Γ. Η. Κριμπάς: Putting the ‘E’ into ‘EMU’
The following consists of three separate notes, written over a three-month period, on the novel issue of so-called “quantitative easing” in the context of European economic governance. The first note, “The EMU as lender of first resort” [Dec. 10th, 2008], was written in response to an exceptionally able article by Martin Wolf in the Financial Times of the day before [“The Eurozone depends on a strong US recovery”]; to fix ideas, the ‘thought experiment’ proposed here is conducted in its extreme mechanistic version, with qualifications dealt with as necessary in the sequel. The second note, “Euro-Sovereign finance” [Feb. 11th, 2009] continues the line of argument in the light of altogether feeble, kite flying attempts to launch a possible Eurobond; this idea is seen as an unstable half-way house between market-dominated anarchy and the market-disciplining device proposed here [the Eurobond trick has since been killed]. A third note on “”Crisis” of Sovereign finance” [Feb. 25th, 2009] displaces the argument to an altogether different plane, far too implicit in the two previous notes and now made explicit – and writ large, perhaps uncongenially too large; it is proposed that, if there is ‘politics’ involved in the crisis – and who would deny it? – the problem is to ‘define’ the relation between the kind of politics relevant to ‘the’ issue of sovereign finance and, in the limit, sovereign solvency, at the precise interface between politics in the form of the sovereign state and the financial markets. A concluding note [March 5th 2009] provides references to the intellectual ancestry and the implicit ‘model’ underlying the exercise.
I. THE EMU AS LENDER OF FIRST RESORT
The ongoing financial crisis is characterized by twin mutually reinforcing excesses, too much debt and too much liquidity, locked in positive feedback. The consequence is a crippling flight to safety, exemplified by the near and even below zero yield of US 3-month T-bills, before official rates moved to match. Yet while monetary policy is enfeebled, fiscal policy must be financed to an extent calling to question the validity of all money, i.e. sovereign solvency. A new blend or, perhaps more accurately, hybrid monetary-fiscal innovation is the emergence of quantitative and/or qualitative easing. Whether or not as yet perceived, use of this hybrid instrument cannot be indifferent to the threat of sovereign in-solvency. In particular, it is not clear-cut in all cases who the sovereign actually is.