Back From Break; Book on Euro
Grumpy is back! I took about a month off, some business travel but also some fun. Here is me landing at the open class glider nationals, Minden NV in June
I also finished a book manuscript, now titled The Euro: Foundations, Crises, Incentives, and Reforms, with Luis Garicano and Klaus Masuch. The book should be published spring or summer 2025. Here’s the 250 word description we wrote for Princeton University Press:
Monetary and fiscal policy are always intertwined, and especially so in a currency union. Member states can be tempted to borrow and spend too much, and then count on the central bank to rescue them by printing money to buy their bonds. The euro started with a clear-eyed understanding of the problem. The independent ECB, with a narrow mandate, would not buy sovereign debts. Debt and deficit rules would keep countries from getting in to trouble.
Subsequent crises resulted in fundamental changes to this structure. In the financial crisis, the sovereign debt crisis, the zero bound era and in the pandemic, the ECB found itself the only game in town. The euro did not include any mechanism for orderly sovereign default, or for the rest of the EU to help a country in trouble. Banks were loaded up with sovereign debt. The ECB created new programs, bought vast amounts of debt, and provided large loans to banks.
But these precedent-setting actions led to unintended disincentives. Everyone now expects the ECB to intervene in sovereign debt markets and to prop up banks. Many countries remain deeply in debt. Bank and economic reforms remain stalled. The system is more fragile than ever. Yet larger and larger bailouts cannot continue.
We recommend reforms. Among others, Europe needs a joint fiscal institution that can provide temporary help to sovereigns, a resolution mechanism so sovereign default is a possibility, and bank reform so that sovereign default does not bring down the financial system.
As usual, the manuscript will be free until publication and the Press asks us to take it down.
Now, back to blogging!
Welcome back!
What do you think about an idea along these lines: each euro member state should issue two classes of debt: junior and senior. The senior debt is intended as fiscal backing to the currency, and cannot exceed X% of GDP. If a country wishes to issue more debt, it can do so, but this is junior debt that will always default first in case there is a fiscal crisis.
Congratulations on the glider work! Very cool aircraft. My Dad taught glider pilots for the Army Air Corp 1938-1942, before joining the Corp in ‘42. Agree fully with your comments about the Fed in responding to the Furman article. Let’s get back to the Fed managing the money supply as Milton proposed.