fed have been anticipating, perhaps over anticipating, that strong consumer confidence levels would eventually translate to gains for retail sales. Retail sales have been flat along and now consumer confidence, based at least on today’s consumer sentiment report, is moving backwards.
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Of the nearly 1.6 million loan originations in Q1, 471,822 were purchase loan originations, down 25% from the prior quarter and up less than 1% from a year ago. There were 1,080,043 refinance originations in Q1, an increase of 6% from the prior quarter and 27% from a year ago.

claims, producer prices, euro comments, public sector jobs

Just a reminder, claims measure those losing jobs who file for benefits, not new hires:

Jobless Claims
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The euro has been moving higher vs the dollar, as CB selling winds down as they reach the lower limits of their reserve targets along with fundamental support from a large and growing EU current account surplus that’s drained those euro sold by those CB’s and other sellers from global markets. This may have left the short sellers and others needing to recover euro allocations subject to a dramatic short squeeze for as long as the current account surplus continues. And this poses an extreme risk to the EU. Growth forecasts have been largely based on ‘weak euro’ and as it moves higher that growth never materializes, and instead the economy deteriorates/unemployment goes higher, etc. etc. and, making matters worse, the ECB is left ideologically bankrupt, having seen negative rates and QE do nothing more than exacerbate the deflation they were trying to reverse. All they can do is try more of the same, which will be a very depressing environment for those who have been suffering under the failed policies. All of which has the potential to accelerate the already growing support for the various anti euro forces.
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Yes, President Obama wins the Tea Party trophy for downsizing government:
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Chicago Fed, EU CPI

Who would have thought?

Chicago Fed National Activity Index
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Highlights
March was not a good month for the economy, an assessment confirmed by the national activity index which fell steeply to minus 0.42 vs an already weak and downwardly revised minus 0.18 in February. And the first quarter as a whole was also weak, reflected in the 3-month average which came in at minus 0.09.

The production component, at minus 0.27, pulled down the index the most in March followed by personal consumption & housing at minus 0.13. Employment also pulled down the index, at minus 0.3 for a big swing downward vs February’s plus 0.11. The only component in positive ground in March, and only barely, was sales/orders/inventories at only plus 0.01.

Imagine what inflation would be without the years of 0 rates, the QE, and the weak euro!

;)

European Union Consumer Prices Fall for Fourth Month

April 17 (WSJ) — Eurostat on Friday said consumer prices in the 28-nation bloc fell 0.1% in March from a year earlier, and confirmed data that showed prices in the eurozone were also 0.1% lower. In February, prices fell 0.3% in the EU as a whole, a figure that was revised from an earlier estimate of 0.2%. Twelve EU members experienced an annual decline in consumer prices in March, down from 20 in February. The decline in prices in the 12 months to March was largely due to a drop in energy costs, although that eased markedly. In the eurozone, energy prices rose 1.7% from February.

Housing starts, Italy Merchandise Trade, UK opinion chart, ECB euro policy musings

Moving up some but still relatively low, but as previously discussed,
this is about people losing jobs, not new hires:

Jobless Claims
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And yet another lower than expected release:

Housing Starts
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Just anecdotal evidence of what happens as the euro is pushed down by CB portfolio selling to ‘equate supply and demand’ etc.

Italy : Merchandise Trade
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Highlights
The seasonally adjusted merchandise trade balance was in a sizeable E4.6 billion surplus in February, up from an unrevised E3.9 billion excess in January.

The headline gain was attributable to a tidy bounce in exports which, up 2.5 percent on the month, essentially reversed their January decline. Capital goods saw a 7.6 percent rise while consumer goods were up 0.2 percent and energy 2.7 percent. Intermediates fell 0.5 percent. Overall exports were 3.7 percent higher than in February 2014, a marked acceleration versus their minus 4.2 percent January rate.

Low odds of the UK going for fiscal expansion:
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Not to forget every Fed member recognizes their role in ‘managing expectations’ as they all believe that the economic performance has a large psychological component. That is, if people were led to believe things were getting worse that would cause a downturn.

Beige Book: U.S. Economy Powers Through Headwinds

By Jefferey Sparshott

April 15 (WSJ) — The U.S. economy continued to expand across most of the country in February and March, though a strong dollar, falling oil prices and harsh winter weather slowed activity in some sectors, according to the Federal Reserve’s latest survey of regional economic conditions. The Fed found modest or moderate growth in eight of its 12 districts. Elsewhere, the pace of economic activity was described as steady, slight or continuing to expand. Minutes of the March meeting showed “several” officials thought June would be the right time, though others said it would be better to wait.

Possible narrative?:
China told Draghi that if the ECB not to go to negative rates and QE or they would retaliate by selling their euro reserves. So Draghi did exactly that to induce a ‘devaluation’ to support EU net exports. The ploy worked, for as long as it lasts. When the CB reserve liquidation fades, the euro will appreciate until the current account surplus turns to a deficit, reversing prior gains in output and employment, and dashing any hoped of growth and employment:

ECB’s Mario Draghi Says Stimulus Is Working

By Brian Blackstone and Todd Buell

April 15 (WSJ) — ECB President Mario Draghi said there is “clear evidence the monetary policy measures we put in place have been effective.” Mr. Draghi said, “The euro area economy has gained further momentum since the end of 2014. We expect the economic recovery to broaden and strengthen substantially.”

German GDP forecasts hiked on weak euro

US macro update, FX update

US macro update:

So looks to me like it’s all gone bad since the oil price crash, exactly as feared, and the Atlanta Fed most recently lowered it’s Q1 GDP estimate to 0.

First, a quick review of the accounting.
GDP = spending = sales = income.
An increase in spending = an increase in sales = an increase in income.

And, on a look back, as a point of logic, is this critical, fundamental understanding:

For every agent that spent less than his income (aka demand leakages) another must have spent more than his income (aka deficit spending/spending from savings) or that much output would not have been sold.

And this also means that to sustain last year’s rate of GDP growth, all the sectors on average need to grow at least at the same rate as last year, and higher if GDP growth is to increase.

Next, in that context, a quick look back at the last few years.

When stocks fell after the 2012 Obama reelection I called it a buying opportunity, as I saw sufficient total deficit spending along with sufficient income growth for additional private sector deficit spending that I thought would support maybe 4% GDP growth.

But that changed when we were allowed to at least partially go over what was called ‘the fiscal cliff’ with the expiration of my (another story) FICA tax cut and some of the Bush tax cuts amounting to what was then estimated to be a $180 billion tax hike- the largest in US history. And the sequesters about 4 months later cut about 70 billion in spending. That all lowered my GDP estimate by that much and more, and I began referring to a macro constraint that would keep an ever declining lid on GDP.

The fundamental problem was that govt, the agent that was spending more than its income to offset the demand leakages, had suddenly removed that support, and I didn’t see any other agent stepping up to the plate or even capable of stepping up to the plate to increase his deficit spending to replace it. Historically it would be housing and cars, but with the income cuts from the decrease in govt net spending I didn’t see those sectors sufficiently increasing private sector deficit spending.

So GDP growth was lower than expected in 2013, and even what we had towards the end of the year looked bogus to me, including the mainstream claiming the rise in inventories this time was a good thing, not to be followed by reduced production, as it meant there were high sales forecasts and it all would be self sustaining. I thought otherwise and wrote about heading to negative growth by year end.

And in fact Q1 2014, originally forecast to grow at about 2%, was first released as positive before being subsequently revised down to less than -2%, with maybe 1% of that drop due to cold weather. At that point I continued to not see any source of deficit spending to offset the demand leakages that were dragging down the economy.

However, what I completely missed in early 2014 was the increase in deficit spending underway in the energy sector as new investment chased $90 crude prices. I knew crude production was expanding, and likely to grow by maybe a million barrels/day or so, but I didn’t realize the magnitude of the rate of growth of that capital expenditure until after prices collapsed several months ago and economists started estimating how much capex might be lost with lower prices.

It was then I realized that the energy sector had been the mystery source of the growth of deficit spending that had been offsetting the drop in govt deficit spending, and thereby supporting the positive GDP prints that otherwise might have gone negative much sooner, and that the end of that support was also the end of positive GDP growth.

So here we are, with Q1 GDP forecasts all being revised down after Q4 was also revised down, as all the charts are pointing south, and all are in denial that it is anything more than a random blip down as happened last year in Q1, along with the pictures of houses and cars covered in snow, as forecasts for Q2 and beyond remain well north of 2%.

But without some agent stepping up to the plate to replace the lost growth in energy CAPEX that replaced the lost govt deficit spending, all I can see is the automatic fiscal stabilizers- falling tax revenues and rising unemployment comp- as the next source of deficit spending that eventually reverses the decline.
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FX:

The euro short/underweight looks to me to be the largest short of any kind in the history of the world. The latest reports confirmed large scale global central bank portfolio shifting out of euro both through historically massive active selling, as well as passively as valuations changed relative weightings. And at the same time, the speculation and portfolio shifting that drove the euro down resulted in the real global economy selling local currencies to buy euro to use to purchase real goods and services from the EU. In other words, the falling euro has supported a growing EU current account surplus that’s removing net euro financial assets from the global economy.

The portfolio shifting has been driven by fundamental misconceptions that include the belief that
1. The old belief that lower rates from the ECB are an inflationary bias and therefore euro unfriendly
2. The old belief that QE is an inflationary bias and therefore euro unfriendly
3. The belief that Greek default is euro unfriendly
4. The new belief that the EU current account surplus creates a domestic savings glut that is euro unfriendly.

The operational facts are the opposite:

1. Lower rates paid by govt reduce net euro financial assets in the economy while net govt spending is not allowed to increase, the net of which functionally is a tax on the economy and euro friendly.
2. QE merely shifts the composition of euro deposits at the ECB while (modestly) reducing interest income earned by the economy and increasing ECB profits that get returned to members to contribute to deficit reduction efforts and not get spent, the net of which is functionally a tax on the economy and euro friendly.
3. Greek bonds are euro deposits at the ECB that are reduced by default, thereby acting as a tax on the economy and euro friendly.
4. The EU current account surplus is driving by non residents buying real goods and services from the EU which entails selling their their currencies and buying euro used to make their purchases, which is euro friendly.

So it now looks to me like the portfolio shifting has run its course as the EU current account surplus continues to remove euro from the global economy now caught short. This means the euro is likely to appreciate to the point where the current account surplus reverses, and since the current account surplus is not entirely a function of the level of the euro, that could be a very long way off. Not to mention that as EU exports soften additional measures will likely be taken domestically to lower costs to enhance competitiveness, which will only drive the euro that much higher.
eu-reserves

more QE nonsense

Aztec economics- sacrifices made the sun rise…

The same logic also proves QE likewise prevented elephant attacks in Rome this year…

ECB Loans Data Suggests QE is Working

By Todd Duell

March 26 (WSJ) — Data showed lending to firms and households rose in February, with loans to corporates rising by €8 billion and loans to households by €1 billion. Moreover, the broad monetary aggregate M3 was up 4% in February in annual terms, above January’s growth of 3.7%. The M1 component of M3 has increased in recent months, having risen by 9.1% on the year in February, after 8.9% in January. The central bank also launched a program last year of conditional four-year loans to banks, designed to encourage commercial banks to pass funds on to eurozone businesses.

Posted in ECB

Greek bank liquidity, Fed minutes, Architecture Billings Index

As previously discussed, and relayed to the finance minister in Greece, there is no reason to assume the ECB will cut off liquidity to Greek banks.

First, those banks are private institutions, and regulated and supervised by the ECB, who has deemed them ‘solvent’ and ‘adequately capitalized’ and therefore eligible for liquidity support as members in good standing.

Think of it this way, if NY went rogue, would the Fed cut off Citibank?

ECB extends liquity for Greek banks: Report

Seems the last thing the Fed wants to do now is engineer higher mtg rates and set back the anemic housing markets.

Sort of like Bernanke did just before housing turned south and has yet to recover…

Federal Reserve minutes indicate no rush to raise interest rates

Below 50, not good:

abi-jan

A Modest Response

A Modest Proposal for Resolving the Eurozone Crisis

By Y. Varoufakis, S. Holland AND J.K. Galbraith

1. Prologue
Europe is fragmenting. While in the past year the European Central Bank has managed to stabilise the bond markets, the economies of the European core and its periphery are drifting apart. As this happens, human costs mount and disintegration becomes an increasing threat.

It is not just a matter for the Eurozone. The fallout from a Eurozone breakup would destroy the European Union, except perhaps in name. And Europe’s fragmentation poses a global danger.

Following a sequence of errors and avoidable delays Europe’s leadership remains in denial about the nature of the crisis, and continues to pose the false choice between draconian austerity and a federal Europe.

By contrast, we propose immediate solutions, feasible within current European law and treaties.

There are in this crisis four sub-crises: a banking crisis, a public debt crisis, a crisis of under-investment, and now a social crisis – the result of five years of policy failure. Our Modest Proposal therefore now has four elements. They deploy existing institutions and require none of the moves that many Europeans oppose, such as national guarantees or fiscal transfers. Nor do they require treaty changes, which many electorates anyway could reject. Thus we propose a European New Deal which, like its American forebear would lead to progress within months, yet through measures that fall entirely within the constitutional framework to which European governments have already agreed.

2. The nature of the Eurozone crisis
The Eurozone crisis is unfolding on four interrelated domains. Banking crisis: There is a common global banking crisis, which was sparked off mainly by the catastrophe in American finance. But the Eurozone has proved uniquely unable to cope with the disaster, and this is a problem of structure and governance. The Eurozone features a central bank with no government, and national governments with no supportive central bank, arrayed against a global network of mega-banks they cannot possibly supervise. Europe’s response has been to propose a full Banking Union – a bold measure in principle but one that threatens both delay and diversion from actions that are needed immediately.

Better understood as a lack of credible deposit insurance, which logically requires that the entity that provides the insurance- the ECB in this case- is responsible for the regulation and supervision of its banks.

Debt crisis: The credit crunch of 2008 revealed the Eurozone’s principle of perfectly separable public debts to be unworkable. Forced to create a bailout fund that did not violate the no-bailout clauses of the ECB charter and Lisbon Treaty, Europe created the temporary European Financial Stability Facility (EFSF) and then the permanent European Stability Mechanism (ESM). The creation of these new institutions met the immediate funding needs of several member-states, but retained the flawed principle of separable public debts and so could not contain the crisis. One sovereign state, Cyprus, has now de facto gone bankrupt, imposing capital controls even while remaining inside the euro.

During the summer of 2012, the ECB came up with another approach: the Outright Monetary Transactions’ Programme (OMT). OMT succeeded in calming the bond markets for a while. But it too fails as a solution to the crisis, because it is based on a threat against bond markets that cannot remain credible over time. And while it puts the public debt crisis on hold, it fails to reverse it; ECB bond purchases cannot restore the lending power of failed markets or the borrowing power of failing governments.

Better understood as failure of the ECB to explicitly guarantee national govt bonds against default. It was only when Mario Draghi said the ECB would ‘do what it takes to prevent default of national govt debt’ that spreads narrowed and the national funding crisis faded. And it is only the threat that Greece will be allowed to default that is causing the current Greek funding crisis.

Investment crisis: Lack of investment in Europe threatens its living standards and its international competitiveness.

He doesn’t differentiate between public investment in public infrastructure, vs private investment that responds to prospects for profits.

As Germany alone ran large surpluses after 2000, the resulting trade imbalances ensured that when crisis hit in 2008, the deficit zones would collapse.

How is ‘collapse’ defined here? The funding crisis was a function of ECB policy that presumably would allow member nations to default, as when Draghi said that would not happen that crisis ended.

And the burden of adjustment fell exactly on the deficit zones, which could not bear it.

However, there were and remain alternatives to said ‘adjustments’ including the permission to run larger budget deficits than the current, arbitrary, 3% limit. Note that this ‘remedy’ is never even suggested or seriously discussed.

Nor could it be offset by devaluation or new public spending, so the scene was set for disinvestment in the regions that needed investment the most. Thus, Europe ended up with both low total investment and an even more uneven distribution of that investment between its surplus and deficit regions.

True, however it is not recognized that the fundamental cause is that the 3% deficit limit is too low.

Social crisis: Three years of harsh austerity have taken their toll on Europe’s peoples.

From Athens to Dublin and from Lisbon to Eastern Germany, millions of Europeans have lost access to basic goods and dignity. Unemployment is rampant. Homelessness and hunger are rising. Pensions have been cut; taxes on necessities meanwhile continue to rise. For the first time in two generations, Europeans are questioning the European project, while nationalism, and even Nazi parties, are gaining strength.

True

3. Political constraints for any solution.
Any solution to the crisis must respect realistic constraints on political action. This is why grand schemes should be shunned. It is why we need a modest proposal.

But immodest enough to do more than rearrange the deck chairs on the titanic.

Four constraints facing Europe presently are: (a) The ECB will not be allowed to monetise sovereigns directly.

Not necessary

There will be no ECB guarantees of debt issues by member-states,

They already said they will do what it takes to prevent default, meaning at maturity and when interest payments are due the ECB will make sure the appropriate accounts are credited. However this policy is discretionary, with threats Greece would be allowed to default.

no ECB purchases of government bonds in the primary market,

Not necessary

no ECB leveraging of the EFSF-ESM to buy sovereign debt from either the primary or secondary markets.

Not necessary

(b) The ECB’s OMT programme has been tolerated insofar as no bonds are actually purchased. OMT is a policy that does not match stability with growth and, sooner or later, will be found wanting.

And accomplishes nothing of consequence for the real economy.

(c) Surplus countries will not consent to ‘jointly and severally’ guaranteed Eurobonds to mutualise debt and deficit countries will resist the loss of sovereignty that would be demanded of them without a properly functioning federal transfer union which Germany, understandably, rejects.

Said eurobonds not necessary for fiscal transfers.

(d) Europe cannot wait for federation. If crisis resolution is made to depend on federation, the Eurozone will fail first.

Probably true.

The treaty changes necessary to create a proper European Treasury, with the powers to tax, spend and borrow, cannot, and must not, be held to precede resolution of this crisis.

Nor are they necessary to sustain full employment.

The next section presents four policies that recognise these constraints.

4. THE MODEST PROPOSAL – Four crises, four policies The Modest Proposal introduces no new EU institutions and violates no existing treaty. Instead, we propose that existing institutions be used in ways that remain within the letter of European legislation but allow for new functions and policies.

These institutions are:

· The European Central Bank – ECB

· The European Investment Bank – EIB

· The European Investment Fund – EIF

· The European Stability Mechanism – ESM

Policy 1 – Case-by-Case Bank Programme (CCBP)

For the time being, we propose that banks in need of recapitalisation from the ESM be turned over to the ESM directly – instead of having the national government borrow on the bank’s behalf.

‘In need of recapitalization’ is not defined. With credible deposit insurance banks can function in the normal course of business without capital, for example. That means ‘need of capital’ is a political and not an operational matter.

Banks from Cyprus, Greece and Spain would likely fall under this proposal. The ESM, and not the national government, would then restructure, recapitalize and resolve the failing banks dedicating the bulk of its funding capacity to this purpose.

Those banks are necessarily already ‘funded’ via either deposits or central bank credits, unless their equity capital is already negative and not simply below regulatory requirements, as for every asset there is necessarily a liability. And I have not been aware of the banks in question have negative capital accounts.

The Eurozone must eventually become a single banking area with a single banking authority.

Yes, with the provider of deposit insurance, the ECB, also doing the regulation and supervision.

But this final goal has become the enemy of good current policy. At the June 2012 European Summit direct bank recapitalisation was agreed upon in principle, but was made conditional on the formation of a Banking Union. Since then, the difficulties of legislating, designing and implementing a Banking Union have meant delay and dithering. A year after that sensible decision, the deadly embrace between insolvent national banking systems and insolvent member-states continues.

Today the dominant EU view remains that banking union must be completed before the ESM directly recapitalises banks.

Again, I don’t recall the problem being negative bank capital, but merely capital that may fall short of required minimums, in which case not only is no ‘public funding’ is required with regard to capital, but the concept itself is inapplicable as adding public capital doesn’t alter the risk to ‘public funds’

And that when it is complete, the ESM’s contribution will be partial and come only after a bail in of depositors in the fiscally stressed countries of the periphery. That way, the banking crisis will either never be resolved or its resolution be delayed for years, risking a new financial implosion.

Our proposal is that a national government should have the option of waiving its right to supervise and resolve a failing bank.

This carries extreme moral hazard, as it removes the risk of inadequate supervision from the national govt, and instead rewards lax supervision. Instead that right to supervise and regulate should immediately be transferred to the ECB for the entire national banking system in exchange for ECB deposit insurance.

Shares equivalent to the needed capital injection will then pass to the ESM, and the ECB and ESM will appoint a new Board of Directors. The new board will conduct a full review of the bank’s position and will recommend to the ECB-ESM a course for reform of the bank. Reform may entail a merger, downsizing, even a full resolution of the bank, with the understanding that steps will be taken to avoid, above all, a haircut of deposits.

That is functionally what I call sustaining credible deposit insurance which largely eliminates bank liquidity issues.

Once the bank has been restructured and recapitalised, the ESM will sell its shares and recoup its costs.

I agree with the resolution process.

The above proposal can be implemented today, without a Banking Union or any treaty changes.

The experience that the ECB and the ESM will acquire from this case-by-case process will help hone the formation of a proper banking union once the present crisis recedes.

POLICY 2 – Limited Debt Conversion Programme (LDCP)
The Maastricht Treaty permits each European member-state to issue sovereign debt up to 60% of GDP. Since the crisis of 2008, most Eurozone member-states have exceeded this limit. We propose that the ECB offer member-states the opportunity of a debt conversion for their Maastricht Compliant Debt (MCD), while the national shares of the converted debt would continue to be serviced separately by each member-state.

The ECB, faithful to the non-monetisation constraint (a) above, would not seek to buy or guarantee sovereign MCD debt directly or indirectly. Instead it would act as a go-between, mediating between investors and member-states. In effect, the ECB would orchestrate a conversion servicing loan for the MCD, for the purposes of redeeming those bonds upon maturity.

The conversion servicing loan works as follows. Refinancing of the Maastricht compliant share of the debt, now held in ECB-bonds, would be by member-states but at interest rates set by the ECB just above its bond yields. The shares of national debt converted to ECB-bonds are to be held by it in debit accounts. These cannot be used as collateral for credit or derivatives creation.6 Member states will undertake to redeem bonds in full on maturity, if the holders opt for this rather than to extend them at lower, more secure rates offered by the ECB.

Governments that wish to participate in the scheme can do so on the basis of Enhanced Cooperation, which needs at least nine member-states.7 Those not opting in can keep their own bonds even for their MCD. To safeguard the credibility of this conversion, and to provide a backstop for the ECB-bonds that requires no ECB monetisation, member-states agree to afford their ECB debit accounts super-seniority status, and the ECB’s conversion servicing loan mechanism may be insured by the ESM, utilising only a small portion of the latter’s borrowing capacity. If a member-state goes into a disorderly default before an ECB-bond issued on its behalf matures, then that ECB-bond payment will be covered by insurance purchased or provided by the ESM.

This can more readily be accomplished by formalizing and making permanent the ‘do what it takes to prevent default’ policy that’s already in place, and it will immediately lower the cost of new securities as well.

Why not continue with the ECB’s OMT? The ECB has succeeded in taming interest rate spreads within the Eurozone by means of announcing its Outright Monetary Transactions’ programme (OMT). OMT was conceived as unlimited support of stressed Euro-Area bonds – Italy’s and Spain’s in particular – so as to end the contagion and save the euro from collapse.

Instead I give credit for the low rates to the ‘do what it takes’ policy.

However, political and institutional pressures meant that the threat against bond dealers, which was implicit in the OMT announcement, had to be diluted to a conditional programme. The conditionality involves troika-supervision over the governments to be helped by the OMT, who are obliged to sign a draconian memorandum of understanding before OMT takes effect. The problem is not only that this of itself does nothing to address the need for both stability and growth, but that the governments of Spain and Italy would not survive signing such a memorandum of understanding, and therefore have not done so.

Thus OMT’s success in quelling the bond markets is based on a non-credible threat. So far, not one bond has been purchased. This constitutes an open invitation to bond dealers to test the ECB’s resolve at a time of their choosing. It is a temporary fix bound to stop working when circumstances embolden the bond dealers. That may happen when volatility returns to global bond markets once the Federal Reserve and the Bank of Japan begin to curtail their quantitative easing programmes.

There will be no funding issues while ‘do what it takes to prevent default’ policy is in force.

POLICY 3 – An Investment-led Recovery and Convergence Programme (IRCP)
In principle the EU already has a recovery and convergence strategy in the European Economic Recovery Programme 2020. In practice this has been shredded by austerity. We propose that the European Union launch a new investment programme to reverse the recession, strengthen European integration, restore private sector confidence and fulfill the commitment of the Rome Treaty to rising standards of living and that of the 1986 Single European Act to economic and social cohesion.

The Investment-led Recovery and Convergence Programme (IRCP) will be cofinanced by bonds issued jointly by the European Investment Bank (EIB) and the European Investment Fund (EIF). The EIB has a remit to invest in health, education, urban renewal, urban environment, green technology and green power generation, while the EIF both can co-finance EIB investment projects and should finance a European Venture Capital Fund, which was part of its original design.

A key principle of this proposal is that investment in these social and environmental domains should be europeanised. Borrowing for such investments should not count on national debt anymore than US Treasury borrowing counts on the debt of California or Delaware. The under-recognised precedents for this are (1) that no major European member state counts EIB borrowing against national debt, and (2) that the EIB has successfully issued bonds since 1958 without national guarantees.

EIB-EIF finance of an IRCP therefore does not need national guarantees or a common fiscal policy. Instead, the joint bonds can be serviced directly by the revenue streams of the EIB-EIF-funded investment projects. This can be carried out within member states and will not need fiscal transfers between them.

A European Venture Capital Fund financed by EIF bonds was backed unanimously by employers and trades unions on the Economic and Social Committee in their 2012 report Restarting Growth. Central European economies (Germany and Austria) already have excellent finance for small and medium firms through their Mittelstandpolitik. It is the peripheral economies that need this, to build new sectors, to foster convergence and cohesion and to address the growing imbalances of competitiveness within the Eurozone.

Rationale

The transmission mechanism of monetary policy to the periphery of Europe has broken down. Mr Mario Draghi admits this. He has gone on record to suggest that the EIB play a active role in restoring investment financing in the periphery. Mr Draghi is right on this point.

But, for the IRCP to reverse the Eurozone recession and stop the de-coupling of the core from the periphery, it must be large enough to have a significant effect on the GDP of the peripheral countries.

If EIB-EIF bonds are to be issued on this scale, some fear that their yields may rise. But this is far from clear. The world is awash in savings seeking sound investment outlets. Issues of EIF bonds that co-finance EIB investment projects should meet these demands, supporting stability and working to restore growth in the European periphery. We therefore submit that joint EIB-EIF bond issues can succeed without formal guarantees. Nonetheless, in fulfillment of its remit to support “the general economic policies in the Union”, the ECB can issue an advance or precautionary statement that it will partially support EIB-EIF bonds by means of standard central bank refinancing or secondary market operations. Such a statement should suffice to allow the EIB-EIF funded IRCP to be large enough for the purposes of bringing about Europe’s recovery.

Misleading arguments and unworkable alternatives:

There are calls for bonds to finance infrastructure, neglecting the fact that this has been happening through the European Investment Bank (EIB) for more than half a century. An example is a recent European Commission proposal for ‘Project Bonds’ to be guaranteed by member states. This assures opposition from many of them, not least Germany, while ignoring the fact that the EIB has issued project bonds successfully since 1958, without such guarantees.10

There is no high-profile awareness that EIB investment finance does not count on the national debt of any major member state of the EU nor need count on that of smaller states.11

There is a widespread presumption that public investment drains the private sector when in fact it sustains and supports it. There is similar presumption that one cannot solve the crisis by ‘piling debt on debt’. It depends on which debt for which purpose, and at what rates. Piling up national debt at interest rates of up to seven per cent or more without recovery is suicidal. Funding inflows from global surpluses to Europe to promote economic recovery through joint EIB-EIF bonds at interest rates which could be less than two per cent is entirely sustainable.

There is little awareness of the EIB’s sister organisation, the European Investment Fund (EIF), which has a large potential for investment funding of SMEs, high technology clusters and a variety of other projects, which it can cofinance with bonds, issued jointly with the EIB (see note 9). Why aren’t the EIB-EIF doing this now? Until the onset of the Eurozone crisis the EIB had succeeded in gaining national co-finance, or co-finance from national institutions, for its investments. But with the crisis and constraints on co-finance, total annual EIB financing fell from over €82bn in 2008 to only €45bn last year. The EIF can counterpart and thereby countervail this. It is a sister institution of the EIB within the EIB Group. Like EIB bonds, EIF bonds need not count on national debt nor need national guarantees. The EIB would retain control over project approval and monitoring. In sum, we recommend that:

The IRCP be funded by means of jointly issued EIB and EIF bonds without any formal guarantees or fiscal transfers by member states.

Both EIB and EIF bonds be redeemed by the revenue stream of the investment • projects they fund, as EIB bonds always have been.

If needed, the ECB should stand by to assist in keeping yields low, through direct purchases of EIB-EIF bonds in the secondary market.

I agree the role of the EIB could be expanded, however the political difficulties are substantial and the time to initial implementation will likely be a year or more- time the EU may not have.

POLICY 4 – An Emergency Social Solidarity Programme (ESSP)

We recommend that Europe embark immediately on an Emergency Social Solidarity Programme that will guarantee access to nutrition and to basic energy needs for all Europeans, by means of a European Food Stamp Programme modelled on its US equivalent and a European Minimum Energy Programme. These programmes would be funded by the European Commission using the interest accumulated within the European system of central banks, from TARGET2 imbalances, profits made from government bond transactions and, in the future, other financial transactions or balance sheet stamp duties that the EU is currently considering.

These revenues currently are returned to the member nations and without them compliance with the 3% deficit limit will reduce other spending and/or require additional taxes.

Rationale

Europe now faces the worst human and social crisis since the late 1940s. In member-states like Greece, Ireland, Portugal, but also elsewhere in the Eurozone, including core countries, basic needs are not being met. This is true especially for the elderly, the unemployed, for young children, for children in schools, for the disabled, and for the homeless. There is a plain moral imperative to act to satisfy these needs. In addition, Europe faces a clear and present danger from extremism, racism, xenophobia and even outright Nazism – notably in countries like Greece that have borne the brunt of the crisis. Never before have so many Europeans held the European Union and its institutions in such low esteem. The human and social crisis is turning quickly into a question of legitimacy for the European Union.

Reason for TARGET2 funding

TARGET2 is a technical name for the system of internal accounting of monetary flows between the central banks that make up the European System of Central Banks. In a well balanced Eurozone, where the trade deficit of a member state is financed by a net flow of capital to that same member-state, the liabilities of that state’s central bank to the central banks of other states would just equal its assets.

Not true. Target 2 is about clearing balances that can cause banks to gain or lose liquidity independent of national trade balances.

Such a balanced flow of trade and capital would yield a TARGET2 figure near zero for all member-states.

Again, it’s not trade per se that alters bank liquidity issues.

And that was, more or less, the case throughout the Eurozone before the crisis.

However, the crisis caused major imbalances that were soon reflected in huge TARGET2 imbalances.

The clearing imbalances were caused by lack of credible deposit insurance exacerbated by potential bank failures, not trade per se.

As inflows of capital to the periphery dried up, and capital began to flow in the opposite direction, the central banks of the peripheral countries began to amass large net liabilities and the central banks of the surplus countries equally large net assets.

Yes, but not to confuse capital, which is bank equity/net worth, and liquidity which is the funding of assets and is sometimes casually called ‘capital’ the way ‘money’ is casually called capital.

The Eurozone’s designers had attempted to build a disincentive within the intraEurosystem real-time payments’ system, so as to prevent the build-up of huge liabilities on one side and corresponding assets on the other. This took the form of charging interest on the net liabilities of each national central bank, at an interest rate equal to the ECB’s main refinancing level.

The purpose of this policy rate is to make sure the ECB’s policy rate is the instrument of monetary policy, reflected as the banking system’s cost of funds.

These payments are distributed to the central banks of the surplus member-states, which then pass them on to their government treasury.

In practice, one bank necessarily has a credit balance at the ECB when another has a debit balance, and net debit balances exist to the extent there is actual cash in circulation that banks get in exchange for clearing balances. This keeps the banking system ‘net borrowed’ which provides the ECB with interest income. Additionally buying securities that yield more than deposit rates adds income to the ECB.

Thus the Eurozone was built on the assumption that TARGET2 imbalances would be isolated, idiosyncratic events, to be corrected by national policy action.

The system did not take account of the possibility that there could be fundamental structural asymmetries and a systemic crisis.

Today, the vast TARGET2 imbalances are the monetary tracks of the crisis. They trace the path of the consequent human and social disaster hitting mainly the deficit regions. The increased TARGET2 interest would never have accrued if the crises had not occurred. They accrue only because, for instance, risk averse Spanish and Greek depositors, reasonably enough, transfer their savings to a Frankfurt bank.

Yes, my point exactly, and somewhat counter to what was stated previously. Depositors can shift banks for a variety of reasons, with or without trade differentials.

As a result, under the rules of the TARGET2 system, the central bank of Spain and of Greece have to pay interest to the Bundesbank – to be passed along to the Federal Government in Berlin.

Which then pays interest to its depositors. The ECB profits to the extent it establishes a spread between the rate it lends at vs the rate paid to depositors. That spread is a political decision.

This indirect fiscal boost to the surplus country has no rational or moral basis. Yet the funds are there, and could be used to deflect the social and political danger facing Europe.

There is a strong case to be made that the interest collected from the deficit member-states’ central banks should be channelled to an account that would fund our proposed Emergency Social Solidarity Programme (ESSP). Additionally, if the EU introduces a financial transactions’ tax, or stamp duty proportional to the size of corporate balance sheets, a similar case can be made as to why these receipts should fund the ESSP. With this proposal, the ESSP is not funded by fiscal transfers nor national taxes.

The way I see it, functionally, it is a fiscal transfer, and not that I am against fiscal transfers!

My conclusion is that any improvement in the economy from these modest proposals, and as I’ve qualified above, will likewise be at least as modest. That is, the time and effort to attempt to implement these proposals, again, as qualified, will make little if any progress in fixing the economy as another generation is left to rot on the vine.

5. CONCLUSION: Four realistic policies to replace of five false choices Three years of crisis have culminated in a Europe that has lost legitimacy with its own citizens and credibility with the rest of the world. Europe is unnecessarily back in recession. While the bond markets were placated by the ECB’s actions in the summer of 2012, the Eurozone remains on the road toward disintegration.

While this process eats away at Europe’s potential for shared prosperity, European governments are imprisoned by false choices:

between stability and growth

between austerity and stimulus

between the deadly embrace of insolvent banks by insolvent governments, and an admirable but undefined and indefinitely delayed Banking Union

between the principle of perfectly separable country debts and the supposed need to persuade the surplus countries to bankroll the rest

between national sovereignty and federalism. These falsely dyadic choices imprison thinking and immobilise governments. They are responsible for a legitimation crisis for the European project. And they risk a catastrophic human, social and democratic crisis in Europe.

By contrast the Modest Proposal counters that:

The real choice is between beggar-my-neighbour deflation and an investmentled recovery combined with social stabilisation. The investment recovery will be funded by global capital, supplied principally by sovereign wealth funds and by pension funds which are seeking long-term investment outlets. Social stabilisation can be funded, initially, through the Target2 payments scheme.

Taxpayers in Germany and the other surplus nations do not need to bankroll the 2020 European Economic Recovery Programme, the restructuring of sovereign debt, resolution of the banking crisis, or the emergency humanitarian programme so urgently needed in the European periphery.

Neither an expansionary monetary policy nor a fiscal stimulus in Germany and other surplus countries, though welcome, would be sufficient to bring recovery to Europe.

Treaty changes for a federal union may be aspired by some, but will take too long , are opposed by many, and are not needed to resolve the crisis now. On this basis the Modest Proposal’s four policies are feasible steps by which to deal decisively with Europe’s banking crisis, the debt crisis, underinvestment, unemployment as well as the human, social and political emergency.

Version 4.0 of the Modest Proposal offers immediate answers to questions about the credibility of the ECB’s OMT policy, the impasse on a Banking Union, financing of SMEs through EIF bonds enabling a European Venture Capital Fund, green energy and high tech start-ups in Europe’s periphery, and basic human needs that the crisis has left untended.

It is not known how many strokes Alexander the Great needed to cut the Gordian knot. But in four strokes, Europe could cut through the knot of debt and deficits in which it has bound itself.

In one stroke, Policy 1, the Case-by-Case Bank Programme (CCBP), bypasses the impasse of Banking Union (BU), decoupling stressed sovereign debt and from banking recapitalisation, and allowing for a proper BU to be designed at leisure

By another stroke, Policy 2, the Limited Debt Conversion Programme (LDCP), the Eurozone’s mountain of debt shrinks, through an ECB-ESM conversion of Maastricht Compliant member-state Debt

By a third stroke, Policy 3, the Investment-led Recovery and Convergence Programme (IRCP) re-cycles global surpluses into European investments

By a fourth stroke, Policy 4, the Emergency Social Solidarity Programme (ESSP), deploys funds created from the asymmetries that helped cause the crisis to meet basic human needs caused by the crisis itself.

At the political level, the four policies of the Modest Proposal constitute a process of decentralised europeanisation, to be juxtaposed against an authoritarian federation that has not been put to European electorates, is unlikely to be endorsed by them, and, critically, offers them no assurance of higher levels of employment and welfare.

We propose that four areas of economic activity be europeanised: banks in need of ESM capital injections, sovereign debt management, the recycling of European and global savings into socially productive investment and prompt financing of a basic social emergency programme.

Our proposed europeanisation of borrowing for investment retains a large degree of subsidiarity. It is consistent with greater sovereignty for member-states than that implied by a federal structure, and it is compatible with the principle of reducing excess national debt, once banks, debt and investment flows are europeanised without the need for national guarantees or fiscal transfers.

While broad in scope, the Modest Proposal suggests no new institutions and does not aim at redesigning the Eurozone. It needs no new rules, fiscal compacts, or troikas. It requires no prior agreement to move in a federal direction while allowing for consent through enhanced cooperation rather than imposition of austerity.

It is in this sense that this proposal is, indeed, modest.

The latest QE policy removes ECB ‘conditionality’

Several years ago Mario Draghi announced the ECB would do what it takes (within the rules) to prevent national govt defaults, which immediately reversed the climb of national govt rates, bringing them down to where they are today. But it also came with ‘conditionality’ regarding fiscal policy, where a violation of the fiscal rules carried the threat of the removal of ECB support.

This time it’s different. As part of this broad based fight to reverse the current deflationary forces, the national CB’s will now be buying their own nation’s debt, thereby, for all practical purposes, eliminating default risk. And with no mention of fiscal conditionality. Taken at its word, this means the latest QE policy has removed the ECB’s leverage over national govt fiscal policy, as the ECB did not tie it’s securities purchases to fiscal compliance.

Therefore Greece and Italy, the two members desiring fiscal expansion, are operationally free to do so without the threat of default driving up their interest rates. They may face EU penalties, etc. but those are a very different matter than the prior default risk.

So the door is now open to anyone bold enough to step through. However they probably don’t know it and probably wouldn’t go there if they did…

And, as previously discussed, QE per se is a deflationary/contractionary strong euro bias in the process of making a very bad situation that much worse.