This appeared as an opinion piece in the Danish newspaper Börsen on 13/1/2012

The EU’s response to the most serious crisis of our lifetimes is failing. The austerity-only path we have embarked upon is a road to recession with deeper unemployment, welfare losses and increasing social frictions.

When excessive levels of Greek debt were first revealed at the end of 2009, it was shocking how quickly the narrative of the crisis changed from one of a financial crisis to that of a fiscal crisis. This change was driven by politics and ideology where leaders in some countries found it easier to blame ‘lazy Greeks’ for the crisis rather than address endemic problems in their banking system. The weakness of the financial sector was pushed out of sight and Europe is now paying the price. Despite enjoying unprecedented public support, the EU banking system remains broken and is failing in its job of supporting the real economy.

This appeared as a Comment piece in the Observer (Guardian) on 11th December

EU leaders promised to stop Europe’s spiral into economic oblivion. They needed to immediately restore confidence in the solvency of Spain and Italy, urgently take steps to kick start growth and credibly commit to changes addressing the institutional weaknesses of the Euro area. They failed on all three fronts and are now almost out of time.

Given the inability of EU leaders to tackle the problems of Greece, a small economy, investors have been losing faith in their ability to support the much larger economies of Spain and Italy that faced economic problems. This has driven up the borrowing costs to unsustainable levels. Unless policy makers can demonstrate how troubled EU economies could meet their borrowing needs at non-penal interest rates, the crisis would continue to deepen.

Transcript of a Keynote Speech I delivered In Berlin on the 15th Sept 2010

The world has been rocked by the most major financial and economic crisis in recent history. This exposed several aspects of financial system dysfunction. These not only increased the instability of the financial markets but also impeded their normal functioning as tools to allocate economic resources efficiently throughout the real economy.

Dear Members of the ECOFIN,

A sense of a worsening crisis has hit the EU. Sovereigns and banks are being shut out of funding markets. They find it increasingly hard to refinance their maturing bonds at affordable interest rates.

In the panic following Lehman’s collapse in 2008, EU governments took national level initiatives to provide emergency support to banks through capital injections and funding guarantees. Given that so many sovereigns are themselves unable to borrow at sustainable rates this national level approach will not work at this time.

The interconnectedness of the EU banking system is so high that the inability of banks in troubled countries to fund and recapitalize themselves through the markets is weighing all EU banks down.

Note: This Appeared in the Financial Times's A-List on the 25th of November

Europe’s dance of death between sovereigns and banks has now turned frantic and much more dangerous. Troubled countries, such as Italy and Spain, continue to weigh their banks down. Growing problems in French, Cypriot and Belgian banks are putting pressure on the countries.

As Mohamed El-Erian argues, action is needed on multiple fronts to stem the worsening crisis but I don’t fully share his priorities.

At the beginning of September I had written, 

“The Euro Area crisis has turned systemic and no sovereign or financial institution is immune to getting sucked in. The worsening problems in Greece are increasing the likelihood of a collapse of the deal agreed just in July and the large aggregate exposures of EU banks to Italian and Spanish sovereign debt have put a question mark over the solvency of individual banks as well as the EU banking system as long as these countries don’t have access to refinancing at reasonable costs.  In addition near term growths prospects have collapsed increasing the likelihood of losses on assets and lowering expected profits.” 

Given how important additional ECB support is to helping stem the panic in the Euro crisis at this stage, it is useful to look at how much it would actually help. An increasing number of shrill commentators have been implying that enhanced intervention from the ECB may be a 'silver bullet'. It will be no such thing. We at Re-Define have been calling for the ECB to do more since before this call became fashionable but we have no illusions about what such an intervention can achieve.

Note: This is my Op-Ed response to Jeff Sach's suggestion that emerging markets should help the eurozone. It appeared in the FT's A-List.

The eurozone’s problems are entirely self-inflicted, and the solutions too must come from within.

However, the European Union may be ‘institutionally incapable’ of getting a handle on the crisis now. Its fragmented structure makes decision-making slow and difficult at the best of times. Petty parochial politics and procrastination has transformed a treatable birth-defect into a near-fatal malady.

The speed, scale and cross-border nature that characterise the crisis now, probably rule out solutions that come from the divided European Council, which is incapable of moving fast enough to restore confidence. The crisis that has already engulfed six of the seventeen euro member states limits their financial ability to act even if they could make quicker decisions. The European Commission, which can act faster, has no money to help.

As the Euro crisis intensifies, an even more serious crisis is brewing in the background, that of impending climate change that threatens not just Europe, but all of humanity. Recent figures on green house gas emissions that exceed the worst case scenario predicted by scientists have shocked the global community. 

At the same time, it has become clear that the biggest missing element from all of the European Union's proposals to stem the Euro crisis has been the absence of any growth strategy. Without growth in Europe, we are all doomed to a fate of debt and deflation.

The 99% and Occupy movements have stimulated a wide-ranging public debate about the lack of opportunities, for those at the bottom rungs of society, as well as about the rising levels of inequality accross the world. The EU now has receod unemployment. 

Our New Blue Print: Funding the Green New Deal: Building a Green Financial System, lays out a detailed plan for how to simultaneously attack these multiple crises.

Note: This is the first part of my Essay 'For Europe, High Stakes in Greece' that has just been published by the American Prospect this week. The recent decision on the Greek referendum adds a special relevance to this article.

The problems of the Euro turned critical when the Greek government nearly defaulted in May 2010 and the International Monetary Fund and European Union agreed to a bailout. In truth, the 17-nation Euro area had deep troubles long before that. Its oversized and undercapitalized banks, its common monetary policy but diverse and fragmented fiscal policies, the persistent economic imbalances among its members, and a cumbersome decision-making structure all made the Euro area economy vulnerable. The crisis, which still unmistakably bears the mark of the Greek tragedy that first set it off, has now spread far beyond Greece.

The Euro was created for normal times, but the EU had no good mechanisms for crisis management. At every step of the Greek drama, policymaker responses have remained behind the curve of economic deterioration. Slowly but surely, this erosion of confidence ensnared other countries, such as Ireland and Portugal, then spread to Spain and Italy, both  widely perceived to be fiscally vulnerable. If European leaders cannot resolve Greece’s problems, they can hardly save the much larger economies of Spain and Italy.

EU leaders are at it once again; putting Financial Transaction Taxes (FTTs or Tobin Taxes as they are also called) back on the agenda while they are forced on the back foot by the unresolved Euro crisis. At a time when citizens are losing faith in the ability of our leaders to solve the crisis, talking about FTTs, which remain heavily popular with the public, almost always earns political brownie points.

But what can FTTs really achieve? And is the current approach, presented by the European Commission, designed to succeed? If not, should be abandon the idea altogether or is there another tax design that will work better?

One thing is for sure FTTs will not change the world, nor democratize global finance. Nor will they raise the hundreds of billions of Euros of revenue that is sometimes attributed to them. But, approached sensibly, a well-designed and flexible regime for financial transaction taxes can deliver a lot of benefits.

 Note: This is the English Version of my Op-Ed Gemeinsam halten wir stand,vereinzelt fallen wir that appeared in the Handelsblatt on the 27th of October.

Having brought Europe to the brink, EU leaders must now pull us back. They face the near impossible challenge of meeting the sky-high market expectations while operating within severe financial, political and time constraints, all of their own making. They owe it to Europe to pull a rabbit out of the hat now, but are incapable of pulling this off.

The economic problems facing the Eurozone were big but solvable within the political space available. With procrastination problems have grown and pettiness and parochialism has shrunk political space to a point where sensible economic decisions no longer seem possible. Bad politics has driven bad policy which in turn has made the politics even more fractious. For the sake of Europe, our leaders must act now or die (politically) trying.

Note: This is an English Version of my Op-Ed Riesig groß und doch zu klein that appears in the Financial Times Deutschland on the 26th of October

Last year we proposed that the EFSF offer bond guarantees not loans, eliminating the need for it to first borrow and then lend, cutting extra costs. Retaining market access, albeit with EFSF support, could provide useful feedback on reforms and help countries get back on their feet faster.

Facing headwinds on the expansion of the EFSF necessary to restore confidence, we suggested, in January 2011, that the EFSF could resort to partial guarantees to increase effective size. Rather than lend Euro 10 billion to a country facing high borrowing costs, the EFSF could cajole sceptical lenders to lower their rates by offering them credit protection – say up to a third of the borrowed amount. The same amount could support Euro 30 billion of lending. Magic?

Note: This is the English version of an Op-Ed published in Aftenposten, Norway's leading newspaper on the 21st of October entitled "Conspicous by its absence"

Norway’s economy is heavily exposed to events and policy shifts around the world, even more so than that of other small countries.  The exposure mainly from trade and the investments of the oil fund. Yet, there is an absence of strategy on how best to manage this exposure.

Norway can only do so much against the daily travails of the oil and financial markets that it is so exposed to. However, it can have much greater influence on global and particularly European financial reform efforts that are changing how these markets work.  Inexplicably, it has chosen to forgo such influence.

As part of the single market, from which Norway derives significant benefits, it is obliged to adopt most EU financial regulations into its domestic legislation. However, it has little formal influence on what form these take. Norway does have an ‘observer’ status in some regulatory groupings; this brings a ‘voice’ but no ‘vote’.

The EFSF is supported by the 17 Euro area Member States who have guaranteed to repay any of its liabilities up to a maximum of Euro 726 billion with each country offering a percentage of this. Germany’s share of the guarantee is Euro 211 billion and France’s is Euro 158 billion. Because a decision was taken that the EFSF would seek an AAA rating its capacity is limited by the amount of guarantees it has from AAA rated member states which is only Euro 440 billion.

This is enough to support Greece, Ireland and Portugal which are all small but not Spain and Italy which are also now facing unsustainably high borrowing costs. There is ZERO political will amongst member states to increase the size of their support for the EFSF so the challenge is to find a way of increasing its effective firepower without increasing MS support. The only way of doing this is to increase the RISK that the EFSF takes. One way of thinking about this is that now that MS have promised Euro 440 billion which they had intended to be used as ‘debt’ which is relatively safe and turn this into ‘equity’ which is far more risky. The size done not change, but the risk goes up.