If you read one thing today... (and you are interested in the EZ)

The President of the Council of Europe has published his proposals ahead of the European summit this Thursday and Friday.

The document does present a roadmap to further integration that should underline the strength of the union in the long run.

It mentions explicitly integrated financial, budgetary and economic policy frameworks.

There is no time frame but it is suggested that this could be agreed in December.

I suspect that the markets are getting impatient for something concrete and will not react with enthusiasm.

But the EZ leaders have shown that they do not want to be (seen to be) swayed by the financial markets' short term reactions.

Democratic accountability and legitimacy also mean that the proposals will have to be sufficiently discussed and approved at the national level.

I think that these proposals are in the right direction.

Of course a lot (all) depends on what Germany thinks it can do.

And further integration presents a challenge not only for those who want to be part of it but also for those who are sceptical or hostile (e.g. the UK).

Does the EZ have time to contemplate these proposals?

I think it does, as long as Italy can borrow at reasonable rates.


Just in case you missed it the document is here.

Greece's Memorandum of Understanding with the "Troika"

For those who haven't had the chance to browse through the MoU that Greece has signed with the troika (ECB, IMF and the European Commission) here is a link to a document (IMF Country Report No. 12/57) that includes it (page 152 onward).

The actual document is entitled "Greece: Request for Extended Arrangement Under the Extended Fund Facility—Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Greece" and contains more or less everything one needs to know about the greek economy, its assessment by the IMF staff, and the MoU that has been signed.

It will, of course, be interesting (and consequential at so many levels) to see whether the greek people decide to renege on, or abide by, their commitment to the terms of the bailout at the elections of June the 17th, 2012. 

They really have to choose between a rock and a hard place... 

Rock: Sticking to the terms of the bailout, achieving some concessions from the troika, staying in the EZ. Recession continues for 2-3 more years, ceteris paribus. 

Hard place: Reneging on the MoU, missing the next loan instalment, defaulting on debt, returning to the drachma. Massive uncertainty.

Problem with the Rock: this option is favoured by the same old parties that have been ruling Greece since the end of the civil war (except for seven years of military rule), and are responsible for the current drama.

Problem with the Hard Place: this option is favoured (implicitly) by a radical Left party that has never been in government, let alone having the responsibility of steering a nation to safe waters during a cataclysm. 

Today the greeks progressed in the euro 2012 football competition's quarterfinals against all expectations. Can they produce another surprise by returning to some sort of economic and social normality? It will take much more than the 90 minutes of a football game but it requires the same kind of spirit.

Greece must hang on?

Exploring the possible economic effects of Greece's election.

Phone interview with Dukascopy TV. Click here for Dukascopy's page or, for a direct YouTube link, click here

Exchange Rate Regimes: What Do Countries Do?

Participating in a currency union is a choice about an economy's exchange rate regime. The exchange rate is fixed -supposedly irrevocably, but of course never say never- and the old currency is abandoned for the crispy notes and shiny coins of a new one.

That's what the eurozone countries chose to do a while back, partly for economical and partly for political reasons.

As economists know, the decision of what exchange rate regime to adopt is not straightforward. It depends on a variety of factors, such as

• what kind of shocks tend to hit the economy 
• what effects the variability of exchange rates has on trade 
• to what extent the country's monetary policy is credible 
• what trading partners and competitors do 
• and so on.

In turn, this decision will determine the effectiveness of particular macroeconomic policies, among other things.

What is interesting is that sometimes countries say that they operate a different exchange rate regime than they actually do. This is the difference between the official de jure regime and the actual de facto one.

So, what do countries actually do?

It turns out that almost everyone intervenes in the foreign exchange market either to maintain a peg, or to prevent the currency from moving too much. For the period, 1998-2007, only 4% of observations fall in the freely floating category.

In the chart above I have used data on de facto exchange rate regimes from Ilzetzki, Reinhart and Rogoff (2008) to show the percentage of observations in their sample that falls in different regimes. They assign a value from 1 to 6 to different types of exchange rate regimes followed by governments:

1. No separate legal tender, Pre announced peg or currency board arrangement, Pre announced horizontal band that is narrower than or equal to +/-2%, De facto peg                       

2. Pre announced crawling peg, Pre announced crawling band that is narrower than or equal to +/-2%, De factor crawling peg, De facto crawling band that is narrower than or equal to +/-2%

3. Pre announced crawling band that is wider than or equal to +/-2%, De facto crawling band that is narrower than or equal to +/-5%, Moving band that is narrower than or equal to +/-2% (i.e., allows for both appreciation and  depreciation over time), Managed floating

                       

4. Freely floating           

           

5. Freely falling                       

6. Dual market in which parallel market data is missing.