Wolfgang Schauble, German finance minister, has a surprisingly sensible op-ed in today's Financial Times. As we suggested yesterday, first the relevant Europeans should decide if they want to keep the euro -- more precisely, who stays in and who leaves the currency union -- then policy must be adjusted accordingly.
Mr Schauble is obviously correct that existing economic self-policing mechanisms are badly broken; the eurozone can only survive if there are effective monitors and appropriate penalties for fiscal and financial transgression. He is also right to fear that involving the IMF in Greece would necessarily give the Fund greater rights to kibbitz on European Central Bank monetary policy. Given the fear and loathing expressed for the IMF's "4 percent inflation solution" (or is it 6 percent?) in eurozone policy circles, you can see why this gives the Greek prime minister some bargaining power - the Germans will do whatever it takes to keep him away from the IMF in the short-term.
But Schauble misses (or holds back for now) on a potentially important point vis-a-vis investment banks.
He is tough, towards the end of his piece, on countries that "intentionally breached European economic and monetary law." But what about banks that aid and abet countries that are trying to break the rules?
Of course, governments can always massage their statistics unassisted. But when international banks help countries to disguise their true debt levels, through off-balance sheet transactions, what is the difference between that and what Merrill Lynch did for Enron regarding "Nigerian oil barges" (and more)?
Technically, Greece's (and potentially other country's) debt deals may not have broken any laws - because the international space for these transactions is so anarchic.
But Mr Schauble would be well within his rights to call for rogue investment banks - i.e., those that help break European rules in any fashion - to be banned from the highly lucrative market for European government new issues.
Of course, if he is afraid to do this because the banks in question have great market power and a fearsome reputation for sharp elbows and exacting revenge, perhaps Mr. Schauble should consider referring the broader investment banking market (including over-the-counter derivatives) to the relevant anti-monopoly authorities within the European Commission.
Cross-posted from The Baseline Scenario.
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