They already have one that can deal with it operationally.
It’s called the ECB.

And my annual per capita distribution of 5% of GDP to the member nations remains the only viable, sustainable solution I’ve seen.

EU Should Create Euro-Area Monetary Fund, Sweden’s Borg Says

By Johan Carlstrom

March 9 (Bloomberg) — The European Union should consider
creating a body similar to the International Monetary Fund to
help distressed euro-area members and sharpen fiscal discipline
in the bloc, Swedish Finance Minister Anders Borg said.

“It’s good if we get an organization that can more
concretely help countries with financial problems,” Borg said
at the office of Prime Minister Fredrik Reinfeldt in Stockholm
today. “Most important, of course, is that we tighten the rules
to make sure that euro countries that are misbehaving cease to
do so.”

The European Commission, the EU executive in Brussels,
yesterday said it’s drawing up plans for a lender of last resort,
or a European Monetary Fund, as leaders try to draw lessons from
the Greek fiscal crisis. Borg said the EU also needs to find
ways to enforce more rigorously the Stability and Growth Pact
rules, which stipulate budget deficits shouldn’t exceed 3
percent of gross domestic product.

If budget rules are breached, the EU needs to consider
imposing “sanctions,” Borg said.

Marking a potential split among EU leaders, French Finance
Minister Christine Lagarde said an EMF may not be the best way
to support fiscally distressed countries. Consideration
shouldn’t be “limited to a European Monetary Fund,” Lagarde
said today. “Other ideas need to be studied and those that
respect the Lisbon treaty are much preferable.”

40 Responses

  1. Helicopter drops are fiscal operations.

    Where does the ECB get its centralized authority for decentralized fiscal operations?

    1. JKH,

      Saw your comment in the other thread. Should discuss the rates sometime, will put forth what I tried to say more clearly- btw another pending discussion is about the Fiscal theory of price level …should catch Scott sometime.

      The ECB is not allowed by law to buy government debt directly from the governments/Treasuries. The exception is that it may purchase directly when some government bonds expire.

      Lets assume it can “monetize”

      So if the ECB purchases €1b of Greece debt,

      ECB Assets+ = €1b Bonds
      ECB Liabilities+ =€1b Reserves

      Greece Govt Assets+=€1b Reserves
      Greece Govt liabilities+ =€1b Bonds

      Now if Greece spends €1b on the private sector

      Greece private Sector Assets+=€1b
      Some Greek bank’s Assets+=€1b
      bank’s Liabilities+=€1b
      Greece Govt Assets-=€1b (back to zero)

      Used “reserves” carelessly here. The treasury’s account at the Fed is not counted as “reserves” e.g.

      The statement that “monetary operations are cannot be helicopter drops” assumes that the operations are with the private sector I guess.

      1. I am absolutely unclear about the role of National central banks – so assumed they do not exist.

      2. Dude? They are members of the plutroticy put in place to scim and devert money to there corrupt buddies…..none of this will EVER work until we all realize this!

      3. Of course you would know this accounting more than I but the reason I wrote them down is that I can’t see it any other way.

    2. Thanks, Ramanan.

      It’s the second time I’ve asked this question on this blog, and you’re the first to take the bait.

      You may be right or wrong. I don’t know. I know that I don’t know.

      I must say that my impression from scanning the ECB balance sheet and a ‘sample’ NCB balance sheet a while ago was somewhat the inverse of your working approach – i.e. that the NCB’s were the operational banks for monetary policy, including bank reserves, and that the ECB from an operational perspective was a repository for Eurozone FX reserves and capital commitments only. A lot of inter ECB-NCB accounting entries as a result.

      That is why I question the operational role of the ECB in such a helicopter drop. The money can’t just be dropped without some sort of accounting entries, and I’d like to know how that’s proposed.

      But your stab at it helps, thanks. I’ll think about that.

      Re: FTPL discussion – you clearly have a mind like a steel trap. We should come back to that at some point, but I need to download additional memory capacity before doing that.

    3. I’ll just add that in my view the operational and accounting relationships between the ECB and the NCBs are very much under-analyzed on all of the Chartalist/MMT blogs these days, including this one and Billy, given the current importance of Eurozone fiscal and monetary issues.

  2. Quick stab: The member States could issue special purpose bonds the total amount of which is computed IAW Warrens percapita instructions. These bonds would be special series ie different from their “gen purpose” type of Govt bonds and not count against the EMU limits. Then just have the State Treasury just auction them off as usual. In States that are over the Treaty limits, the Treasury would have to use the proceeds to immediately redeem existing regular Govt bonds, in States that are within limits, they could perhaps issue a tax rebate to the citizens or use it for other Govt purposes.

    Hvent thought it all the way thru, could create increase in AD if state gave tax rebate, interest rates, etc. Resp,

  3. This doc comes close to explaining a few things –, though I do not find it too enlightening on a quick scan. I still have basic questions such as what is the balance sheet of a National bank like. Does the Greek central bank do open market operations with some banks in Germany ? Do banks have multiple accounts at different central banks ? Is there one balance sheet for ECB+NCBs or multiple balance sheets ?

  4. the way i understand it is the national cb’s have the accounts at the ecb which can’t be overdrawn, and the national govs have accounts at the national cb, making that institution pretty much a ‘pass through’ entity.

    so a national cb could by its govts bonds, and credit its govs account, but if/when that nat gov spends the funds the nat cb’s account at the ecb is reduced when those checks clear. so the nat cb would have to sell the nat gov bonds it bought to fund the spending of the euros.

    1. I did expect that if anybody was buying government bonds, it would be the NCB’s. But I think the requirement to sell bonds would depend on whether government spending crossed national boundaries and banking systems – i.e. if the cheque is cleared back by a foreign NCB against the payer government/NCB. Otherwise, the funds remain within the originating NCB liability profile, and the ECB account won’t be overdrawn.

      Of course, any NCB could sell the bonds just bought in order to drain reserves after G spending, but that wouldn’t necessarily be a function of the ECB account profile. And I’m not sure why they would buy them in the first place in that event.

      1. JKH,

        It is the NCB that are the operational banks for monetary policy.

        I did expect that if anybody was buying government bonds, it would be the NCB’s. But I think the requirement to sell bonds would depend on whether government spending crossed national boundaries and banking systems – i.e. if the cheque is cleared back by a foreign NCB against the payer government/NCB. Otherwise, the funds remain within the originating NCB liability profile, and the ECB account won’t be overdrawn.

        I’m not sure if this is what you’re looking for but the following link
        describes the operations of the Eurosystem in which counterparties can only obtain credit from the central bank of the country in which they are based – their home central bank (HCB) – by collateralising eligible assets. However, through the CCBM, they can use marketable assets issued (i.e. registered or deposited) in other countries. To do so, counterparties must arrange with the “issuing” securities settlement systems (i.e. the SSS in which the securities have been issued and deposited) for the collateral to be transferred to an account maintained by the local NCB, which is usually the central bank of the country where the SSS is located. The local NCB will then hold the collateral on behalf of the central bank granting the credit (i.e. the HCB) and thus act as a correspondent central bank (CCB).

      2. thanks, BFG

        That looks like it describes cross border collateral for central bank credit. I’m wondering how the NCB’s deal with reserve distribution. We normally think of CB’s controlling the size of their balance sheets and reserves. Not clear how this is the case for NCB’s with cross border clearing of Euro payments.

    1. 🙂 for 39:20

      41:00 – “I can show that I hadn’t made a mistake in double entry bookkeeping …bank reserves = bank equity” …. ” …are flows”

  5. How to do the book keeping at various central banks is a minor problem compared to the political problem, which is that Germany is much more cautious about inflation than the PIGS, plus it is a much stronger exporter. It’s this difference in culture and economic performance that is the problem. I don’t think Warren’s flat “per capita” helicopter drop solves that problem. But if he can explain why it does solve the problem, Europe will see to it that he gets a Nobel Prize.

    This is a good article on these “country differences” – it’s a bit long and wordy, but for those with the time….. :

    1. Wolf is describing in that article what Rob Parenteau and Marshall Auerback have been calling “the paradox of public thrift” in a couple of pieces lately, in the context of the sector financial balances model. The Eurozone as a whole won’t be able to export itself to recovery (i.e. won’t be able to emulate Germany), so government deficit reduction will mean private sector deficit increases as well as deflationary pressures on wages in attempting to respond via exports (since individual countries don’t have their own currencies to depreciate). Seems a candidate for a helicopter drop. Probably doesn’t hurt to know the accounting for it beforehand.

      1. If the only problem is “paradox of public thrift”, and the problem is of the same scale in every Euro country, that is easily solved with a helicopter drop. But the reality is that a per capita drop for every Euro citizen would push demand in Germany up to a level that Germans believe to be inflationary. Even if Germans are wrong here, i.e. if in fact Germany can take some more aggregate demand, Germany will reach capacity before the PIGS. What to do? If Germans can be made to accept relatively high inflation for five years or so, that would solve the problem (as Wolf points out in his penultimate para). Or if everyone in PIG countries took roughly a 20% pay cut (which would effectively devalue their “currency”, that would solve the problem).

        I.e. given an outbreak of common sense and goodwill, the problem could be solved overnight, but human beings are not noted for their love of common sense and goodwill.

  6. it’s similar to the problem hk has with its fixed fx policy

    in a downturn they have to deflate enough to get costs down enough to resume net exports.

  7. I have a question relating to the accounting that I don’t quite understand:

    What happens at an aggregate level to equities on the balance sheet (e.g. the private sector’s balance sheet). I can understand that the creation of a financial asset creates a matching liability, but I don’t quite understand how equity is accounted for. At an individual level, equity is equal to net assets, so what happens at an aggregate level? I’m completely confused.

  8. A slightly abstract and simplified view of ECB, NCBs, Banks and Govts. (No Gold e.g.) Will be happy to get comments

    In tabular form here (columns with assets and liabilities) (Donno how to place currency notes consistently)

    Before building a picture to see open market operations etc one has to look at transactions – keeping the balance sheets in mind.

    In usual transactions between two parties, banks and the central banks are involved. However, in the case of the Euro, I guess the national central banks are also involved.

    e.g., if I am a Spanish and you are a Greek and I have to pay you €100, my bank reduces my deposits by €100 and your Greek bank increases your deposits by €100. My bank’s funds at the Spanish central bank goes down by €100 and your bank’s account at the Greece central bank goes up by €100. The Greek and the Spanish central banks settle at the ECB. The transactions are not like the typical interbank settlements at the Fed – exchanging reserves or issuing CDs. I guess they directly settle it at the ECB. However the Greek and the Spanish banks may have to issue CDs or borrow reserves.

    The ECB may set an interest rate = target on the NCBs on the advances given. The NCBs may always be in an overdraft position at the ECB.

    Just building a story from scratch. Hope JKH or someone helps me out.

    1. Heroic effort, Ramanan. It’s crazy that the ECB doesn’t have a simple document on this stuff.

      Thinking of “reserves” as settlement balances, then it would seem that national banking systems must maintain settlement balance arrangements with their respective central banks. Because of multiple national central banks, it’s logical that NCB’s would also maintain settlement balance arrangements with the ECB. (WM noted this somewhere above). So in effect, there is a two-stage reserve/settlement system.

      The ECB/NCB reserve/settlement interface would allow cross-border clearing between different national banking systems, as in your Spanish/Greek example.

      That cross-border clearing would transfer deposits, bank reserves with NCB’s, and NCB reserves with the ECB all simultaneously.

      Question is what happens from there. I could see each NCB doing OMO with their own government debt to reverse the effect on their own reserve liability positions. But that does nothing to change their long and short positions at the ECB.

      So I’m guessing those long and short positions get converted into “structural” asset and liability claims that sit on balance sheets until they get reversed by “exogenous” cross border flows in the other direction. The balance sheets of both the ECB and the NCBs seem to show some sort of massive slush pool of intra-system claims in both directions which would support this idea.

      That’s all just for clearing and settlement purposes, cross-border.

      Interest rate control is another issue. I gather there’s a corridor system. I think operational OMO is delegated somewhat from the ECB to the NCB’s for implementation according to system wide liquidity conditions as well as local liquidity conditions.

      But the ECB background papers are really lousy at explaining this.

      Somebody reading this blog from Europe must be able to add some concrete knowledge here.

      1. Excellent points JKH. Good points raised about what happens from there.

        Simple question. Can NCBs issue CDs to each other ? Do they trade with one another ? Are they allowed ?

        A “Balance of Payments” in one direction will scare NCBs because they may find themselves with lesser and lesser balances at the ECB. In that case they wouldn’t want to depend on the banks too much to reverse the direction of funds.

        Another complicated question is if NCBs can trade with other banks. Sure can be analyzed – I just want everything to be firm in my head, which is not the case right now.

        I think as far as OMOs are concerned, they do something more that just what the Fed does Page 9 has a few things, but horribly written as you said.

      2. The answers are somewhere in this rats nest of ECB background documents, but I’m in no rush to figure it out. It’s like a scavenger hunt for signs of intelligence amidst the ruins of badly connected facts.

        One thing I did notice the last time I looked at the ECB balance sheet. It was somewhat out of date, but most of the balance sheet bulk was taken up by the Fed FX swaps that hit pretty high levels last year. I’m not sure there’s all that much operational there beyond that. Plus the balance sheet classifications are completely opaque and useless – Euro zone this and non-Euro zone that, etc.

        I think the operational relationship between the NCB’s and the ECB is the most difficult to figure out. To your question, I don’t know the degree to which NCB’s transact directly with each other.

      3. Yes really opaque. That is why I tried to start everything from scratch, and hopefully moving in the right direction. I think one can just build up the basic workings by pure reasoning, using an “it cannot be otherwise” kind of argument. Nicholas Kaldor did it in the in the days the Fed and BoE operated in secrecy, and so did Warren.

        I have updated the BS url : a lot of that may be not permitted, though they could be called repurchase agreements, such as an NCB doing a reverse repo with a bank/Non-bank in a different country

        Taking the NCBs trading to the extreme – I suspect there are some operations which target the NCBs lending each other and other ones where NCBs control their country interbank rates, though that could be a lot of blabbering.

      GUIDELINE OF THE EUROPEAN CENTRAL BANK of 26 April 2001 on a Trans-European Automated Real-time Gross Settlement Express Transfer system (Target)

      seems to have some juice. Article 4-b-1 says

      The ECB and each of the NCBs shall open an inter-NCB account on their books for each of the other NCBs and for the ECB. In support of entries made on any inter-NCB account, each NCB and the ECB shall grant one another an unlimited and uncollateralised credit facility


      To effect a cross-border payment, the sending NCB/ECB shall credit the inter-NCB account of the receiving NCB/ECB held at the sending NCB/ECB; the receiving NCB/ECB shall debit the inter-NCB account of the sending NCB/ECB held at the receiving NCB/ECB.

  9. The ECB (Trichet) has finally provided (limited) comment on this EMF proposal by the EU. here is a link to a bloomberg video report. It looks like the press corps literally had to physically surround him just to get a short measured comment on this proposal for a separate “euro lender of last resort” Fund…I cannot find any other ECB communication on this EU proposal.

    1. PS,

      This is also helpful …

      “Payment systems in the euro area”

      The TARGET setup can be described as a decentralised system in which payment messages are exchanged on a bilateral basis without a central counterparty. No information on payment orders exchanged is sent to the ECB during the business day.

      TARGET = The Trans-European Automated Real-time Gross settlement Express Transfer

      I remember a paper by Scott where he talks of CHIPS and Fedwire … seems analogous. Money can be understood by studying payment systems – as Randy Wray says, money is an IOU.

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