Daily commentary: on gold-backed European Maastricht compliant sinking fund

This is a belated commentary for Friday. I have a lot of links on the global growth slowdown today but I covered this earlier saying Weak global economic data signal likelihood of global recession. I wanted to highlight Marshall Auerback’s post on gold remonetisation as he picked up on a theme about what the SPD and Greens are saying in Germany I discussed last week in "Germany: Merkel faces domestic political hurdles on fiscal pact". Specifically, it’s the Maastricht-compliant carve out I discussed that the SPD and Greens are pushing in order for Merkel to get a Bundesrat sign off on the fiscal compact.

Marshall’s post was a bit more specific than the information I had at the time of my writing. Here’s what I said last week:

Maastricht compliant carve out. The Green party is now talking up an idea whereby the debt within each euro area member state that is under the 60% debt to GDP hurdle be carved out for joint indemnification. I have heard about this idea before but have not received enough specifics to know how this is going to work. However, the general idea is that the problems are with countries being over the Maastricht treaty hurdles on debt and deficits. All debt under the 60% Maastricht debt hurdle is then fair game for joint indemnification. Note that the Germans also are over the 60% hurdle with a debt to GDP ratio of 82%. So they would only be able to get 60/82nds of their debt pooled under this plan. The goal here is to stop countries being beholden to market ‘speculation’ and reduce the coupon paid on all Maastricht compliant debt so that at least this debt has a low coupon for the countries in the periphery.

I am still not 100% certain on the specifics of this particular proposal but Marshall’s post reads like the reverse of what I wrote, namely that the pooling arrangement is for the debt over the Maastricht 60% hurdle and that the debt under the hurdle would be left alone. Here’s how Andy Lees describes the idea as quoted in Marshall’s post.

Under the proposal southern European debtor states would pledge their gold reserves as collateral under a EUR2.3trn stabilisation plan. The SDP opposition supports the idea and the Greens have said they will block ratification of the Fiscal Pact unless this is adopted. The plan splits the public debts of EMU states. Anything up to 60% GDP would remain sovereign and anything over that would be transferred gradually into the redemption fund. The fund would gradually retire the debt over 20 years. Whilst Germany would suffer higher credit costs – (Jefferies calculates it would cost Germany 0.6% GDP annually) – it would have the security of gold lodged to the fund, and is therefore acceptable to the German public. Germany’s Five Wise Men also say this cost to Germany would be modest compared with the growth that would come from a disciplined economy. The fund would also relieve the ECB of its need to monetise to bail out Europe, again something Germany desires. From my perspective this is fascinating as it is effectively Germany saying we will lend you the money but in return for gold. Germany is therefore saying they don’t trust the euro as it is, and wants a stronger, almost gold backed Euro. On the other hand if southern Europe agrees, it is a major commitment to the Euro. In one way or another it legitimises or raises the profile of gold again as key to monetary assets, but by doing so it takes power away fromgovernment as it imposes constraint on them and so in the normal course of events would be fought against aggressively, but if this is the choice being offered to southern Europe, they may have to accept. On the other hand if they don’t accept it, would this mark the end of the euro as it would be a statement that southern Europe is not prepared to take the discipline that a monetary but not fiscal union should infer? This would be a re-establishment of that discipline. If Europe adopts this gold backing, what would be the implication for fiat money globally? Would others have to follow?

https://www.telegraph.co.uk/finance/financialcrisis/9298180/Europes-debtors-must-pawn-their-gold-for-Eurobond-Redemption.html

I don’t have any more to provide in terms of commentary until I get a better idea of how far along this proposal is. But it is a very interesting way to deal with the fiscal problem.

That’s it. Here are the links.

The Center of the Universe » Blog Archive » How to fix the euro banking system

Economy is Slowing, Obama Can’t Help, at Least Before November – Jim Tankersley – NationalJournal.com

Brazil stimulus fails to boost growth – FT.com