There’s a problem with this Joe Stiglitz plan

Unfortunately, today joint liability contracts that can enhance efficiency are difficult to implement in the Eurozone countries because of restrictions imposed by the laws and treaties that bind the EU, and in particular, the Treaty of Lisbon. Hence, the need for amending the Treaty of Lisbon, so that it is possible, under certain conditions, for one nation to stand guarantee for another nation’s borrowings.

That problem being that when it becomes possible it will become compulsory.

8 thoughts on “There’s a problem with this Joe Stiglitz plan”

  1. I know Tim is not exactly a eurofanatic, but how far does he think it would go to solve the problems if we had a real pan-European banking industry with lots of large banks operating in most/all countries (rather than the current, nationally-fragmented industry), and a central bank with true lender of last resort power (i.e. one that can openly prop up a commercial bank or even a sovereign in a genuine emergency, rather than resorting to tricks of increasingly dubious legality)?

    The “debts of other countries” we are standing for are in large part (not entirely) the costs of bailing out said national banking industries, something that has to be done when said industry lends to its sovereign at favourable rates and faces losses as a result. Supernationalise the industry and its no longer Banco Crapal being lent on by its sovereign to take unacceptable risks – perhaps Eurobanco can make risk decisions with more arms length? Yes, this is kite-flying.

  2. The sovereign debt crisis exposed weaknesses in the Eurozone’s financial architecture that may not have been fully anticipated when the founding treaties of the Eurozone were drafted.

    Oh, I think they were, I remember reading numerous articles about these risks. The problem was they were from EU skeptics and so had political responses ranging from head in the sand to fingers in the ears singing lalala.

    Could it, for example, pay for Germany and the UK to take on the liability for debts incurred by Cyprus or Slovenia from some international investment banks? This model shows that the answer is yes, and it also illustrates the design of a contract that can improve credit flows to Cyprus and Slovenia.

    And good luck selling that one to the German and British tax payer, especially this bit:

    Lenders who may have no knowledge of or familiarity with these nations will be willing to lend, knowing that Germany and the UK will use their standing, trading, and other business relations with Cyprus and Slovenia as leverage to make these borrowing nations be more vigilant in the use of the credit,

    He’s probably on to a good idea, but as I see it the creditors in Britain and Germany will look for some sort of Government guarantees so like a lot of good ides from economists it will fail at the point where economics meets politics and reality.

    We don’t trust our own politicians so how on earth are we going to be persuaded to trust johnny foreigner’s politicians, especially when they have a track record of being profligate? I have a good friend living in Cyprus and I wouldn’t trust the Cypriot Government with anyone’s money, let alone mine.

  3. What Stiglitz describes as a weakness in EU treaties I view as a strength. He describes how the hurdle has been in place since 1992, so our betters in Brussels can have no excuse for failing to abide by the long existing rules.

    Stiglitz’s example seems to miss something. If a guarantor nation guarantees another nation’s debts its own debt profil gets worse and it can borrow less for its own needs. The guarantee from country k lowers the risk of default for country j but increases the risk of default for country k.

    It wouldn’t surprise me if Stiglitz’s game theory also over estimates the effectiveness of country k’s ability to supervise the actions of country j. And in the real world, dealing with the real EU, it would not be the UK or Germany supervising Cyprus or Slovenia it would be Brussels doing it, which introduces a massive moral hazard for Brussels to say everything is fine even if it isn’t safe in the knowledge that Germany or the UK is there to pick up the tab.

    The EU member states all chose to turn their individual banking crises into sovereign debt problems. They did not have to and that they all happened to do so is a poor justification for further eroding member state sovereignty.

  4. Sorry Gareth, this is not a comedians blog.

    You used moral hazard and Brussels in the same sentence.

    Give that line to John Bishop for his new tour, it will bring the house down.

  5. Imagine Spain, Italy, Portugal, Greece and France being able to borrow at German interest rates. Oh wait …. that’s already happened

  6. @Offshore observer, yes it happened because the market saw fit to lend to everyone at German rates. The market was wrong and should man up and eat its losses.

  7. JamesV, I agree in principle, but perhaps the “markets” were making a bet that the Euro had such political support that bail outs were inevitable (either directly or through ECB buying up debt). through the retrospectoscope it turns out they were right.

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