In December 2011, the ECB provided some €489bn to banks in the form of three-year loans at low interest rates (1%) through open-market operations (see Will new ECB repo operations support the eurozone bond market?).
These ‘Longer-term refinancing operations’ or ‘LTROs’ are designed to ease the burden on European banks which have been struggling to persuade markets that they are dealing with their large amounts of toxic debt, some of which is sovereign debt. Indeed, some of the ECB loans have been used to purchase Italian and Spanish bonds, thereby reducing the likelihood that these countries will default on their debts – at least for the timebeing.
On 29 February 2012, the ECB offered another round of LTROs. Some 800 banks borrowed €530bn under the scheme, bringing the total to a little over €1tr. Initially, much of the money has been put back on overnight deposit with the ECB. The hope, however, is that the loans will be used to support increased credit throughout the eurozone and to fund further purchases of sovereign debt.
But will the increased narrow money supply in the eurozone through these open-market operations result in increased broad money and increased spending and growth? The answer to that depends a great deal on confidence: confidence of banks to lend to firms and consumers; confidence of firms and consumers to borrow. The hope is that the extra money supply will not simply see a corresponding reduction in the velocity of circulation.
The following articles consider the likely effects of these longer-term repos on the real economy.
Articles
ECB hands €529bn in emergency loans to European banks Guardian, Heather Stewart (29/2/12)
Q&A: The ECB’s bank funding programme The Telegraph, Angela Monaghan (29/2/12)
Fighting Debt with Debt Forbes, Bob McTeer (5/3/12)
Is ECB’s €1trn cash boost just the tip of the iceberg? Investment Week, Kyle Caldwell, Dan Jones (5/3/12)
Banks deposit record €821bn at ECB Financial Times, Mary Watkins (5/3/12)
Europe economy may see slim gain from supersize funding: poll Reuters, Sumanta Dey (5/3/12)
Who is the ECB helping? BBC News, Stephanie Flanders (29/2/12)
ECB information on OMOs
Open Market Operations ECB
Questions
- Explain how longer-term refinancing operations work.
- What will determine how much of these ECB loans will be lent to companies?
- Explain what is meant by (a) the velocity of circulation; (b) the money multiplier. Why will the size of these two determine the likely success of the ECB’s LTRO programme?
- Why may the ECB’s actions boost market sentiment? Why might they have the opposite effect?
- Explain what is meant by the “continued de-leveraging by banks”. How does this impact on the money multiplier?
My son Andrew Sloman (see also) is currently in Goa. My wife Alison and I went to visit him over half term – our first trip to India. Goa is a beautiful state, with wonderful beaches, fantastic food and perfect weather in February. But inland from this tourist haven lies an environmental disaster caused by the open-cast extraction of iron ore.
This tiny state by Indian standards produces more than 60% of India’s iron ore exports. Whilst, along with tourism, the iron ore industry has been one of the largest contributors to the Goan economy, its environmental footprint is massive. Deforestation and water and air pollution are just three of the environmental externalities.
So should a cap be placed on the amount of iron ore that is mined? Should the industry be taxed more heavily? Should tough environmental standards be imposed on the industry? Or should it simply be allowed to continue, given its large contribution to the Goan economy? Or, at the other extreme, should the industry be closed? The linked article looks at some of the issues. Try to identify, as an economist, what information you would require in order to come to a conclusion to these questions.
Greens’ shout for cap on iron ore mining falls on deaf ears Times of India, Paul Fernandes (28/2/12)
Questions
- What negative externalities are involved with the Goan iron ore industry? Are there any positive externalities?
- What difficulties are there in measuring the negative externalities?
- How would you set about doing a cost–benefit analysis of (a) expanding the Goan iron ore industry; (b) shutting it?
- Explain the following: “The net present value of the opportunity cost for 25 years at 12% social discount rate of giving it up is greater than its environmental cost by Rs 14,449 crore, the report states.” (A crore is 10 million and Rs is the symbol for an Indian Rupee, where £1 = approximately 78 rupees.)
- What difficulties are there in attempting to take distribution into account when doing a cost–benefit analysis?
After a marathon 13-hour session in Brussels, ending at 5am on 21 February, eurozone finance ministers agreed a second bailout for Greece. The aim was to lighten Greece’s debt burden and prevent the country being forced to default.
Under the deal, Greece will have some €107bn of its debt written off. The main brunt of this will be borne by private creditors, who will see the value of their Greek bonds fall by 53.5% (some 70% in real terms). Old bonds will be swapped for ones with longer maturities and lower interest rates. In addition, Greece will be given further loans of more than €130bn through the EFSF on top of the €73bn already lent. The monies will be put in a special escrow account and can be used only to service the debt, not to finance general government expenditure.
In return, Greece must reduce its debt to GDP ratio from the current 160% to 120.5% by 2020. It must agree to continuing tight austerity measures and to significant supply-side reforms to reduce the size of the public sector and increase efficiency. Implementation of the measures would be overseen by an EU Task Force based in Greece.
But while governments in the EU and around the world are relieved that a deal has been finally agreed and that Greek default seems to have been averted – at least for the time being – the problems for Greece seem set to get worse. The further austerity measures will deepen the recession, now in its fifth year. Growth is not expected to return until 2014 at the earliest, by which point real GDP is expected to have shrunk by some 17% from the start of the recession. The question is whether the Greek people will stand for further cuts in income and further rises in unemployment, which had reached 20.9% in November 2011 and is still rising rapidly.
Articles
Eurozone backs Greek bailout Euronews (21/2/12)
Greece Wins Second Bailout as Europe Picks Aid Over Default Bloomberg, James G. Neuger and Jonathan Stearns (21/2/12)
Eurozone agrees second Greek bail-out Financial Times, Peter Spiegel and Alex Barker (21/2/12)
Greece secures bailout to avoid debt default Independent, Gabriele Steinhauser and Sarah DiLorenzo (21/2/12)
EU tells Greece to cut more jobs, sees 2014 growth Reuters, Gabriele Robin Emmott and Nicholas Vinocur (21/2/12)
Eurozone agrees €130bn bailout for Greece The Telegraph, Bruno Waterfield (21/2/12)
Greece averted nightmare scenario – finance minister BBC News (21/2/12)
Greece: Dangerous precedent? BBC News, Robert Peston (21/2/12)
The end of the marathon? The Economist, Charlemagne’s notebook (21/2/12)
What Analysts Think of the Greek Deal The Wall Street Journal, Alexandra Fletcher (21/2/12)
Three steps to a strong eurozone Guardian, Henning Meyer (21/2/12)
Opinion: the eurozone is just buying time Deutsche Welle, Henrik Böhme (21/2/12)
Greece must default if it wants democracy Financial Times, Wolfgang Münchau (19/2/12)
Eurozone’s Greece deal: debt and delusions at dawn Guardian. Editorial (21/2/12)
€130bn plaster leaves Greece independent in name only Guardian, Larry Elliott (22/2/12)
The Greek debt deal: Thumbs down The Economist, Buttonwood’s notebook (21/2/12)
Webcasts and podcasts
Are Greeks’ euro days numbered? Channel 4 News (21/2/12)
Wolf and Authers on Greece Financial Times, John Authers and Martin Wolf, (21/2/12)
Greece ‘unlikely to meet targets’ BBC Today Programme, Ngaire Woods, Guntram Wolff and Alistair Darling (21/2/12)
Austerity-hit Greeks scorn bailout deal Euronews (21/2/12)
Greek Bail Out Could Lead To More Violence Sky News (21/2/12)
Official Press Release
Eurogroup statement Europa Press Release (21/2/12)
Questions
- Outline the features of the bailout on offer to Greece. What is Greece expected to do in return for the bailout?
- To what extent has the deal lightened Greece’s macroeconomic problems?
- Why does granting a bailout create a moral hazard? How has the ECB/IMF/EU Commission Troika attempted to minimise the moral hazard in this case?
- Has Greece’s financial problem been essentially one of liquidity or solvency?
- What supply-side measures is Greece being required to implement? Will they have any demand-side consequences?
- From where is Greek growth likely to emanate after 2014?
- What are the downside risks of the deal?
- How likely is it that there will have to be a third bailout?
As a resident of Bristol it is with considerable interest that I’m following the development of the Bristol pound, due for launch in September 2012. One Bristol pound will be worth one pound sterling.
The new currency will be issued in demoninations of £1, £5, £10 and £20 and there is a local competition to design the notes. Participating local traders will open accounts with Bristol Credit Union, which will administer the scheme. It has FSA backing and so all deposits will be guaranteed up to £85,000.
The idea of a local currency is not new. There are already local currencies in Stroud in Gloucestershire, Totnes in Devon, Lewes in East Sussex and Brixton in south London. The Bristol scheme, however, is the first to be introduced on a city-wide scale. The administrators are keen that use of the currency should be as easy as possible; people will be able to open accounts with Bristol Credit Union, pay bills online or by mobile phone.
As the money has to be spent locally, the aim is to help local business, of which more han 100 have already signed up to the scheme. Bristol has a large number of independent traders – in fact, the road where I live is off the Gloucester Road, which has the largest number of independent traders on one street in the UK. The organisers of the Bristol pound are determined to preserve the diversity of shops and prevent Bristol from becoming a ‘clone town’, with high streets full of chain stores.
But how likely is the scheme to encourage people to shop in independent shops and deal with local traders? Will the scheme take off, or will it fizzle out? What are its downsides? The following articles consider these issues.
Articles
The Bristol Pound set to become a flagship for local enterprise The Random Fact, Thomas Foss (7/2/12)
What is the point of local currency? The Telegraph, Rosie Murray-West (7/2/12)
The Bristol pound: will it save the (local) economy? Management Today, Emma Haslett (6/2/12)
‘Bristol Pound’ currency to boost independent traders BBC News Bristol, Dave Harvey (6/2/12)
We don’t want to be part of ‘clone town Britain’: City launches its own currency to keep money local Mail Online, Tom Kelly (6/2/12)
British Town Prepares To Launch Its Own Currency — Here’s How That’s Going To End Business Insider, Macro Man (7/2/12)
They don’t just shop local in Totnes – they have their very own currency Independent, Rob Sharp (1/5/08)
Videos and webcasts
The town printing its own currency [Stroud] BBC News, Tim Muffett (22/3/10)
Brixton launches its own currency BBC News (17/9/09)
Local currency BBC Politics Show (30/3/09)
Local currency for Lewes BBC News, Rob Pittam (13/5/08)
The Totnes Pound transitionculture.org on YouTube, Clive Ardagh (21/1/09)
Local Currencies – Replacing Scarcity with Trust Peak Moment on YouTube, Francis Ayley (8/2/07)
Questions
- What are the advantages of having a local currency?
- What are the dangers in operating a local currency?
- What steps can be taken to avoid the dangers?
- Can Bristol pounds be ‘created’ by Bristol Credit Union? Could the process be inflationary?
- What market failures are there in the pattern of shops in towns and cities? To what extent is the growth of supermarkets in towns and the growth of out-of-town shopping malls a result of market failures or simply of consumer preferences?
- Are local currencies only for idealists?
Last October (2011) we considered the case for a Tobin tax: also known as a financial transactions tax (FTT) or a ‘Robin Hood tax’. Since then there have been increased calls for the world to adopt such a tax.
It was promoted by President Sarkozy and supported by many other leaders at the G20 conference in Cannes on 3 and 4 November 2011. It has also been publicly supported by Bill Gates, the Archbishop of Canterbury and the Vatican, as you can see from the video clips and articles below. It is also one of the demands of protesters at St Pauls in London and at other places around the world.
However, the introduction of such a tax is vehemently opposed by many banks and by the US, UK, Canadian and Australian governments, amongst others. In the articles below, we consider the latest arguments that are being used on both sides. With such strong feelings it looks as if the arguments are not going to go away.
Update
On 29 January 2012, French President, Nicolas Sarkozy, announced plans to introduce a 0.1% levy on financial transactions. Naturally, by taking the lead, he hopes that other EU countries will follow suit. The final set of articles consider his move.
What is a Tobin Tax? BBC News, Andrew Walker (2/11/11)
Rowan Williams: St Paul’s protest has ‘triggered awareness’ BBC News (2/11/11)
Bill Gates explains his support for a Tobin tax BBC News (2/11/11)
Robin Hood tax: What is the Tobin tax? BBC Newsnight, Andrew Verity (17/11/11)
Q&A: What is the Tobin Tax on financial trading BBC News (2/11/11)
Head-to-head: the Robin Hood tax BBC News, Gemma Godfrey and Prof Avinash Persaud (9/12/11)
Time for us to challenge the idols of high finance Financial Times, Rowan Williams, Archbishop of Canterbury (1/11/11)
Gates says ‘Robin Hood’ tax has part to play Financial Times, Chris Giles (3/11/11)
Sarkozy Pledges Fight for Transaction Tax Bloomberg, Rebecca Christie and Helene Fouque (4/11/11)
Financial Transaction or Speculation Taxes: Not Quite What They Seem Forbes, Tim Worstall (4/11/11)
Is a Robin Hood Tax the Answer? Forbes, Kelly Phillips Erb (3/11/11)
Bill Nighy takes Robin Hood tax to the G20 Guardian, Patrick Wintour and Larry Elliott (3/11/11)
G20 tax moves disappoint charities Press Association (4/11/11)
Jamaica should support the Robin Hood Tax Jamaica Observer (6/11/11)
World Leaders Need to Agree to the Robin Hood Tax at G20 Huffington Post, Bill Nighy (3/11/11)
Obama, the G20, and the 99 Percent Huffington Post, Jeffrey Sachs (1/11/11)
Now is the moment to bring banks to heel This is Money, Jeffrey Sachs (3/11/11)
Note on financial reform from the Pontifical Council for Justice and Peace The Vatican Today
Tobin Tax would cost £25.5bn and cause job losses says think-tank London loves Business, Rebecca Hobson (4/11/11)
The Spurious Case Against A Financial Transactions Tax – Analysis Eurasia Review, Dean Baker (2/11/11)
Update
Sarkozy Says France to Impose Transaction Tax From August Bloomberg Businessweek, Helene Fouquet and Mark Deen (30/1/12)
Struggling Sarkozy unveils financial transactions tax Sydney Morning Herald, AFP (30/1/12)
Sarkozy announces French financial transaction tax BBC News (30/1/12)
French president announces unilateral financial transaction tax Deutsche Welle Spencer Kimball, Andrew Bowen and Nicole Goebel (30/1/12)
Questions
- What are the main arguments in favour of a financial transactions tax?
- What are the main arguments against a financial transactions tax?
- To what extent is the debate a normative one and to what extent could evidence be used to support one side or the other?
- What would determine the extent to which the tax would be passed on to consumers?
- Would a financial transactions tax impede growth? Explain.
- Would financial intermediation be made more efficient by the imposition of such a tax?
In December 2011, the ECB provided some €489bn to banks in the form of three-year loans at low interest rates (1%) through open-market operations (see Will new ECB repo operations support the eurozone bond market?).
