"Politicians, now what?"

This is the front page headline of tomorrow's Dutch magazine Elsevier.

The subtitle reads, "the best exit strategy is the break-up of the eurozone".

It seems that people are growing increasingly tired of waiting for an answer to the question and are more than happy to suggest their own solutions.

Will Ireland have a eurosceptic President?

Things are hotting up in the Irish presidential race. After the previous favourite, David Norris, and his ill-fated campaign came to an abrupt end following revelations about his private life - step into the ring namesakes Gay Mitchell and Gay Byrne (pictured) to slug it out.

The former - the Fine Gael party’s official nomination - is staunchly pro-EU and has been a serving MEP since 2004. During the 2008 referendum on the Lisbon Treaty he acted as Fine Gael’s director of elections. However, since David Norris ditched his campaign, Mitchell has been somewhat the frontrunner as other candidates ponder their chances.

But rumour is rife that Byrne will lead a charge for office as an independent candidate (he has never been linked to a political party). ‘Gaybo’ as the veteran broadcasting legend is famously referred to on the emerald isle, would be a highly popular candidate and is largely seen as Mitchell’s greatest contender. In fact, a poll in this morning puts him 20 points ahead Mitchell. He is though, judging by his latest remarks on the European Union, politically-speaking, the polar opposite of Mitchell. Responding yesterday to a question on how his eurosceptic sentiments might affect his presidential bid, he said:

“What we’re seeing now in Europe as far as I’m concerned, is a culmination of all my concerns about it down through the years. I never thought we would reach the disastrous stage we are at at the moment in Europe in my lifetime. I thought that it would eventually come in my grandchildren’s time but it’s come much much quicker than even I visualised and it’s happening even as we speak.”

He added that Ireland was “being run by mad people in Brussels” while arguing that the euro was a “crazy notion from the beginning. We crossed the Rubicon when we joined the single currency. I think there is no backing out now but it is a mad mad world.”

Strong words from the 77 year-old but perhaps not that surprising. He is not a man to shy away from incendiary remarks, especially those directed at the EU. He was vehemently opposed to the Lisbon Treaty during both referendums and called the Treaty “unintelligible bile.” For the minute, it’s unclear as to whether his country or even his most ardent of supporters agree with him on these matters.

But it’s striking to note that the strongly pro-EU main opposition party in Ireland, Fianna Fail, is considering standing aside and offering its support to Byrne, which says a lot about his appeal. FF TDs have said that Byrne's eurosceptic credentials may in fact be an asset with the public. TD Seán Fleming said, “He’s a man who’s always had his finger on the pulse in Ireland and he’s well on the pulse on this one.”

Very interesting.

A structural funding solution to the crisis?

Over on his Telegraph blog noted economist Andrew Lilico has come up with an original idea for tackling the eurozone crisis. Lilico suggests using the existing structural funds programme to distribute further funding to the struggling PIIGS, thereby helping to boost GDP growth and stabilize the sustainability of their debt burdens (and appease markets about this point).

Credit to Lilico for coming up with an original and constructive idea (and we’re always interested in outside the box thinking) but there does seem to be a few issues with putting the structural funds to work in this manner.

First, the record of the Structural funds doesn't inspire confidence. Most of the evidence - including OECD reports and the influential Sapir report for the Commission - suggests that the impact of structural funds is inconclusive at best, with the causality and the counter-factual tough to prove (See here, here, here, here and here). In places such as Ireland and to a lesser extent Spain, the funds have had a positive economic impact (in Ireland because they effectively financed the government's pro-growth measures). However, in Italy, Greece, Portugal and Belgium (Wallonia) it's far less clear what the funds have achieved. The picture is particularly bleak in southern Italy.

But even assuming that the structural funds have had a positive impact on the GDP of some countries previously, it is very possible that this time around they could be lost in the black hole of fiscal consolidation and potential recession in the PIIGS. This relates to another point: the funds are simply wholly unequipped to serve as a backstop in a debt and solvency crisis. There are numerous technical features of the structural funds which would need to be completely revamped for them to be fit for such a purpose, to name but a few:

- Co-financing would have to be scrapped since the PIIGS can’t afford to part finance any structural funds projects (due to the liquidity crisis which this is aimed at tackling, clearly a catch 22). This is holding back disbursement at the moment and will do until it is removed completely, however, it is the only form of conditionality which is attached to these funds.

- To get the Germans to pay, another form of strict conditionality (which is to replace co-financing) would have to be introduced, possibly some form of austerity target, although then it ceases to be structural funding and becomes budget support. Given the PIIGS history of missing targets (including structural funds targets), its unclear whether this would make accessing the funds any easier and would throw up similar problems as the ones we’ve seen with disbursement of the bailout funds.

- The disbursement criteria would have to be completely changed. The current region-based (NUTS) system linked to Gross Value Added isn’t in any way designed to deal with liquidity and solvency crises (it’s based on long-term regional convergence). Again this means completely over-turning the structural funds. Why not just start from scratch with a purpose built mechanism if this is the way you want to go?

- The aim of the proposal seems to be to boost short term economic growth and help PIIGS deal with liquidity issues and budget problems, as such it would need to be a flexible and short term mechanism. Putting aside whether this is really achievable given EU bureaucracy, such a mechanism would not fit into the current EU budget framework which is negotiated in sever year blocks. (Trying to negotiate how to allocate the new funds within the structural funds framework, which relates to economic convergence, would most likely be hellish and long winded, neither of which is needed right now).

- The European Parliament – a hotbed for rent-seeking – would also need to be stripped of its effective veto over the long-term EU budget if such a mechanism were ever to be effectively implemented.

Ultimately, Lilico is looking for an existing conduit to centrally distribute funds to the PIIGS which will help economic growth, thereby bypassing some of the tricky economic and political debates which have been raging on - not least in Germany. The idea essentially requires a mechanism for transferring budget support to these countries with some limited conditionality. This can never really be done by structural funds - without effectively creating a whole new policy - and would lead us back to the same old questions and problems relating to monetary transfers during this crisis, just as we’ve seen with Eurobonds, the EFSF and the ECB, now wouldn’t it?

At the end of the day, alas, there's no short cut to a fiscal union - and it will come with a huge political cost no matter how we twist and turn it.

Back in the USSR

At Open Europe, we tend to find comparisons between the EU and the USSR rather far-fetched. The reason is simple: not only does the EU, for all its many flaws, also stand for some positive things, such as open borders and free markets (although they could be freer), the EU is simply not a totalitarian dictatorship where people are controlled, tortured and all the rest (though reading through the acquis communautaire does come pretty close to torture at times).

Still it's the comparison that no-one less than Richard Sulik, the Speaker of the Slovak Parliament, hinted at yesterday, as he lashed out at the ongoing eurozone bailouts. DPA quotes him saying:

"This is like the Soviet Union. But we have never joined such a union. No one before our (EU) accession referendum ever told us that Slovakia should now pay billions upon billions for Greek pensions and Italian I-don't-know-what."

Regardless of whether such comparisons are appropriate, it surely says something about the anger brewing in some capitals regarding the blind faith in endless bailouts.

Given that Slovakia rescued its own most important state-owned banks without any foreign help a decade ago, an effort which cost the country 12 per cent of its gross domestic product, Mr. Sulik proabably reads the Slovak public mood quite well here.

In the coming months, every eurozone country will need to approve changes to the EFSF, the temporary bailout fund, which would not only broaden its powers but also increase its size. Sulik, who is the leader of the junior governing Freedom and Solidarity (SaS) party, has already said, "We will do everything we can in order for the parliament not to approve it."

This will be a long and winding road.

When 'More Austerity' Is Easier Said Than Done

Regular readers might have noted that we've become somewhat Italy-obsessed of late. Well, we have good reasons. The fate of the Single Currency largely depends on whether the 'Bel Paese' can get out of the woods.

Following last week’s announcement that the Italian government will aim to achieve its zero deficit target by 2013 instead of 2014, Berlusconi & co. now need to find around €20 billion a year earlier than expected - not pocket change. Unfortunately, the Italian government is split on where, exactly, the money should come from.

In fact, Italian media reports that the government is considering more cuts and reforms to pensions. In particular, the gradual increase in the retirement age for women working in the private sector could be brought forward to next year rather than 2020, and plans to raise the retirement age in line with life expectancy could also be implemented a year earlier.

Berlusconi will discuss the new austerity measures with Italian trade unions and employers' organisations this afternoon. Hardly surprising, unions will put up resistance. But more worrying is that Lega Nord leader Umberto Bossi (in the picture with Il Cavaliere) - Berlusconi's junior coalition partner - said yesterday that he will not accept further adjustments to Italy's pension system.

As an alternative, Lega Nord (reportedly with the support of Italian Economy Minister Giulio Tremonti) is now pushing for new taxes on capitals and properties. Berlusconi is widely quoted in the Italian press saying,

"It won't be a government led by me that imposes a property tax. I'd rather resign."

Yeah, right.

These guys'd better get their act together. Despite the temporary relief offered by the ECB's bond-buying, the markets expect that Rome takes action. If the Italian government doesn't offer some clear evidence that it can deliver on what it's promised, the distance between Rome and Athens will soon appear dangerously narrow.

A simple "Grazie" would do

Italian paper Il Messaggero offers juicy backstage details straight from Italian Prime Minister Silvio Berlusconi's Villa Certosa in Sardinia (jikes). Not that we expected that Il Cavaliere would be happy about being bossed around by the ECB as the latter required concrete economic reforms in return for providing Italy with a lifeline. However, the comments reported by the paper - taken from private conversations between Berlusconi and some key Italian ministers - beat expectations.


This is what Berlusconi reportedly said,

“With all those letters and communiqués, they [according to the paper, 'they' refer to the ECB, French President Nicolas Sarkozy and German Chancellor Angela Merkel] made us appear as a government under a compulsory administration. This is not true. Also, they decided to intervene in favour of our bonds to save themselves, not Italy.”

He added,

“If the green light of individual countries is needed before the ECB can intervene, that means that the ECB is not yet, as it should be, the autonomous, authoritative and independent governor of the euro area. If it must be said, as [ECB President Jean-Claude] Trichet did, that in return for an intervention in favour of our bonds a political ‘yes’ was needed, then we have evidence of the fact that we’re far away from a communitarian governance which can frighten speculators. And if today it’s our turn, tomorrow it can be Paris’s turn.”

Apparently, Berlusconi's last point (by far the most interesting) was echoed by Italian Foreign Minister Franco Frattini, who is also quoted in the article saying,

“Sarkozy and Merkel know well that contagion from speculation can hit them too. Had they stopped the ECB from intervening, they would have also done a damage to their own countries.”

Hmmm, a simple 'grazie' would've been sufficient. To be fair, Berlusconi does have a point about the politicisation of the ECB.

The ECB's SMP rationale

There are many questions surrounding the ECB’s decision to purchase Italian and Spanish debt under its Securities Markets Programme (SMP), but one that hasn’t been heavily probed is the ECB's rationale for its intervention (admittedly not the biggest issue but an interesting one nonetheless).

In its statement on Sunday the ECB claimed that it had decided to “actively implement” the SMP (read purchase Italian and Spanish debt) in order to help restore “a better transmission” of monetary policy. ECB President Jean-Claude Trichet reiterated this position again today saying:

"The ECB is fiercely independent. Ours are monetary-policy decisions. They are absolutely not negotiated"

So, the ECB is essentially suggesting that they have decided to purchase bonds not because they want to safeguard the eurozone but because it is essential for the ECB to effectively fulfil its primary goal of price stability.

This may seem like a trivial difference, but it is important to hold central banks accountable for their actions, particularly when they border on fiscal policy and politics such as this instance does. The ECB is clearly claiming that it is not stepping outside of its mandate; however, this does not look to be the case. (It’s not entirely the ECB’s fault given the position that eurozone leaders have put it in, but highlights the structural problems within the eurozone, when the so-called lender of last resort can only act if it justifies its actions under the auspices of 'monetary policy').

So could the SMP purchases ever actually form part of monetary policy transmission? Well, as an FT editorial points out today, the rising yields and falling prices of Italian and Spanish government debt, combined with the growing market turmoil, could put significant pressure on European banks (Italian and Spanish ones in particular, since they hold mountains of sovereign debt). Conducting monetary policy effectively through banks and financial markets where some of their core assets are dropping in value is far from easy.

This argument makes sense, except for one important point – why, if this policy is justifiable from a standalone view of monetary policy, did the ECB need to rally so hard (reportedly sending secret letters with effective demands to Italian PM Silvio Berlusconi) to get guarantees in return for its decision? It’s become clear that the ECB applied significant pressure to the Italian and Spanish governments to get the economic policies which it saw as desirable. In Italy this meant front-loading the budget cuts while in Spain it meant instituting more cuts this year to meet the deficit targets, and we’re sure there’s more to come.

The point here is that the ECB is stepping outside its mandate and, pretty much, engaging in fiscal policy. It is necessary to do this (to some extent) because the eurozone lacks a suitable lender of last resort (as we’ve previously pointed out), but the ECB can only do this by pretending its part of its monetary policy goals. This almost ridiculous situation highlights an on-going structural flaw in the eurozone – specifically, who is the final backstop and how accountable are they?

Who can live life in the euro to Issing (Germany)'s rules

Otmar Issing's article in the FT this morning makes for very interesting reading. His former role on the ECB's executive board and therefore as an architect of the Single Currency makes his analysis of the current problems all the more important. But it also raises big questions.

He writes:

"The crisis of European economic and monetary union seems to confirm a long-standing belief that monetary union cannot survive without political union...

...Connecting the initial idea of a political union with developments currently under way is both logically flawed and politically dangerous. In short: a consistent concept of a political union should be based on a constitution, and imply a European government controlled by a European Parliament, elected according to democratic principles.

What we see happening now is something quite different. More and more national taxpayers’ money is now at risk to “save” the euro. Yet the conclusion that this process is leading in the direction of political union is derived from the strict conditions imposed upon member states that broke the rules, in exchange for help – conditions which imply a kind of European control over elements of member state governments."

He goes on to warn that:

"Any attempt to 'save' monetary union via agreements which transfer sovereignty to a European level, where violations of fundamental treaties have become a regular event, lacks any logic. In the end it will only further alienate the people from Europe itself.

...This type of political union would not survive. Its collapse would be brought by resistance from the people. In the past cries of 'no taxation without representation' have brought war. This time the consequence would be to threaten the collapse of the most successful project of economic integration in the history of mankind."

Issing's analysis is extremely powerful and one that we would largely agree with - and it's also an indication of the frustration in Germany over the direction in which the Single Currency is moving, not least with the ECB's decision to start splashing around in the Spanish and Italian bond markets. But Issing's article begs the question, what is the alternative solution to the political union that he describes? After all, Issing is not arguing for the euro to be abolished. In fact in his last sentence, he describes it as "the most successful project of economic integration in the history of mankind."

Issing describes the euro as a "depoliticised currency" based on "rules enshrined in international treaties" and "entrusted to an independent central bank with a clear mandate to maintain price stability." This could very easily be characterised as the wider German rule-based view of how the euro (and many other things in life) should work.

But what about the countries who haven't been able to survive within the rules? Alright Greece broke them from the start but the likes of Spain and Italy are clearly struggling to cope within the euro's one-size-fits-all straitjacket and played by the rules in good times.

Issing doesn't offer an opinion on how this should be addressed but surely the logic of maintaining this rules-based view is that those that can't stick to them will have to leave.

Of course, Issing is far too diplomatic to even hint at this possibility but once you acknowledge that going down the current path of collectivising debt in the eurozone, and saving the fiscally irresponsible, will cause the euro to "collapse" and "further alienate people" what other alternative is there to showing the rule-breakers the exit door?

Compare and contrast Franco-German positions on larger bailout fund

The WSJ noted earlier today that, barely 12 hours after the European Central Bank signalled it was prepared to wade into the Spanish and Italian bond markets, providing some temporary respite to global stock markets and reducing borrowing costs for these beleaguered governments, German politics has already dampened hopes that the eurozone might have a bigger pot of money to stem the financial tide.

A spokesman for Chancellor Angela Merkel, Christoph Steegmans, has been quick to take an enlarged eurozone bailout fund off the agenda. An enlarged EFSF, empowered to buy bonds on the secondary markets at July's eurozone summit, is seen by many as the necessary next step to stem the crisis (we have pointed out that it's not quite so simple for political as well as economic reasons).

However, Steegmans has said the €440bn fund will stay as agreed in July. "The EFSF will remain what it is, and keep the volume it had before July 21," he said, aware that this already sensitive deal has yet to pass through the Bundestag.

But in a matter of only a few hours, French Finance Minister Francois Baroin had contradicted Merkel's spokesman, saying in no uncertain terms that the EFSF may indeed by expanded if necessary. Reuters this afternoon quotes him saying, "The allotment is €440 billion and we've already said if we need to go further we will go further," referring to the very same July 21 summit deal. "There will be no weakness in the July 21 agreement for the euro zone. There should be no doubt about its implementation," he added.

This latest 'difference of opinion' within the Franco-German axis will only further damage market confidence, particularly since Merkel and Sarkozy released a joint statement reaffirming their unity only yesterday and made no mention of an increased EFSF. Whether Baroin's was a rogue or orchestrated comment remains to be seen, but we doubt it went down well in Berlin.

Merkel finds some peace and quiet away from those noisy markets

In the wake of massive financial market turmoil, most eurozone leaders have taken to running around like headless chickens. German Chancellor Angela Merkel, on the other hand, has decided to put her feet up and relax.

Away on holiday in the chilled-out South Tyrol, Merkel has confirmed that she’ll be away for next week too. Question is, will the eurozone still be in working order by the time she’s back?

In an attitude reminiscent of the legend of King Canute, Merkel's office today declared (on her behalf we should add):

“Markets caused the drama now they have to make sure to get things straight again”

It's like taking a bull into a china shop, watching it destroy half the store and then leaving to let it clean up its mess....

The eurozone crisis: Markets, governments and voters

© European Union, 2011

Below are some thoughts on the ongoing crisis that we sent out a while ago:

Fears over the eurozone debt crisis have sent markets into free fall over the last few days, and although recently announced US employment data may give markets some short-term reprieve, these fears are likely to continue. At the heart of this crisis is one simple, but yet politically hugely complicated problem: the eurozone is left without a lender of last resort. EU leaders agreed on 21 July that the eurozone bailout fund – the EFSF – rather than the European Central Bank, should have the mandate to act as the backstop and provide cash for struggling governments and banks. However, they did not equip the EFSF with the necessary cash to do so, due to political constraints, leading to huge uncertainty on the markets with EU leaders sending out mixed signals. Therefore, the deal may in fact have made things worse in the short-term.

This illustrates the impossible choice that the eurozone faces between appeasing markets that want more fiscal union and ignoring voters who strongly oppose it.

What could happen now?

On paper, two main things could help to soften the immediate crisis – but both look politically impossible:

1) The ECB stepping up: The markets want the ECB to start buying Spanish and Italian bonds. Buying Irish and Portuguese bonds – which the ECB did yesterday – is almost pointless since these countries are already getting government-backed bail-outs (via the rescue packages), meaning they are already off the markets. In contrast, Spanish and especially Italian bond markets are liquid. In fact, The ECB’s intervention yesterday may have made the situation worse by half-heartedly intervening, raising expectations, in turn leading to apprehension over it not purchasing Italian and Spanish debt. This created a jump in the cost of borrowing for these two countries.

Why it is politically problematic: In order for the buying to be effective, the ECB would have to buy bonds on a massive scale – not miles away from the Quantitative Easing (QE) pursued by the Federal Reserve in the US and the Bank of England. Given that the ECB already has an exposure of €444bn to the PIIGS, such a move would send it into unchartered territory, and completely into the realm of fiscal policy – which is against its own rules and the promises given to German voters in the 1990s. Several key players in Germany would strongly oppose such a move. The complexity of this is illustrated by the fact that several members of the ECB’s Governing Council even voted against the comparatively modest decision yesterday to start buying Portuguese and Irish government bonds. In any case, in return for taking on this role and the risk it involves the ECB would want a large say over fiscal policy in the eurozone, and would likely push for massive austerity. This would lead to the central bank being heavily involved in political decisions, an undemocratic situation which everyone wants to avoid.

2) Radically increase the size of the bailout fund: The current size (€440bn) of the eurozone bailout fund, the EFSF, is far too small to cover Italy and/or Spain. Italian bond market is €1.6tr and Spain's is around €600bn, with both having large amounts of debt maturing over the next few years. To be effective, the EFSF lending capacity would have to be at least quadrupled, and to have any impact in this crisis, it needs to be doubled, at least.

Why it is politically problematic: Since a Triple-A rating needs to be guaranteed for the EFSF, the entire burden of this increase would in reality fall on the six Triple-A rated countries, which will be forced to provide loan guarantees amounting to over a quarter of each of their GDPs. This, in turn, could impact negatively on their own financial position and rating. Such an arrangement cannot be agreed without completely ignoring voters in these countries, who are vehemently opposed to putting more cash on the line. Any increase would need to be ratified by national parliaments, and given the noise the Dutch, Finnish and German parliaments have made over the existing loan guarantees, which have been on a far smaller scale, this is unlikely to happen. These parliaments have not yet ratified the increase in the size and scope already agreed by EU leaders in July and earlier this year.

How long will Spain and Italy be able to hold up?

Italy and Spain can withstand rising yields for a short period (a few months). But in the longer term, such yields will significantly add to their deficits and will force further austerity – which will be very unpopular domestically and which risks killing off any growth prospects. Rising costs also feed through to the countries’ banking sectors, which could face increasing costs leading to a tightening of credit in the economy.

Both countries suffer massively from low growth and poor competitiveness, with Italy in particular lacking a credible plan for how to get out of its snowballing debt problem – interest payments on debt outstrip growth meaning debt continues to grow relative to GDP. Italy and Spain will somehow need to find a way to make the long-term changes necessary to boost their growth and competitiveness, within the restraints of a flawed currency union.

So is there anything the eurozone can do to stop contagion in the short term (before it’s too late)?

If radically expanding the EFSF and a proper liquidity role for the ECB are ruled out due to political constraints, what, then, can eurozone leaders actually do? The brutal truth is: not that much.

Eurozone leaders have wasted so much time and manoeuvring room on completely failed policies, i.e. the bailouts. A restructuring of the Greek, Irish and Portuguese economies now look like a more attractive option. Far from stemming contagion, every day they wait, the more painful the necessary restructuring becomes, as markets get more jittery, bond spreads increase, in turn putting more pressure on government funds as the crisis sucks in more countries.

The existing EFSF funds could be used to help provide a backstop for European banks and to recapitalise them. The ECB could continue its bond buying on a short term basis but needs to develop a plan for how to wind down this programme in the long-term.

There is now even talk of a eurozone bout of QE. However, it is not clear whether the ECB could ever do this effectively, since, any increase in money (either electronic or hard currency) has to go through the ECB Governing Council, meaning it needs the approval of the National Central Banks (NCBs) of Triple-A countries such as Germany, Finland and the Netherlands, who are unlikely to agree to it. Even if it were approved, the actual distribution mechanism would need to be through NCBs, according to the member states' share in the ECB, meaning that Germany could get a huge bout of QE which it does not necessarily need or want.

Is the endgame drawing closer?

The impossible short-term choices, pitting the need to soothe the markets against national democratic restraints, perfectly illustrate the flaw that was inbuilt in the eurozone from the very beginning. The choice that was always inevitable is therefore drawing closer: appease markets but run over voters and create a full fiscal union - or break up the eurozone.

Could the ECB actually perform QE even if it wanted to?

Given the stock market free fall and bond market turbulence we’re seeing, the question over whether the ECB could actually embark on an effective round of Quantitative Easing (QE) has become a pertinent one. We’re not so sure it could (leaving aside the broader questions over how effective QE would be in any case [see US economy for details]).

First off, any increase in the monetary base of the eurozone requires the approval of the ECB Governing Council (GC), whether it is in hard currency (directly printing money) or electronically creating money (how QE is usually done). The GC is made up of the ECB executive board and the heads of each eurozone national central bank (NCB). The vote would be decided under QMV votes are weighted according to the level of capital shares each country has in the ECB. A majority is defined as two thirds of capital and at least half the members of the GC. So it would be a close run thing, but there could easily be enough opposition to halt any QE plan.

Secondly, even if any QE were approved, it would need to go through NCBs. The usual QE process is to deposit the funds directly into the reserve accounts which banks hold with a central bank or to purchase assets (probably government bonds) they hold via these accounts. Since these accounts do not exist directly with the ECB it would need to go through the NCBs (as per usual for monetary policy). So, all NCBs would need to enact the QE and to maintain the stability of the euro (so that new money is not just being created in excess in one area) the amounts would have to match up to the defined shares of the eurozone monetary base.

This means that Germany would actually have to enact a large percentage of the QE, in an economy which is growing solidly and is already becoming worried about inflationary pressures (particularly at current interest rates). Although, German domestic demand could do with a boost there is likely to be some inflationary effect of the QE if the transmission is effective. Even with the heavily interconnected banking sector in Europe it is unlikely that, given the current market pressures, money would easily flow around Europe to where it is most needed. Many banks continue to remain undercapitalised and are seeing profits squeezed by rising non-performing loans and the sovereign debt crisis. These are general problems with QE admittedly but are exacerbated by the structure of the eurozone making QE an ineffective tool in the eurozone.

As of right now, we still might be some way from an ECB bout of QE (although it’s closer than a few days ago). But, the ECB’s inability to perform what can be seen as a key tool in a central bank’s armoury highlights the structural problems for the ECB within the eurozone. In the longer term this could easily feed into market fears as we have been seeing with the heavily linked issue of lender of last resort.

Another President, really?

It’s been yet another day of uncertainty in the eurozone, with market fears over euro debt sending shares plunging across the globe and with EU leaders all over the place.

Amid the confusion, France has stepped up again with calls to strengthen the role of the Eurogroup, the forum where eurozone finance ministers get together to make policy decisions.

The groundbreaking proposal?

European Council President Herman Van Rompuy should take the lead and also be the ‘President for the Eurozone’. They now have Germany onside, and both will push the proposal over the next few months.

What’s interesting is that this would dramatically sideline, and perhaps eventually exclude, the role of the Eurogroup Chairman, currently held by the Luxembourg PM and uber-federalist Jean-Claude Juncker. Reuters claims that member states’ leaders may be inclined to support the proposal due to the allegedly “lacklustre performance” of Juncker, who’s been around the euro-block for some time now. We’re not surprised that he’s feeling jaded.

We see what they're trying to do - the Eurogroup is in desperate need of some coherence. But giving Van Rompuy another title? Will that really make anyone happier?

Not The Right Time To Argue, Guys

Earlier today, a curious skirmish took place between Italy's Prime Minister Silvio Berlusconi and Economy Minister Giulio Tremonti during a press conference, following an emergency meeting between the Italian government, unions and employers' organisations, (for our Italian-speaking readers, a video is available here). The two men who aren't exactly the best of friends.

The exchange between the two speaks for itself:

Tremonti: "We are approaching the main international economic and financial institutions to work on a set of joint proposals [to come out of the crisis]: the European Commission, the OECD and the IMF..."

Berlusconi (interrupting): "And the ECB."

Tremonti (giving Silvio a rude look): "Well, I think the ECB is very important, but can't be involved."

Berlusconi: "But it can be informed."

...upon which Tremonti just ignores him and continues speaking.

Slightly worrying that the two top people in a government overlooking an increasingly wobbly €1.8tr bond market aren't even trying to leave a public impression of being on the same page...