No need for a monetary halfway house: Lessons from the European Payments Union for post-Soviet currency arrangements

The Soviet ruble has become the common currency for 14 independent states with their own policies on credit expansion and budget deficits. The built-in inflationary bias of the present arrangement can be redressed if the common ruble makes way for separate currencies. However, if major successor states of the Soviet Union switch to their own monies, trade between the former Soviet republics may be further disrupted as long as the new currencies are not convertible for current transactions. The European Payments Union (EPU) of the 1950s is often presented as a model for the successor states of the Soviet Union with separate currencies. However, the EPU clearing mechanism and its facility for soft credits were mere second-best devices to mitigate the harm that was caused by the inconvertibility and the collective overvaluation of the West European currencies against the dollar. In the 1950s, a sufficient devaluation of West European currencies would have removed the rationale for restrictions on trade and payments and would thus have made the EPU obsolete. Today, the former Soviet republics need not waste their time in a payments union, i.e. in a halfway house on the road to convertibility, unless they opted for a gross overvaluation of their currencies. In recent years, Poland, Hungary and Czechoslovakia have made their currencies convertible at least for most current transactions of their residents. This minimum convertibility has promoted their integration into the worldwide division of labour; it has been maintained because exchange rate policy has not led to a sustained misalignment. Instead of copying Western Europe's post-war mistake, the post-Soviet republics should follow the example of the East-Central European countries and make their currencies convertible at realistic and sufficiently flexible exchange rates. Regardless of their currency arrangements, the successor states of the Soviet Union have to transform their banking systems and establish an efficient system to clear payments between banks. Technical help from abroad could promote this process. However, the states need no mechanism that discriminates between interstate payments and payments between the states and third countries. Proponents of a special post-Soviet payments arrangement sometimes argue that such an institution would promote the cooperation between the successor states of the Soviet Union; it would thus be politically useful regardless of economic considerations. However, the strained political relations between many post-Soviet countries suggest that the readiness for a reliable cooperation is limited. Hence, special arrangements that inflate rather than economize on the need for cooperation are likely to be unstable. --

Transforming the financial system in Eastern Europe's market economies: A proposal for clean balance sheets and an institutional transfer

In developed market economies, banks and other financial institutions perform a variety of vital tasks: they mobilise savings and allocate funds to the optimal uses, they pool investment risks, they exploit scale economies in the evaluation and monitoring of borrowers, and they match the preferences of lenders and borrowers for liquidity and for specific term structures of portfolios. Driven by self-interested owners whose own capital is at risk and by equally self-interested top managers who care for their reputation on the market for top executives, the banks exert financial discipline on their customers.

Between Perestroika and Internal Market 1992: A new role for EFTA

The winds of change are blowing through Europe. In the western half of the divided continent the European Community (EC) is setting about to complete its Internal Market by the end of 1992, in the East various members of the Council for Mutual Economic Assistance (Comecon) are striving for a thorough reform of their derelict command economies. Both projects are part and parcel of a worldwide trend towards freer markets, both are quite sensible in their own right. Unfortunately, they are incompatible in at least one aspect that is crucial for the economic future of Europe as a whole: while many Comecon countries seek closer links with Western Europe under the heading of perestroika, a misconceived Internal Market 1992 threatens to deepen the economic division of the old continent. The purpose of .this paper is to sketch the major causes for concern and to elaborate a concept on how instead a properly designed 1992 could contribute to a pan-European economic integration. The core of the proposal is (i) to give the emerging Internal Market a clear liberal imprint, (ii) to extend the nondiscriminatory treatment to the European Free Trade Assocation (EFTA), and (iii) to offer EFTA membership to all those East European countries whose economic reforms have progressed sufficiently far.

Lending stability to Europe's emerging market economies: On the importance of the EC and the ECU for East-Central Europe

The standard literature lists three ways in which the Western industrialised countries could support the transformation process in Europe's emerging market economies (EMEs): technical assistance, financial aid and trade access (see i.a. World Bank 1991, p. iv) . Important as such support would be, it may not suffice. This paper adresses the question whether the West could make a further major contribution: lending institutional stability to the EMEs. The starting point is the observation that an institutional deficiency or even void is one of the major causes of the transformation crisis. ' The old institutions have largely vanished; the emergence and consolidation of new and ultimately far superior institutional arrangements takes time; the nascent local institutions lack stability and credibility. Whereas the issues of credibility and institutional stability have featured prominently in the debate on some internal aspects of the transformation process, they have played no major role in the discussion on how the West could support the EMEs and how East-Central Europe could and should be incorporated into the process of European integration.

Maastricht: A dead end of European integration?

Unlike previous steps in West European integration, the Treaty of Maastricht contains hardly any of the liberal elements which had so far kept the centralizing and bureaucratic features of the EC in check. The treaty embodies a vision of a uniform EC, to be modelled along the lines of an interventionist nation state. • Maastricht is the culmination of an integration strategy which was designed for a small number of West European countries. At least since the fall of the Berlin wall, this inward-looking approach has been wrong for Western Europe. With respect to a European integration that goes beyond the Western half of the continent, Maastricht leads into a dead end. The interventionist provisions of Maastricht, the harmonisation approach to the completion of the single market and the general strengthening of the common redistributive policies are barriers to an enlargement of the EC. This runs directly counter to the overriding task of European policy for the coming years: the re-integration of the European post-communist countries into the European mainstream. The attempt to pursue the two separate goals of economic integration and political unification within a single and uniform institution, the EC, is at the root of the major problems of European integration. The frequent blurring of economics and politics makes for bad economics and bad politics at the same time: It strengthens the EC's bias towards interventionist and politicized solutions to economic problems. It also impairs a close and effective political cooperation between the core countries of the EC because other members are obliged to participate even if they are merely interested in a common market. • To reconcile the parallel processes of economic widening and political deepening, European integration needs to be re-defined along classical liberal lines. Ideally , Europe should introduce a clear separation between politics and economics so that political goals such as an ever-closer Franco-German cooperation or the prevention of Serbian-style aggressions could be pursued effectively in a suitable political club, whereas economic integration could progress in a broader economic club. • If the EC is to become deeper and wider without burdening itself with an ever-greater potential for internal conflicts, it will have to concentrate its common activities on fewer and more essential tasks. It will have to put less emphasis on harmonisation and economic interventionism, scale down its harmful and divisive redistributive activities and weaken the link between economic integration and political cooperation. • In the Treaty of Maastricht, the subsidiarity principle is formulated in such general terms as to be almost useless. The principle needs to be clarified along liberal lines. To serve as an effective safeguard against excessive centralisation, it should then be elevated to a constitutional level so that it takes precedence over all existing and future Community legislation. --

Better banks for Eastern Europe

Grossly inefficient banking systems are one of the major impediments to a rapid and sustained upswing in Europe's emerging market economies (EMEs for short). Although the transition from plan to market necessitates a large-scale re-allocation of domestic capital and easy access to foreign capital, the EMEs have adopted slow and inefficient approaches to the transformation of their banking systems. The EMEs can create optimal conditions for financial intermediation and a substantial import of capital and skills if they immediately import an efficient banking system and enter into an East-West Banking Union with the EC. A Banking Union goes far beyond the adoption of some relevant EC regulations for local banks; it gives all financial intermediaries licensed in one EC country free access to the EMEs subject to the same rules that apply in the EC internal market. At present, non-performing loans still tie state banks to insolvent state enterprises; the precarious portfolio positions of domestic banks serve as a convenient excuse for not allowing efficient and experienced Western banks to enter the market in the EMEs. To resolve the portfolio problem at one stroke, all loans that state banks had granted to state firms prior to a certain date should be written off; tight ceilings on the amount of new credits each state firm can receive from state banks would prevent a recurrence of the problem. The ceilings should not apply to private banks, which are controlled by self-interested owners. State banks should be recapitalized using government bonds that are indexed to inflation. Since a programme of debt write-off and recapitalization raises the value of state firms and state banks and thus the potential proceeds of privatization, it need not constitute a drain on the state budget. A clean sweep, which eases the privatization of firms and banks, is preferable to a time-consuming and arbitrary case-by-case approach. Even if it is no longer politically possible to fully discard the present gradualist policies, the EMEs should at least upgrade their piecemeal debt-reduction and recapitalization programmes. Thereafter, the residual portfolio problems should no longer pose an obstacle to immediate and free market access for foreign banks within an East-West Banking Union. --

The fact that the UK avoided an immediate crisis does not tell us much about the future

More than ten weeks ago now, the UK voted to leave the European Union. Holger Schmieding explains why the initial shock has subsided fast. First, instead of taking charge, the leading Brexiteers lost the ensuing power struggle within the Conservative party as the mildly pro-EU Theresa May prevailed within just three weeks. Second, May’s calm and slow approach to Brexit issues has fostered the impression that she will seek realistic co-operation rather than ideological confrontation with the EU27

The UK government is shedding some of its illusions about Brexit, and softening its position

Step by step, the UK government is shedding some of its illusions about Brexit, argues Holger Schmieding (Berenberg). The United Kingdom has already accepted that it will have to meet the legally binding financial commitments it incurred while it was a member of the European Union (the so-called Brexit bill) and is going along with the EU's timetable for negotiations (divorce issues first, transition deal next, outlines of a future trade deal last). Last Friday saw another set of concessions being made by the Prime Minister

Britain needs the EU much more than vice versa

Britain and the EU need each other, but Britain needs the EU more than vice versa, argues Holger Schmieding, writing in response to the session of the LSE Commission of the Future of Britain in Europe ‎chaired by Kevin Featherstone. He claims that after a Brexit there’s a risk that more countries may consider leaving the EU. In order to prevent such ripple effect, the core countries of the European Union, which remains the best compromise machine on earth, would push for reforms and closer integration