The ECB’s recent announcement that it would provide unlimited support for the sovereign bonds of struggling Euro economies through Outright Monetary Transactions (OMTs) is a big deal. A really big deal. Let me illustrate by borrowing the words of a European colleague—a macroeconomist himself—as we walked into the office this morning. (He will remain nameless.)
Imagine that you woke up this morning and learned that the Fed had announced that it would buy an unlimited amount of bonds issued by the state of California. In return, it gained the ability to dictate to California’s state government, more or less, how it could run its public finances, its pension system, and so on.
That’s what is at stake with yesterday’s announcement. It has the potential to be the largest transfer of sovereignty from European national governments to the EU bureaucracy that we have seen in 20 years. My colleague spoke of this ominously—“you’re really starting to mess with democracy now”—and this means a lot coming from a Belgian!
I say potentially because it’s not yet clear that the OMTs will be effective, because the ECB still faces a credibility problem: unlimited bond purchases will be effective in the event that bond markets believe that both national governments and the ECB are committed to doing whatever it takes to implement the fiscal compact. There are multiple equilibria in this scenario, one in which the ECB starts managing national budgets, and another in which the ECB spends a ton of money for naught.
I sense that the ECB is pretty darn committed, and I sense that national governments are similarly committed. But what about ordinary people? Over the past year I have spoken about this with friends, colleagues, and acquaintances from Germany, Belgium, the Netherlands, France, Italy, Spain, and Portugal. (I have had no conversations with Greek colleagues about this, a point to which I will return below.) What I hear from the Spanish and Portuguese is that there is simply no choice: their countries must remain in the Euro. Full stop. There is no choice.
But Europeans do have a choice. With characteristic dry wit, my Belgian macroeconomist colleague put it like this:
They always ask “do you want to stay in the Euro?” Well of course they do. But they need to ask “do you want to stay in the Euro and have a recession for twenty years?” Because that’s what they are facing.
I’m pretty sure he’s exaggerating for effect, but not too much, and the point still stands. The statistic that I would like to know is the real support for the Euro in the PIIGS when individuals are forced to recognize the costs associated with remaining in the Euro. Ideally, we’d have some sort of survey item where respondents are asked how many years of economic contraction, price adjustment, and structural reform they would be willing to accept in exchange for staying in the Euro, and then we would examine the distribution of responses to that question. An answer of 0 years would indicate that the respondent does not support the Euro at all, 1 year would indicate very weak support, 5 years would indicate pretty strong support, 100 years would indicate nearly unconditional support.
Is there any research out there that gets at this? If not, anyone want to work on it with me? I am serious, but I need colleagues from the PIIGS to do it.
A small addendum on Greece. I have not spoken about the Euro crisis with any Greek colleagues or friends. But I am struck by how in conversations with Spanish and Portuguese friends, there is a nearly unanimous sentiment that whatever their economic troubles, they are of a different dimension than the Greeks’ troubles. For them, Greece is the real European basketcase, while Spain and Portugal simply have big problems and a long road of recovery ahead. I mention this not because I believe that it is true or false, but simply because it speaks of the ways in which Europeans themselves conceive of the Euro’s troubles. Greek readers, I’d love to hear your reactions.
Tom Pepinsky 