Dear reader,
my Twitter timeline provided me with this piece by Dutch economists Eijffinger & Mujagic just some hours after
PAINI 2 was published.
PAINI by the way means: Panic About Idiocy Not Inflation, whereas WAINI was acronym for Worry about idiocy not inflation.
Before I comment here is their latest piece published by Project Syndicate:
The Eurozone’s Uncertainty Principle (by @SCWEijffinger & @edinmujagic, Apr 13th 2013)
I do agree with their statement :
Unpredictability could damage the eurozone even more than the crisis itself. Large-scale capital flight from the eurozone’s weaker economies would put them in dire straits, forcing their partners to provide even more emergency assistance, while capital flight from the eurozone as a whole could destabilize even its strongest economies, bringing the monetary union closer to a chaotic breakup. Moreover, by undermining confidence, unexpected measures can drive citizens to vote for populist leaders, adding political uncertainty to Europe’s challenges.
read more at http://www.project-syndicate.org/online-commentary/euro-exit-rules-would-stabilize-financial-markets-by-sylvester-eijffinger-and-edin-mujagic#AohKQ2yFfybjRavX.99
as I have expressed earlier in
part 2a.
I am not so sure about the other conclusion of Eijffinger & Mujagic, although back in the early days of 2011, their way of thinking was also mine. However there is a point that a lack of rules, procedures known to all market participants is potentially dangerous and creates uncertainty. Lack of predictability must result in swift, short term oriented reactions such as capital flight first and reluctance to invest in such an area of unpredictably later. Or to join such an area for other candidates which are not deterred by obvious economic decline, but even more by such -we might even say irrational- behavior.
There is however support for the thesis by Eijffinger & Mujagic: Megan Greene, previously a
director of Roubini Global economics, who recently stated:
When it comes to leaving the euro area, however, choreography is key. A unilateral, disorderly default would be the worst possible option for Cyprus. Instead, this small country would need to negotiate its exit with each member of the troika of international creditors.
source:
Cyprus Can Save Itself by Fleeing the Euro (Bloomberg, Apr 9th 2013)
Cyprus and Greece: Living in "Hotel California" (Huffington Post, Apr 3rd 2013)
Her position was shared by Izabella Kaminska of FT's Alphaville team, during last Friday's broadcast of BBC Newsnight.
Although Ms Greene was certainly influenced by professor Roubini and his
preference for exits, other economists do have a point when they ask what is this the 'lesser evil'. In the case of Cyprus not only the outcome of the 'econ shock' is unclear , but also the completely surprising treatment of Cyprus by the other finance ministers of the eurozone. Not only have others enjoyed a complete bailout by
EFSF or
ESM, but it was also clearly expressed in Eurogroup's statement from June 2012, which said:
The financial assistance package shall be provided by the EFSF or the ESM on the
basis of its financing instruments. The Eurogroup looks forward to a swift response
from the IMF to the Cypriot request after having completed its required internal
procedures
Full statement & timeline of delays re Cyprus (EZR)
Cyprus and Greece: Living in "Hotel California" (Huffington Post, Apr 3rd 2013)
Not only the obviously delay tactics must be criticized, but also the 'last minute demands' put on the negotiating table of the Eurogroup meeting March 15/16. A meeting by the way not only ill prepared, delayed up to point where Cyprus was facing financial collapse, but also obviously without prior consultations with other EU, not euro area, members which would later get hit hard by decisions prepared by a certain minority of finance ministers.
Some extraordinary problems were created for the UK, which had to organize
to fly in emergency cash for their servicemen and women, right after Eurogroup finished their blackmail
(<=is thre are better description for it ?). But that's not the end of that story: By focusing on how to force Cyprus to swallow their proposals,
all EZ finance ministers not only agreed on the proposal by Cypriot finance minister of giving all deposits a 'haircut' (
all unaware at the time that this violated the principle of insured deposits below 100.000€), but even worse obviously completely 'unaware' of the fact that much Russian money was at stake and previous loans provided by Russia might put the 'Russian card' on the table for those who face economic collapse and are being forced into a corner. I will leave it here by just saying that other Brussels based organisations would certainly watched this debacle in disbelief.
All in all this (March 15/16th) EG meeting resembled more an indebted businessman seeking negotiations with
Don Barzini facing his 'negotiator'
Virgil Sollozzo than a meeting of European countries granting each other some respect and who all follow the principles of a civilized Europe. This eye witness account of the Maltese finance minister, Mr Edward Scicluna describes the situation:
Cyprus: a lesson for life (Times of Malta, Mar 19th 2013)
Uncertainty created especially for other small EU and EZ member states:
Eurogroup’s treatment of Cyprus is ‘eye-opener’ for Malta, Luxembourg - Pissarides (MaltaToday, Mar 25th 2013)
Although some, if not most, politicians will see the dwindling support of their electorate not as a problem, because even when voter participation in elections drops to below 50,40 or whatever percentage they will get elected into office, it is however vital for an economy, a currency area, to
uphold the confidence in the system !
Maybe that is the whole point, that politicians might have gotten out of touch with the very basics of economics, where the problem of people losing faith in their currency, their banks, their economic future is the starting point from where things are getting really ugly. The point where economic recession goes into depression and then into meltdown or "Kernschmelze" in German, a word
very often used by the former helm of Deutsche Bank, Ackermann.
Another lesson those politicians in charge might have to learn 'the hard way' is, that they might think to get away with their voter deception tactics, but money professionals will draw their own conclusions, watch carefully the deeds of politicians not listen so much to their words. So it is noted that bank recap rules have still not be enforced in full and other measures as
SSM are not only not in place, but are delayed and drastic, potentially catastrophic short term solutions are enforced instead.
Other non-flying turkeys like
FTT (EZR compilation) are being launched despite devastating previous experiences or similar scientific research provided by recognized research institutes, but in the clear hope that their electorate will welcome/buy such measures sold as 'look, we act in defiance against the evil banks'.
And although they and their companions from their national press will do their utmost to make this Cyprus debacle disappear from the agenda, the financial world will as ECB president Draghi never forget what has happened and how 17 EZ ministers gave their 'green light' for confiscation of depositors' property and for putting capital controls in place.('OCA' now a joke) This will not forgotten, it definitely created uncertainty/confusion and although the gamble on contagion limitation was more or less successful (for now) as far as other sovereign bond yields are concerned, it could have started an undertow which slowly dissolves the pillars of the common European currency and endangers any solid - growth oriented - economic development.
related:
All other blog entries re Cyprus [EZR]
ignore the technical stuff:
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