Jim Stewart, School of Business and Bridget McNally, NUI Maynooth, have written "A Note on Pension Fund Charges in Ireland". This is Working Paper No. 5 from the TCD Pension Policy Research Group.
A PDF is available on their website (click here).
Wednesday 27 February 2013
London Debt Agreement
Tom McDonnell: Today marks the 60th anniversary of the start of negotiations concerning post war debt relief for Germany. The "London Agreement on German External Debts", also known as the London Debt Agreement, was a crucial component of Germany's post war economic miracle. You can find the text of the agreement here. The guardian has coverage here and Deutsche Welle has coverage here.
Martin Wolf
Nat O'Connor: Martin Wolf, chief economics commentator at the Financial Times, was in Dublin yesterday, to deliver a talk to the TCD Phil society. TASC helped sponsor the event. The topic of his talk was "The State of Economics". Despite refering to this as the "most arid" of the topics that he had offered to speak about (and you can blame the TCD Phil committee for the choice), Mr Wolf made a number of observations that confirm, in his estimation, the need for a major rethink of economics.
"We did not know what we thought we knew" about the economy. That was one of the strong themes of Martin Wolf's presentation. He talked about his own, belated, interest in the work of Hyman Minsky. Minsky posed a deceptively simple (and for years ignored) question to macroeconomists. Minsky argued that for any model of the economy to be realistic, it had to allow for a Great Depression as one possible outcome. Yet, orthodox macroeconomic models of recent decades were simply incapable of allowing for that. In other words, no matter what configuration of variables were used in those models, they did not and could not allow for a major crash. Little suprise then that the crash was not predicted and, moreover, that many prominent economists thought that inflation control had eliminated the possibility of such a major crash occuring.
Mr Wolf has come to the conclusion that the macroeconomic paradigm "failed" and the orthodoxy was simply "wrong", in relation to the importance it gave to inflation targeting and the mistaken belief that "cleaning" after a crisis would be cheaper than "leaning" against one, in terms of Government policies to prevent a crisis from occuring.
What this implies, he said, is that a good deal more leaning against risky behaviour is required by governments, including regulation of banking, less risky financing of property, and much larger counter-cyclical capital investment.
In hinting at what a new economic paradigm might look like, Mr Wolf used the analogy of a bridge building project. Although the fundamental laws of physics apply to the construction of bridges, we do not ask theoretical physicists to undertake their design. Rather, we employ the profession of engineers, who have an array of practical skills, including rules of thumb, that better qualify them to oversee the construction of a durable bridge in the real world. By analogy, we need more "economic engineers" in future rather than theoreticians to advise governments and business about how the economy works in reality, rather than according to the idealised, orthodox models (the same models, I might add, that failed to allow for the possibility of the major economic crash that we just experienced).
In relation to Ireland, Mr Wolf noted that the interests of taxpayers were "sacrificed" for senior bondholders, seemingly due to pressure from the EU. He described this as "insane" and "immoral" and noted that the blanket guarantee was a "catastrophe" that resulted in Ireland holding a great deal of debt that we shouldn't have. With that said, Mr Wolf did express the view that Ireland's economy was doing better than others, such as Spain, with their unemployment over 25 per cent and youth unemployment over 50 per cent. He also expressed concern about the French economy. Crisis in France would of course strike to the heart of the Euro zone and EU economy, which will accelerate the need for changes to EU-level economic policy.
The question I would then pose is whether the EU is capable of seeking a new paradigm, with a greater role for practical "economic engineers", or whether EU policy (to Ireland's disadvantage) will continue to be dictated by a failed, theoretical economic orthodoxy.
"We did not know what we thought we knew" about the economy. That was one of the strong themes of Martin Wolf's presentation. He talked about his own, belated, interest in the work of Hyman Minsky. Minsky posed a deceptively simple (and for years ignored) question to macroeconomists. Minsky argued that for any model of the economy to be realistic, it had to allow for a Great Depression as one possible outcome. Yet, orthodox macroeconomic models of recent decades were simply incapable of allowing for that. In other words, no matter what configuration of variables were used in those models, they did not and could not allow for a major crash. Little suprise then that the crash was not predicted and, moreover, that many prominent economists thought that inflation control had eliminated the possibility of such a major crash occuring.
Mr Wolf has come to the conclusion that the macroeconomic paradigm "failed" and the orthodoxy was simply "wrong", in relation to the importance it gave to inflation targeting and the mistaken belief that "cleaning" after a crisis would be cheaper than "leaning" against one, in terms of Government policies to prevent a crisis from occuring.
What this implies, he said, is that a good deal more leaning against risky behaviour is required by governments, including regulation of banking, less risky financing of property, and much larger counter-cyclical capital investment.
In hinting at what a new economic paradigm might look like, Mr Wolf used the analogy of a bridge building project. Although the fundamental laws of physics apply to the construction of bridges, we do not ask theoretical physicists to undertake their design. Rather, we employ the profession of engineers, who have an array of practical skills, including rules of thumb, that better qualify them to oversee the construction of a durable bridge in the real world. By analogy, we need more "economic engineers" in future rather than theoreticians to advise governments and business about how the economy works in reality, rather than according to the idealised, orthodox models (the same models, I might add, that failed to allow for the possibility of the major economic crash that we just experienced).
In relation to Ireland, Mr Wolf noted that the interests of taxpayers were "sacrificed" for senior bondholders, seemingly due to pressure from the EU. He described this as "insane" and "immoral" and noted that the blanket guarantee was a "catastrophe" that resulted in Ireland holding a great deal of debt that we shouldn't have. With that said, Mr Wolf did express the view that Ireland's economy was doing better than others, such as Spain, with their unemployment over 25 per cent and youth unemployment over 50 per cent. He also expressed concern about the French economy. Crisis in France would of course strike to the heart of the Euro zone and EU economy, which will accelerate the need for changes to EU-level economic policy.
The question I would then pose is whether the EU is capable of seeking a new paradigm, with a greater role for practical "economic engineers", or whether EU policy (to Ireland's disadvantage) will continue to be dictated by a failed, theoretical economic orthodoxy.
Tuesday 26 February 2013
Ireland Drowning in Private Debt (4 of 4)
Paul Sweeney: Ireland has many core strengths. It has a well-educated workforce, albeit with too many unemployed, skills are being lost, there is high emigration and very high debt, much of the public which was run up as private corporate debt. It one of the most open economies in the world; we export a high proportion of our GDP and these exports are high value added and are largely recession-proof, and include a high proportion of service exports. We are running a balance of payments surplus. The programme of public sector reform is progressing well.
In spite of the severely damaged reputation of Irish business, the World Bank listed Ireland as 9th best place to do business out of 183 countries. Taxes are extremely low on business and employers’ social contributions are amongst the lowest in the world. Ireland has a barrage of state agencies devoted to assisting businesses. The rise in productivity (ULC) and on the much more useful wider definition of competitiveness , Ireland performs very well, though there are issues with our international reputation for business, and also serious problems for domestic firms in access to credit and also due to the collapse in domestic demand. The official “pro-business” culture was so uncritical that it contributed in a major way to the economic collapse and to the collapse of many viable businesses too. That mind-set needs to be addressed.
This relative stability in real incomes, in welfare rates and in public employment is the key to the explanation of why there has been no rioting in Ireland, despite our travails. In the circumstances, these are equitable income and welfare policies.
It is crucial that the core EU economies which are performing well should act in solidarity and not in punishment to the underperforming peripherals.
The best action would be an EU-wide coordinated stimulus. There is no shortage of social and infrastructural needs and refurbishment in Europe. But the cut in the EU Budget last week does not auger well for such intelligent action at EU level. However, large countries may yet take action, individually or in concert.
A Common Fiscal Policy in Europe (and a coherent Banking Union) is key to addressing inequality, sorting out the banks and boosting demand by underwriting an EU-wide stimulus programme. It may begin with a small budget overall, but a small budget in EU terms is still a lot of cash.
It would be preferable to have tax coordination rather than harmonisation where member states may set rates within bands, though a common tax base for companies makes sense in a single market. This means that Ireland’s low Corporation Tax regime should be re-negotiated as part of the deal on the socialised bank debts as we move towards greater fiscal union. The Irish government is making a policy error in its undying defence of its low Corporation Tax rate and against the FTT, while it simultaneously seeks assistance on Ireland’s unsustainable bank debts.
So what can the IMF as a key part of the Troika do to further assist the Irish people?
It is the view of Congress that the IMF has been the least negative member of the Troika in Ireland, with more pragmatic view of what needs to be done. However, there are some issues on labour market “reforms” with which we are unhappy.
It is our impression that the IMF would have insisted that the Irish people should not carry the total burden of the banking adjustment alone. Regrettably, the ECB, while moving considerably from its initial position, has insisted that the Irish Government/taxpayer repay the bank bondholders in full, in order to safeguard the European banking system. Last week’s deal on the promissory notes on the two dead banks, while a great improvement, still means the bondholders are left untouched.
While the EU banking reforms are progressing, it is unclear whether they will go far enough to address the Geithner Doctrine that no big bank must fail nor any bondholder must be left behind. It is vital that the sovereign and public debts are separated and that Europe assists Ireland on its socialised debt. We are being punished for being the first in dealing with our failed banks and for the foolishness of the government which guaranteed all the creditor as well as the depositors of the banks. The people threw that government out for that and for its appalling economic policies, which squandered much of the real sustained progress of the Celtic Tiger period.
Without a significant deal on Ireland’s €64 billion bank debt burden, there is little chance of economic recovery in the near future. Figures from Eurostat show that Ireland has paid more for the bank crisis than any other EU state. So far, the bank bailout has cost us €41 billion, while Germany – with an economy almost 20 times our size – has paid €40 billion. We have also paid more than the UK, France, Portugal and Spain.
The Irish people’s recent experience of capitalism is that when wealthy bankers and bondholders take risks that fail, the public bails them out. Combined with the decline in labour’s share of national income over the past three decades, economic policies and governance must change fundamentally.
While the IMF is not in favour of domestic stimulus, especially in crisis countries, there is a strong case for an EU-wide action for a stimulus. The IMF commendably revised it multipliers in the light of the depth of the recession and other factors and this means that a stimulus in Europe would work every effectively in reducing its vast unemployment of 26.06 million.
However, the lack of interest by the European elite in dealing with the vast level of unemployment in Europe threatens its institutions, including democracy itself.
In spite of the severely damaged reputation of Irish business, the World Bank listed Ireland as 9th best place to do business out of 183 countries. Taxes are extremely low on business and employers’ social contributions are amongst the lowest in the world. Ireland has a barrage of state agencies devoted to assisting businesses. The rise in productivity (ULC) and on the much more useful wider definition of competitiveness , Ireland performs very well, though there are issues with our international reputation for business, and also serious problems for domestic firms in access to credit and also due to the collapse in domestic demand. The official “pro-business” culture was so uncritical that it contributed in a major way to the economic collapse and to the collapse of many viable businesses too. That mind-set needs to be addressed.
This relative stability in real incomes, in welfare rates and in public employment is the key to the explanation of why there has been no rioting in Ireland, despite our travails. In the circumstances, these are equitable income and welfare policies.
It is crucial that the core EU economies which are performing well should act in solidarity and not in punishment to the underperforming peripherals.
The best action would be an EU-wide coordinated stimulus. There is no shortage of social and infrastructural needs and refurbishment in Europe. But the cut in the EU Budget last week does not auger well for such intelligent action at EU level. However, large countries may yet take action, individually or in concert.
A Common Fiscal Policy in Europe (and a coherent Banking Union) is key to addressing inequality, sorting out the banks and boosting demand by underwriting an EU-wide stimulus programme. It may begin with a small budget overall, but a small budget in EU terms is still a lot of cash.
It would be preferable to have tax coordination rather than harmonisation where member states may set rates within bands, though a common tax base for companies makes sense in a single market. This means that Ireland’s low Corporation Tax regime should be re-negotiated as part of the deal on the socialised bank debts as we move towards greater fiscal union. The Irish government is making a policy error in its undying defence of its low Corporation Tax rate and against the FTT, while it simultaneously seeks assistance on Ireland’s unsustainable bank debts.
So what can the IMF as a key part of the Troika do to further assist the Irish people?
It is the view of Congress that the IMF has been the least negative member of the Troika in Ireland, with more pragmatic view of what needs to be done. However, there are some issues on labour market “reforms” with which we are unhappy.
It is our impression that the IMF would have insisted that the Irish people should not carry the total burden of the banking adjustment alone. Regrettably, the ECB, while moving considerably from its initial position, has insisted that the Irish Government/taxpayer repay the bank bondholders in full, in order to safeguard the European banking system. Last week’s deal on the promissory notes on the two dead banks, while a great improvement, still means the bondholders are left untouched.
While the EU banking reforms are progressing, it is unclear whether they will go far enough to address the Geithner Doctrine that no big bank must fail nor any bondholder must be left behind. It is vital that the sovereign and public debts are separated and that Europe assists Ireland on its socialised debt. We are being punished for being the first in dealing with our failed banks and for the foolishness of the government which guaranteed all the creditor as well as the depositors of the banks. The people threw that government out for that and for its appalling economic policies, which squandered much of the real sustained progress of the Celtic Tiger period.
Without a significant deal on Ireland’s €64 billion bank debt burden, there is little chance of economic recovery in the near future. Figures from Eurostat show that Ireland has paid more for the bank crisis than any other EU state. So far, the bank bailout has cost us €41 billion, while Germany – with an economy almost 20 times our size – has paid €40 billion. We have also paid more than the UK, France, Portugal and Spain.
The Irish people’s recent experience of capitalism is that when wealthy bankers and bondholders take risks that fail, the public bails them out. Combined with the decline in labour’s share of national income over the past three decades, economic policies and governance must change fundamentally.
While the IMF is not in favour of domestic stimulus, especially in crisis countries, there is a strong case for an EU-wide action for a stimulus. The IMF commendably revised it multipliers in the light of the depth of the recession and other factors and this means that a stimulus in Europe would work every effectively in reducing its vast unemployment of 26.06 million.
However, the lack of interest by the European elite in dealing with the vast level of unemployment in Europe threatens its institutions, including democracy itself.
Monday 25 February 2013
Ireland Drowning in Private Debt (3 of 4)
Paul Sweeney: Employment is the key indicator of a successful economy. Unemployment is very high at 14.6%. This is up from 4.3% for many years. Employment peaked at 2.1m but is now down to 1.77m. The number of unemployed was 325,000 persons at Q3, 2012.
Emigration is taking the heat of increased unemployment. The number of job losses was 360,000 down from peak in 2007. 87,000 people left Ireland in year to April 2012 and 53,000 entered, leaving a net figure of 34,000.
Labour market participation is down as people are staying at home or in education. A key indicator of unemployment is those who would like to work but who stay in education or at home because they are discouraged workers. The total of those who would like to work was up to 25.6% at end September 2012 as Figure 2 shows.
FIGURE 2:
Source: CSO, Indicators of Potential Labour Supply in QNHS QNQ32
We have seen that industrial employment has been in decline each year since the Crash of 2008 and it has not stabilised yet. If we are lucky, we may stabilise on job losses in 2013.
However, the real issue here and in Europe is that there is a growth of precarious employment, as the following graph (Fig 3) shows. As full time jobs declined – rapidly and by 360,000 since peak in 2008 – there was a rise in part time employment. Indeed, one could believe that many once full-time jobs had become precarious jobs. It can be seen that the rise in part time jobs was around 15 per cent while full time jobs fell by over 21 per cent.
FIGURE 3: Growth in GDP, GNP, Full-Time & Precarious Employment
Source: CSO National A/Cs & QNHS
This growth of long term unemployment is illustrated in the following graph.
FIGURE 4: Growth in Long Term Unemployment, 2007-12
Source: CSO & M Collins, NERI
The future outlook is hardly encouraging. It appears to be for more or less jobless growth, according to official data including the IMF as Table 1 below shows:
TABLE 1: Unemployment Projections and Estimates of the Unemployed, 2012-2017
Source: NERI QEO Autumn (2012:9) and M Collin’s calculations.
Note: Estimate assumes the labour force remains constant to 2017 at the average level for the four quarters of 2011 (2,113,975 individuals).
The key issue is how are we dealing with the unemployment problem? The shift to active labour market policies is welcome, but we in the unions constantly ask, what is the point in training people when there are few jobs? We are constantly told by workers who have been trained that it is really demoralising when they end up with no jobs after “training”.
Policy should be informed by the existing situation, its likely duration and the composition of the workforce. All economic forecasts in recent times do appear to be overly-optimistic and that should inform a realistic outlook on employment.
Figure 5 below shows that the jobs being created and found by young people in Europe are not exactly high-paying, with most jobs being in catering, shop work, personal care and domestics.
FIGURE 5:
Source: EU Vacancy Monitor Jan 2012
In 2010, the latest data available, on average approximately 4.9 million people aged between 18 and 29 found a job in the EU27. Interestingly, the top four occupations for young people in 2010 were the same as for all age categories. While these jobs have relatively ease of entry and so offer prospects for new entrants (youth) to the labour market, they are not the best jobs. Significantly, 23 of the 25 top jobs for young people were also in the top 25 occupations in terms of job-finders for all age categories.
An important indicator is the job vacancy rate. The chart below (Figure 6) show that there are 7.4 unemployed per job vacancy in the EU27, but in Ireland, there are 31 unemployed. It is not as bad as Portugal, Greece, Spain and Latvia, but this scale of unemployment is at a dangerous level.
FIGURE 6: Vacancy Rate in European Countries 2010
If all the jobs were filled instantly, 30 of the 31 in Ireland would still be unemployed; i.e. there are so few jobs that no amount of training will have a significant effect. This illustrates the depth of the crisis; it would be different if we were close to full employment.
In conclusion, this indicator of growth and employment reinforces the view that it is demand which is required.
Emigration is taking the heat of increased unemployment. The number of job losses was 360,000 down from peak in 2007. 87,000 people left Ireland in year to April 2012 and 53,000 entered, leaving a net figure of 34,000.
Labour market participation is down as people are staying at home or in education. A key indicator of unemployment is those who would like to work but who stay in education or at home because they are discouraged workers. The total of those who would like to work was up to 25.6% at end September 2012 as Figure 2 shows.
FIGURE 2:
Source: CSO, Indicators of Potential Labour Supply in QNHS QNQ32
We have seen that industrial employment has been in decline each year since the Crash of 2008 and it has not stabilised yet. If we are lucky, we may stabilise on job losses in 2013.
However, the real issue here and in Europe is that there is a growth of precarious employment, as the following graph (Fig 3) shows. As full time jobs declined – rapidly and by 360,000 since peak in 2008 – there was a rise in part time employment. Indeed, one could believe that many once full-time jobs had become precarious jobs. It can be seen that the rise in part time jobs was around 15 per cent while full time jobs fell by over 21 per cent.
FIGURE 3: Growth in GDP, GNP, Full-Time & Precarious Employment
Source: CSO National A/Cs & QNHS
This growth of long term unemployment is illustrated in the following graph.
FIGURE 4: Growth in Long Term Unemployment, 2007-12
Source: CSO & M Collins, NERI
The future outlook is hardly encouraging. It appears to be for more or less jobless growth, according to official data including the IMF as Table 1 below shows:
TABLE 1: Unemployment Projections and Estimates of the Unemployed, 2012-2017
Source: NERI QEO Autumn (2012:9) and M Collin’s calculations.
Note: Estimate assumes the labour force remains constant to 2017 at the average level for the four quarters of 2011 (2,113,975 individuals).
The key issue is how are we dealing with the unemployment problem? The shift to active labour market policies is welcome, but we in the unions constantly ask, what is the point in training people when there are few jobs? We are constantly told by workers who have been trained that it is really demoralising when they end up with no jobs after “training”.
Policy should be informed by the existing situation, its likely duration and the composition of the workforce. All economic forecasts in recent times do appear to be overly-optimistic and that should inform a realistic outlook on employment.
Figure 5 below shows that the jobs being created and found by young people in Europe are not exactly high-paying, with most jobs being in catering, shop work, personal care and domestics.
FIGURE 5:
Source: EU Vacancy Monitor Jan 2012
In 2010, the latest data available, on average approximately 4.9 million people aged between 18 and 29 found a job in the EU27. Interestingly, the top four occupations for young people in 2010 were the same as for all age categories. While these jobs have relatively ease of entry and so offer prospects for new entrants (youth) to the labour market, they are not the best jobs. Significantly, 23 of the 25 top jobs for young people were also in the top 25 occupations in terms of job-finders for all age categories.
An important indicator is the job vacancy rate. The chart below (Figure 6) show that there are 7.4 unemployed per job vacancy in the EU27, but in Ireland, there are 31 unemployed. It is not as bad as Portugal, Greece, Spain and Latvia, but this scale of unemployment is at a dangerous level.
FIGURE 6: Vacancy Rate in European Countries 2010
If all the jobs were filled instantly, 30 of the 31 in Ireland would still be unemployed; i.e. there are so few jobs that no amount of training will have a significant effect. This illustrates the depth of the crisis; it would be different if we were close to full employment.
In conclusion, this indicator of growth and employment reinforces the view that it is demand which is required.
Friday 22 February 2013
Ireland and the future of the European Union
Tom McDonnell: Presentation to the Oireachtas Joint Committee on European Union Affairs, Thursday 21st February 2013: “Ireland and the future of the European Union” National Debate 2013
It is important to consider the implications for Ireland of increasing financial, budgetary, and economic policy integration within the European Union. But what will this integration look like? The answer to that question depends on the changing structure of the Economic and Monetary Union (EMU). We know that EMU as constructed was fragile, incomplete, and highly flawed:
To understand what EMU will look like in ten years’ time we must understand what the different solutions to these problems look like.
We have already seen a number of official policy responses and changes (or proposed changes) to EMU in recent months. These include:
It is often forgotten that the historical rationale for a central bank was not to stabilise prices by controlling inflation, but to stabilise the entire economic system itself by providing backstop or ‘last resort’ liquidity to banks and to sovereigns. The OMT initiative was therefore a crucial step and reflects the critical need for the Euro zone to have a Lender of Last Resort (LOLR) for sovereigns – for that is precisely what the OMT represents. The announcement and formulation of the OMT in August and September 2012 was when the Euro was saved. The detail of how each measure is implemented will be very important.
But this set of measures remains critically incomplete. Little has been done to ease the growth and employment crisis. Pro-cyclical policies of internal devaluation have taken hold in the periphery. These policies were undertaken to deal with fiscal and competitiveness imbalances but have not been matched by countervailing measures in the core. The overall effect has been ‘deflationary’ (i.e. it has caused economies to contract rather than grow). This has exacerbated and elongated the jobs and growth crisis in Europe.
In the medium term, a permanent mechanism is needed so that the so-called ‘multiple equilibria problem’ of sovereign borrowing costs spiralling out of control is eliminated for any state showing a willingness to pursue a sustainable fiscal path. Different versions of Eurobonds have become fashionable as an idea. But moral hazard concerns mean they are not the solution. A better solution would be to assign a banking licence to a special purpose vehicle, for example the ESM, and then to use this vehicle as a de facto conditional Lender of Last Resort for sovereigns. This would be a key institutional development.
How can we break the link between sovereigns and banks? The next few years will see the gradual construction of a banking union for the Euro zone, and this of course will have major implications for the EU as a whole. A centralised banking union is a necessary component of any viable monetary union. In practice this means independent centralised supervision, regulation and resolution of financial institutions at the Euro zone level. This will have major implications for member states. In addition, protecting taxpayers and depositors in the future, while also dealing with capital flight, will require a centralised deposit insurance scheme modelled along the lines of the FDIC (Federal Deposit Insurance Corporation) in the United States. This would end the differentiation between banks in the periphery and the core and help create a genuine banking union.
So we are looking at further integration in the form of a Euro zone banking union and possibly the creation of a Euro zone lender of last resort.
A more fundamental question is whether Euro zone member states can align monetary and fiscal policies to the goals of employment and growth. The answer to that question is yes. But only at the level of the Euro zone itself. The broad framework required involves intergovernmental coordination of policies to prevent competitiveness and domestic fiscal imbalances from growing too large. An example of this is the new European semester. In order to help offset regional recessions and asymmetric shocks, such a framework will require a centralised fiscal fund. This is because member states have lost much of their power to use their own budgets as a countercyclical ‘automatic stabiliser’, while also losing control over other macroeconomic policy levers such as exchange rate policy and monetary policy. These lost policy tools need to be replaced in some form.
Safeguarding democratic legitimacy and accountability within a full fiscal union would require a fundamental overhaul of the treaties and far greater power for the European Parliament and its committees.
It is important to consider the implications for Ireland of increasing financial, budgetary, and economic policy integration within the European Union. But what will this integration look like? The answer to that question depends on the changing structure of the Economic and Monetary Union (EMU). We know that EMU as constructed was fragile, incomplete, and highly flawed:
- There was no centralised authority responsible for the supervision, regulation and, if necessary, resolution, of financial institutions
- There was no fiscal transfer mechanism to deal with asymmetric shocks; no ‘automatic stabilisers’ at Euro zone level to replace those lost at the domestic level; and no mechanism for offsetting competitive imbalances or for preventing them in the first place
- There was no Lender of Last Resort for member states and therefore no ‘circuit breaker’ to protect against negative feedback loops of spiralling borrowing costs. Member states were at the whim of massive and destabilising credit inflows and outflows
To understand what EMU will look like in ten years’ time we must understand what the different solutions to these problems look like.
We have already seen a number of official policy responses and changes (or proposed changes) to EMU in recent months. These include:
- European Central Bank (ECB) interventions in the secondary bond markets through their Securities Market Programme (SMP) and through their new Outright Monetary Transactions (OMT) initiative. (In other words, the ECB has been indirectly buying government bonds through the SMP and has agreed to do ‘whatever it takes’ through the OMT);
- Special purpose vehicles have been created in the form of the EFSF and ESM (European Financial Stability Facility and European Stability Mechanism respectively) to preserve the stability of the Euro by providing emergency funding lines to sovereigns;
- Numerous initiatives including bank recapitalisations and cheap liquidity have sought to stabilise the European banking system;
- The parameters of a Single Supervisory Mechanism (SSM) have been agreed and from the start of 2014 the ECB will be legally responsible for supervising 6,000 banks.
It is often forgotten that the historical rationale for a central bank was not to stabilise prices by controlling inflation, but to stabilise the entire economic system itself by providing backstop or ‘last resort’ liquidity to banks and to sovereigns. The OMT initiative was therefore a crucial step and reflects the critical need for the Euro zone to have a Lender of Last Resort (LOLR) for sovereigns – for that is precisely what the OMT represents. The announcement and formulation of the OMT in August and September 2012 was when the Euro was saved. The detail of how each measure is implemented will be very important.
But this set of measures remains critically incomplete. Little has been done to ease the growth and employment crisis. Pro-cyclical policies of internal devaluation have taken hold in the periphery. These policies were undertaken to deal with fiscal and competitiveness imbalances but have not been matched by countervailing measures in the core. The overall effect has been ‘deflationary’ (i.e. it has caused economies to contract rather than grow). This has exacerbated and elongated the jobs and growth crisis in Europe.
In the medium term, a permanent mechanism is needed so that the so-called ‘multiple equilibria problem’ of sovereign borrowing costs spiralling out of control is eliminated for any state showing a willingness to pursue a sustainable fiscal path. Different versions of Eurobonds have become fashionable as an idea. But moral hazard concerns mean they are not the solution. A better solution would be to assign a banking licence to a special purpose vehicle, for example the ESM, and then to use this vehicle as a de facto conditional Lender of Last Resort for sovereigns. This would be a key institutional development.
How can we break the link between sovereigns and banks? The next few years will see the gradual construction of a banking union for the Euro zone, and this of course will have major implications for the EU as a whole. A centralised banking union is a necessary component of any viable monetary union. In practice this means independent centralised supervision, regulation and resolution of financial institutions at the Euro zone level. This will have major implications for member states. In addition, protecting taxpayers and depositors in the future, while also dealing with capital flight, will require a centralised deposit insurance scheme modelled along the lines of the FDIC (Federal Deposit Insurance Corporation) in the United States. This would end the differentiation between banks in the periphery and the core and help create a genuine banking union.
So we are looking at further integration in the form of a Euro zone banking union and possibly the creation of a Euro zone lender of last resort.
A more fundamental question is whether Euro zone member states can align monetary and fiscal policies to the goals of employment and growth. The answer to that question is yes. But only at the level of the Euro zone itself. The broad framework required involves intergovernmental coordination of policies to prevent competitiveness and domestic fiscal imbalances from growing too large. An example of this is the new European semester. In order to help offset regional recessions and asymmetric shocks, such a framework will require a centralised fiscal fund. This is because member states have lost much of their power to use their own budgets as a countercyclical ‘automatic stabiliser’, while also losing control over other macroeconomic policy levers such as exchange rate policy and monetary policy. These lost policy tools need to be replaced in some form.
Safeguarding democratic legitimacy and accountability within a full fiscal union would require a fundamental overhaul of the treaties and far greater power for the European Parliament and its committees.
However, what I have described is very far from a complete fiscal union. While greater integration and coordination between EU member states is inevitable under EMU, full fiscal union is unnecessary.
It is important to note that in parallel to the formal development of the EMU, other more ad hoc forms of integration will occur. A good example is the Financial Transaction Tax (FTT) – also called the Tobin Tax or Robin Hood tax – which has been signed up to by 11 Euro zone member states, but not Ireland. The European Commission tabled its proposals on 14th February of this year, confirming a levy of 0.1% for shares and bonds, and 0.01% for derivatives. The FTT is an example of the enhanced co-operation procedure permitted under the existing EU treaties. These types of procedure may become more common in the future as it becomes increasingly difficult to reach agreement between the soon-to-be 28 EU member states. However, they also represent the risk of a fragmentation of economic policy across the EU, with multi-lateral agreements replacing common EU-wide policies.
The attitude and position of the United Kingdom within the EU is of great economic significance for Ireland. It seems unlikely that the UK will actually leave the EU but that is a political question perhaps better answered by my colleague. I am limiting my response to the likely consequences of particular outcomes rather than speculate on the future of the UK’s relationship with the rest of Europe.
In sum, this is a critical decade for the European project. Catastrophic errors were made in the design of the EMU. Economic history and economic theory were both ignored. I have sketched a brief outline of the type of policies needed to create a durable EMU.
It is important to note that in parallel to the formal development of the EMU, other more ad hoc forms of integration will occur. A good example is the Financial Transaction Tax (FTT) – also called the Tobin Tax or Robin Hood tax – which has been signed up to by 11 Euro zone member states, but not Ireland. The European Commission tabled its proposals on 14th February of this year, confirming a levy of 0.1% for shares and bonds, and 0.01% for derivatives. The FTT is an example of the enhanced co-operation procedure permitted under the existing EU treaties. These types of procedure may become more common in the future as it becomes increasingly difficult to reach agreement between the soon-to-be 28 EU member states. However, they also represent the risk of a fragmentation of economic policy across the EU, with multi-lateral agreements replacing common EU-wide policies.
The attitude and position of the United Kingdom within the EU is of great economic significance for Ireland. It seems unlikely that the UK will actually leave the EU but that is a political question perhaps better answered by my colleague. I am limiting my response to the likely consequences of particular outcomes rather than speculate on the future of the UK’s relationship with the rest of Europe.
In sum, this is a critical decade for the European project. Catastrophic errors were made in the design of the EMU. Economic history and economic theory were both ignored. I have sketched a brief outline of the type of policies needed to create a durable EMU.
Thursday 21 February 2013
The Star Pupil
Social Europe Journal has a caustic analysis of the narrative that Ireland has been in some way a star pupil and success story here.
Meanwhile, starting on page 181 of this compendium, you can find Daniel Finn's critique of the Irish policy response to the economic crisis.
Meanwhile, starting on page 181 of this compendium, you can find Daniel Finn's critique of the Irish policy response to the economic crisis.
GDP Growth and Wellbeing: what is the relationship between economic growth and welfare in Ireland?
Guest Post by EilÃs Lawlor: It is sometimes argued that under conditions of austerity and economic hardship discussions of issues relating to quality of life and wellbeing are inappropriate. And there is something in this. With the figure for those at risk of poverty in Ireland continuing to rise, you could be forgiven for arguing that the objective of raising material incomes should be centre-stage.
Even if you accept the criticisms of GPD as a measure of progress, you may also think that whilst an over-focus on GDP got us into this mess, a relentless emphasis on raising it again is the only way to get us out of it. After all, it would raise investor confidence, increase tax revenue and reduce unemployment. Yet the Irish economy has begun to grow, and Ireland continues to be regularly cited as a success story of austerity.
Reflecting on this uptick in growth last year, I made the case that that GDP growth might not be the answer to our problems in spite of the recession. Instead, I argued that Ireland remains a stark reminder of where an emphasis on growth at all costs, and a systematic sidelining of quality of life issues can lead. The legacy of chaotic planning, ghost estates, empty motorways, poor public transport, investment-starved public services, and a weak banking sector - all products of previous growth agenda - cannot be erased by a few percentage points of positive growth. Neither is growth as measured by GDP necessarily the solution to rising debt or lower living standards. It simply creates a false choice between material and non-material ends.
It is to investigate these issues further that I have begun a three-year research project at the University of Sussex in the UK with a particular focus on the relationship between economic growth and welfare in Ireland. The aim is to build an index of progress and compare it to movements in GDP over the past twenty years to look at where GDP predicts positive change and where it does not. The first step in constructing this index is to find out what kinds of things matter to people. To this end I am surveying people about the things they value in life. You can take the survey here. The results will be posted on the same space as they emerge.
I will post again when the analysis is completed later in the year. In the meantime, you can read more about the project here.
Even if you accept the criticisms of GPD as a measure of progress, you may also think that whilst an over-focus on GDP got us into this mess, a relentless emphasis on raising it again is the only way to get us out of it. After all, it would raise investor confidence, increase tax revenue and reduce unemployment. Yet the Irish economy has begun to grow, and Ireland continues to be regularly cited as a success story of austerity.
Reflecting on this uptick in growth last year, I made the case that that GDP growth might not be the answer to our problems in spite of the recession. Instead, I argued that Ireland remains a stark reminder of where an emphasis on growth at all costs, and a systematic sidelining of quality of life issues can lead. The legacy of chaotic planning, ghost estates, empty motorways, poor public transport, investment-starved public services, and a weak banking sector - all products of previous growth agenda - cannot be erased by a few percentage points of positive growth. Neither is growth as measured by GDP necessarily the solution to rising debt or lower living standards. It simply creates a false choice between material and non-material ends.
It is to investigate these issues further that I have begun a three-year research project at the University of Sussex in the UK with a particular focus on the relationship between economic growth and welfare in Ireland. The aim is to build an index of progress and compare it to movements in GDP over the past twenty years to look at where GDP predicts positive change and where it does not. The first step in constructing this index is to find out what kinds of things matter to people. To this end I am surveying people about the things they value in life. You can take the survey here. The results will be posted on the same space as they emerge.
I will post again when the analysis is completed later in the year. In the meantime, you can read more about the project here.
Ireland Drowning in Private Debt (2 of 4)
Paul Sweeney: We will demonstrate why austerity is failing by looking at key economic indicators, with a focus on the most important indicator, employment, in the next post. The bailout package made economic recovery more difficult than it needed to have been. The level of the adjustment and the mix of the cuts and taxes (2:1) is wrong and should be reversed. The deflationary impacts of the measures in the package are such that growth has been negligible and this not largely due to the recession in Europe.
However, those economic factors which are positive will be examined first.
The deal on the Promissory Notes agreed on 7th February 2013 will be of significant benefit to Ireland. Secondly, the Government is on track to meet its fiscal deficit targets so far. The key and almost singular area of interest to the Troika is that Ireland meets its fiscal target of 3% by 2015. The Irish government has met all targets set out by the Troikas in each review since end 2010. To achieve this target €24bn has been taken out of the economy by end 2012 and a further €9bn will be taken out in the next three years. This is equivalent to cutting over a quarter of our GNP.
Thirdly, Irish exports are holding up and the Balance of Payment is in surplus. Exports are driving what little growth we have. After six quarterly declines to end 2009, exports have been rising. This is not a great achievement as Ireland’s exports are largely non-cyclical, being ICT, pharma and food. Labour costs in many exports are not significant. However, imports are down (by 25% from peak) as people have little to spend on them. The Balance of Payments are now healthy with a big surplus of exports over imports. But it is due in part to imports collapsing, due to lack of domestic demand.
A fourth positive factor is that the rate of interest on 10 year bonds is down and will stabilise after the deal on the Promissory Notes.
Productivity is also up substantially, i.e. unit labour costs were down by 23% since mid 2008 (real HCI) and this has been achieved without a fall in averaging hourly earnings for most workers (i.e. it was achieved without a painful internal devaluation for labour). Thus it is due to a) less people at work; b) better use of capital and labour; c) to the decline of low productivity construction and on the other side to d) the dependence on apparently high productivity multinationals, due perhaps in some measure to transfer pricing.
The fifth positive factor is that the Purchasing Managers index continued to rise. Sixthly, the level of inflation at end 2012 was slightly lower than it was in 2008. Prices fell by -4.5% in 2009 and again by a lesser -1% in 2010 but rose since then. Prices are rising by 1.2% now and are likely to pick up.
Moving from the positive to neutral we look at incomes. In spite of two cuts in the pay of all public servants averaging 14%, average hourly earnings in the total economy have not fallen in real terms. It was seen that the previous government tried an experiment in Internal Devaluation. It cut public service wages and the minimum wage by a massive 12%, expecting that private sector wages would follow.
This did not happen and private sector earnings have been relatively stable. About 24% of employees have had pay rises, c. 22% have had cuts and most have had no or little change in hourly earnings. The number of hours worked has dropped and so weekly earnings including overtime and other premium payments had fallen slightly. However, the latest data saw weekly earnings rise by 1.1% in the year to Q3, 2012. We have seen that productivity has risen substantially since the Crash of 2008.
A recent study of how employers dealt with the total wage bill found that there had been cuts, but “however, these cuts were primarily achieved though employment reductions with relatively low contributions at the aggregate level from changes in average hourly earnings and average weekly paid hours.”
This relative stability in real incomes of those who kept their jobs since the Crash of 2008 has also been extremely important in ensuing that the huge collapse in domestic demand – of one quarter in five years – was not worse. This is because averagely paid workers generally spend most of their incomes. The last government also cut the minimum wage by 12 per cent but the new government reversed this immediately. It also did not cut welfare rates and there is a deal with the public service whereby there will be no further pay cuts (two of which had averaged 14 per cent) provided there is support for substantial change, which is occurring.
These are all important indicators of performance, but others factors are far less impressive.
Economic Growth
The economic growth figures, either GDP or GNP, have been scraping along the bottom for some years, which is better than the collapse. The next chart (Fig.1) shows the fall in domestic demand, which is so important for employment. It is still in decline.
FIGURE 1: Domestic Demand has COllapsed
Source: CSO, National Income A/Cs.
Most conservatives have focused on the one positive economic development which is the performance of Irish exports. Exports have performed very well, but exports alone are not sufficient to pull the economy out of recession when domestic demand is being driven down by domestic economic policies. Without growth there will be no new jobs. Without new jobs, generating incomes, taxation and confidence, the burden of austerity could overwhelm us.
The large gap between Ireland’s GNP and GDP is growing and rose from 14/16% to 27% of GDP. Thus GDP appears to be faring much better but it is a poorer indicator of welfare for Ireland.
A key part of the lack of demand is due to the flatness of wages. The reversal of the cut in the Minimum Wage did help. The government sought “reforms” of wage setting mechanisms the Employment Regulation Orders (EROs) and Registered Employment Agreements (REAs), and instructed the Labour Court to undertake the review with an academic economist who was to assess their impact on jobs. He found that most had minimum impact on jobs. So this dialogue was reasonable.
However, some of Ireland’s wealthiest employers in the fast food industry, the Quick Food Alliance , successfully fought a case to the High Court to abolish the Joint Labour Committee in the fast food industry and Employment Regulation Order of the Labour Court which had set the minimum pay and conditions of workers outside Dublin, as unconstitutional. The law courts are blunt instrument in dealing with industrial relations as the outcome is generally stark. The effect of the judgement is that while all JLCs remained in existence their EROs became unenforceable and ceased to apply. As a result the National Employment Rights Authority (NERA) could not enforce the minimum pay and conditions of employment prescribed in EROs in force at the time of the High Court decision. The Government amended the legislation in response to the court ruling. A review of the JLCs is taking place now and the unions await the outcome before they determine if the legislation meets the requirements of workers in these sectors.
Public and Personal Debt
The socialisation of the bank debt has pushed Public debt up and it was 118% GDP at end 2012 and will peak at around 121% in 2013. On top of high public debt, private debt is very high too. Household net worth has fallen by 37.7 per cent since the peak in Q2, 2007. Household debt is at €180bn or €39,999 per household. As a ratio of disposable income, it stands at 210 per cent thought it has reduced from its peak at 220 per cent in Q3, 2011.
Very Low Investment
A real worry must be the extremely low level of investment in Ireland. Total Irish investment is the lowest in the EU27 member states in 2012 at around 9 per cent of GDP compared to an average of 18.5 per cent. Ireland is even below Greece at 12 per cent. It may fall further in 2013 with the 2013 Budget cutting the Capital Programme by a further €0.55bn, though the Central bank thinks investment will begin to grow - but not until 2014. This very low level of investment in Ireland does not auger well for the future.
However, those economic factors which are positive will be examined first.
The deal on the Promissory Notes agreed on 7th February 2013 will be of significant benefit to Ireland. Secondly, the Government is on track to meet its fiscal deficit targets so far. The key and almost singular area of interest to the Troika is that Ireland meets its fiscal target of 3% by 2015. The Irish government has met all targets set out by the Troikas in each review since end 2010. To achieve this target €24bn has been taken out of the economy by end 2012 and a further €9bn will be taken out in the next three years. This is equivalent to cutting over a quarter of our GNP.
Thirdly, Irish exports are holding up and the Balance of Payment is in surplus. Exports are driving what little growth we have. After six quarterly declines to end 2009, exports have been rising. This is not a great achievement as Ireland’s exports are largely non-cyclical, being ICT, pharma and food. Labour costs in many exports are not significant. However, imports are down (by 25% from peak) as people have little to spend on them. The Balance of Payments are now healthy with a big surplus of exports over imports. But it is due in part to imports collapsing, due to lack of domestic demand.
A fourth positive factor is that the rate of interest on 10 year bonds is down and will stabilise after the deal on the Promissory Notes.
Productivity is also up substantially, i.e. unit labour costs were down by 23% since mid 2008 (real HCI) and this has been achieved without a fall in averaging hourly earnings for most workers (i.e. it was achieved without a painful internal devaluation for labour). Thus it is due to a) less people at work; b) better use of capital and labour; c) to the decline of low productivity construction and on the other side to d) the dependence on apparently high productivity multinationals, due perhaps in some measure to transfer pricing.
The fifth positive factor is that the Purchasing Managers index continued to rise. Sixthly, the level of inflation at end 2012 was slightly lower than it was in 2008. Prices fell by -4.5% in 2009 and again by a lesser -1% in 2010 but rose since then. Prices are rising by 1.2% now and are likely to pick up.
Moving from the positive to neutral we look at incomes. In spite of two cuts in the pay of all public servants averaging 14%, average hourly earnings in the total economy have not fallen in real terms. It was seen that the previous government tried an experiment in Internal Devaluation. It cut public service wages and the minimum wage by a massive 12%, expecting that private sector wages would follow.
This did not happen and private sector earnings have been relatively stable. About 24% of employees have had pay rises, c. 22% have had cuts and most have had no or little change in hourly earnings. The number of hours worked has dropped and so weekly earnings including overtime and other premium payments had fallen slightly. However, the latest data saw weekly earnings rise by 1.1% in the year to Q3, 2012. We have seen that productivity has risen substantially since the Crash of 2008.
A recent study of how employers dealt with the total wage bill found that there had been cuts, but “however, these cuts were primarily achieved though employment reductions with relatively low contributions at the aggregate level from changes in average hourly earnings and average weekly paid hours.”
This relative stability in real incomes of those who kept their jobs since the Crash of 2008 has also been extremely important in ensuing that the huge collapse in domestic demand – of one quarter in five years – was not worse. This is because averagely paid workers generally spend most of their incomes. The last government also cut the minimum wage by 12 per cent but the new government reversed this immediately. It also did not cut welfare rates and there is a deal with the public service whereby there will be no further pay cuts (two of which had averaged 14 per cent) provided there is support for substantial change, which is occurring.
These are all important indicators of performance, but others factors are far less impressive.
Economic Growth
The economic growth figures, either GDP or GNP, have been scraping along the bottom for some years, which is better than the collapse. The next chart (Fig.1) shows the fall in domestic demand, which is so important for employment. It is still in decline.
FIGURE 1: Domestic Demand has COllapsed
Source: CSO, National Income A/Cs.
Most conservatives have focused on the one positive economic development which is the performance of Irish exports. Exports have performed very well, but exports alone are not sufficient to pull the economy out of recession when domestic demand is being driven down by domestic economic policies. Without growth there will be no new jobs. Without new jobs, generating incomes, taxation and confidence, the burden of austerity could overwhelm us.
The large gap between Ireland’s GNP and GDP is growing and rose from 14/16% to 27% of GDP. Thus GDP appears to be faring much better but it is a poorer indicator of welfare for Ireland.
A key part of the lack of demand is due to the flatness of wages. The reversal of the cut in the Minimum Wage did help. The government sought “reforms” of wage setting mechanisms the Employment Regulation Orders (EROs) and Registered Employment Agreements (REAs), and instructed the Labour Court to undertake the review with an academic economist who was to assess their impact on jobs. He found that most had minimum impact on jobs. So this dialogue was reasonable.
However, some of Ireland’s wealthiest employers in the fast food industry, the Quick Food Alliance , successfully fought a case to the High Court to abolish the Joint Labour Committee in the fast food industry and Employment Regulation Order of the Labour Court which had set the minimum pay and conditions of workers outside Dublin, as unconstitutional. The law courts are blunt instrument in dealing with industrial relations as the outcome is generally stark. The effect of the judgement is that while all JLCs remained in existence their EROs became unenforceable and ceased to apply. As a result the National Employment Rights Authority (NERA) could not enforce the minimum pay and conditions of employment prescribed in EROs in force at the time of the High Court decision. The Government amended the legislation in response to the court ruling. A review of the JLCs is taking place now and the unions await the outcome before they determine if the legislation meets the requirements of workers in these sectors.
Public and Personal Debt
The socialisation of the bank debt has pushed Public debt up and it was 118% GDP at end 2012 and will peak at around 121% in 2013. On top of high public debt, private debt is very high too. Household net worth has fallen by 37.7 per cent since the peak in Q2, 2007. Household debt is at €180bn or €39,999 per household. As a ratio of disposable income, it stands at 210 per cent thought it has reduced from its peak at 220 per cent in Q3, 2011.
Very Low Investment
A real worry must be the extremely low level of investment in Ireland. Total Irish investment is the lowest in the EU27 member states in 2012 at around 9 per cent of GDP compared to an average of 18.5 per cent. Ireland is even below Greece at 12 per cent. It may fall further in 2013 with the 2013 Budget cutting the Capital Programme by a further €0.55bn, though the Central bank thinks investment will begin to grow - but not until 2014. This very low level of investment in Ireland does not auger well for the future.
Wednesday 20 February 2013
The Unhelpful Mister Rehn
Tom McDonnell: Mr. Rehn's recent open letter on fiscal multipliers; the effects of discretionary fiscal consolidation; and the relevance of economic theory and evidence, was a truly dispiriting and perplexing intervention.
It is easy to understand why the handling of the Euro crisis has been such an unmitigated shambles with people like Mr. Rehn running the show. We deserve better.
The Commissioner is taken to task by Jonathan Portes here and by Karl Whelan here. Both contributions are well worth a read.
Confidence indeed.
It is easy to understand why the handling of the Euro crisis has been such an unmitigated shambles with people like Mr. Rehn running the show. We deserve better.
The Commissioner is taken to task by Jonathan Portes here and by Karl Whelan here. Both contributions are well worth a read.
Confidence indeed.
Tuesday 19 February 2013
Ireland Drowning in Private Debt (1 of 4)
Paul Sweeney: There is little or no recovery after five years of austerity in Ireland, especially when judged by the key factor of unemployment. Ireland does appear to be on target to reduce its budget deficit to 3 per cent. But at great cost to the rest of the economy and to society.
Last week’s deal by the Irish Government on the private bank Promissory Notes will give a boost to confidence in Ireland. However, it was a deal which should never have had to be done and it should not have totally protected the private bank creditors of the two dead banks, Anglo Irish and Irish Nationwide. There should have been burden-sharing by the private creditors who were stupid enough to lend to these banks.
Ireland has institutionalised the “Geithner Doctrine” which is that top banks must not fail and that no bondholder will be left behind. The Geithner Doctrine is deep-rooted in EU governments, as Ireland has shown.
Leading economist Morgan Kelly said that in December 2010, “at a conference call with the G7 finance ministers, the haircut (of Irish bank bondholders) was vetoed by US treasury secretary Timothy Geithner who, as his payment of $13 billion from government-owned AIG to Goldman Sachs showed, believes that bankers take priority over taxpayers. The only one to speak up for the Irish was UK chancellor George Osborne, but Geithner, as always, got his way. An instructive, if painful, lesson in the extent of US soft power, and in who our friends really are” Irish Times, 11 May, 2011. Geithner was worried that if Ireland refused to repay bank bondholders then, according the UK Daily Telegraph (10 June 2011), “that could have spread contagion to the entire European system, to which American-backed “credit default swaps” were exposed to the tune of €120bn.”
The Minister for Finance used an elegant metaphor in explaining his deal on the Promissory Notes. He talked of the mortgage on his own home and said he had turned a harsh term loan into a long term mortgage and by the time it will be fully repaid, it will not be so costly. What is missing is that he at least has a home. The Irish citizens get little or nothing for their payments.
Ireland will now get up to 40 years to repay the debts of the private banks and at lower interest rates. But our 1.8 million at work will repay over €35bn, which is more than the total tax paid last year (€33.7bn) in Ireland. For this we will get absolutely nothing in return – not one school building, not one teacher nor even a hospital bed. Such deal may satisfy the ECB and the EU, but it undermines respect for democracy.
Ireland‘s economic collapse in 2008 was not due to poor competitiveness, nor to public sector profligacy, but to gross irresponsibility by a small elite in the private sector, operating within what had become an ultra-liberal economic system. It was the private banking collapse, which the government foolishly under-wrote which brought Ireland down. Commissioner Rehn demanded, in Latin, “pacta sunt servanda” and in English that the Irish taxpayers “respect your commitments and obligations.”
But these debts are not ours, but those of the private defunct banks, which our sacked previous government guaranteed, in our name, without our consent. Prior to this, European banks queued up to lend to our reckless banks, while the ECB looked on benignly. Tax policy – cutting direct taxes on incomes and profits, tax breaks especially for property investment and tax-shifting – also contributed substantially to Ireland’s current economic crisis. The third factor was de-regulation.
This series of four blog posts results from Paul Sweeney's presentation to the IMF in Washington, February 2013. Three case studies were discussed (Portugal, Romania and Ireland). This was part of a wider meeting between the International Trade Union Confederation, the IMF and the World Bank
Last week’s deal by the Irish Government on the private bank Promissory Notes will give a boost to confidence in Ireland. However, it was a deal which should never have had to be done and it should not have totally protected the private bank creditors of the two dead banks, Anglo Irish and Irish Nationwide. There should have been burden-sharing by the private creditors who were stupid enough to lend to these banks.
Ireland has institutionalised the “Geithner Doctrine” which is that top banks must not fail and that no bondholder will be left behind. The Geithner Doctrine is deep-rooted in EU governments, as Ireland has shown.
Leading economist Morgan Kelly said that in December 2010, “at a conference call with the G7 finance ministers, the haircut (of Irish bank bondholders) was vetoed by US treasury secretary Timothy Geithner who, as his payment of $13 billion from government-owned AIG to Goldman Sachs showed, believes that bankers take priority over taxpayers. The only one to speak up for the Irish was UK chancellor George Osborne, but Geithner, as always, got his way. An instructive, if painful, lesson in the extent of US soft power, and in who our friends really are” Irish Times, 11 May, 2011. Geithner was worried that if Ireland refused to repay bank bondholders then, according the UK Daily Telegraph (10 June 2011), “that could have spread contagion to the entire European system, to which American-backed “credit default swaps” were exposed to the tune of €120bn.”
The Minister for Finance used an elegant metaphor in explaining his deal on the Promissory Notes. He talked of the mortgage on his own home and said he had turned a harsh term loan into a long term mortgage and by the time it will be fully repaid, it will not be so costly. What is missing is that he at least has a home. The Irish citizens get little or nothing for their payments.
Ireland will now get up to 40 years to repay the debts of the private banks and at lower interest rates. But our 1.8 million at work will repay over €35bn, which is more than the total tax paid last year (€33.7bn) in Ireland. For this we will get absolutely nothing in return – not one school building, not one teacher nor even a hospital bed. Such deal may satisfy the ECB and the EU, but it undermines respect for democracy.
Ireland‘s economic collapse in 2008 was not due to poor competitiveness, nor to public sector profligacy, but to gross irresponsibility by a small elite in the private sector, operating within what had become an ultra-liberal economic system. It was the private banking collapse, which the government foolishly under-wrote which brought Ireland down. Commissioner Rehn demanded, in Latin, “pacta sunt servanda” and in English that the Irish taxpayers “respect your commitments and obligations.”
But these debts are not ours, but those of the private defunct banks, which our sacked previous government guaranteed, in our name, without our consent. Prior to this, European banks queued up to lend to our reckless banks, while the ECB looked on benignly. Tax policy – cutting direct taxes on incomes and profits, tax breaks especially for property investment and tax-shifting – also contributed substantially to Ireland’s current economic crisis. The third factor was de-regulation.
This series of four blog posts results from Paul Sweeney's presentation to the IMF in Washington, February 2013. Three case studies were discussed (Portugal, Romania and Ireland). This was part of a wider meeting between the International Trade Union Confederation, the IMF and the World Bank
Monday 18 February 2013
Guest Post: Bank Reform
Guest post by Arthur Doohan: The 'battered can' that is the Irish economy has been very firmly kicked as far down the road as anyone could possibly imagine the road extending. We have imposed on the next two generations an interest only mortgage payable in 35 years time. It is a fabulous piece of financial 'legerdemain' from a country which during the boom times couldn't borrow money for 25 years!
Loudest amongst the voices 'spinning' and 'shilling' for the deal were those who said that growth and inflation will erode the many billions down to a mere bagatelle.
There was absolutely no guidance given, from people who have screwed up their growth forecasts for the last three years running, as to where 40 years of continuous growth was likely to come from.
Growth comes principally from small businesses. Many of these fail, some do moderately well and some do spectacularly well, generating through 'creative destruction' economic and cultural transformations such as that achieved by Apple.
Small businesses need credit. Credit that they are currently not getting from Ireland's pillar banks.
Ireland's banks have not been 'reformed'. Minister Noonan took various bits of dead banks and cobbled together 2 Frankenstein-ian monsters that are part zombie and part vampire. The zombie part can be seen in the inability to do anything new or to think for themselves. The vampire part can be seen in the suffering of families in negative equity mortgages.
Can banks be reformed? Can anything be done to prevent a re-occurance of a lending boom? Are we stuck with 'Too Big Too Fail' and all the real 'moral hazard' that entails, which is, of course, globally much worse now than before the crisis erupted.
I believe that there is a lot that can be done, without requiring much capital, that would give us safer, simpler and more effective banking. Sadly, none of these suggestions are those being promoted abroad by Messrs Vickers and Volcker.
The recipe is quite simple. Take out the systemic risk from 'clearing banks', make banks smaller and simpler and tweak both 'capital requirements' and 'deposit guarantees' so that they penalize gigantism and speculation.
Financial theory and corporate practice and investor preference has turned away from 'conglomerates' but that is what 'Universal Banks' are. Given the linkages across the whole economy and multipliers inherent in finance, then banks should be actively prevented from running multiple financial operations under a single capital/shareholder structure. An example of a practical implementation of this would mean no creditcard operations alongside deposit taking/lending amongst other divestitures.
On a different tack, 'UB' has a strategic weakness that imperils the whole economy and that is not found anywhere else in finance, is abhorred in the 'real' economy and for which banks are unable to advance a rationale. In equity markets, in futures markets, in commodities markets, and elsewhere, we have exchanges for the transmission of risk. In the real world we separate out energy transmission from generation and we separate making drugs from prescribing drugs.
Why do we allow banks, which advance credit, to have ownership and control of the transmission of credit/liquidity/cash. This is an historical accident whose time of tolerance has passed. From 'This sucker could go down' to 'your ATM's will shut', the loss of the 'clearing system' has been used to frighten the citizens into propping up bankrupt banks.
If the clearing system is so vital why do we allow those who pose the greatest risk to it to be its owners and operators. The existence of the other exchanges and of SWIFT show that it is not a requirement of financial markets.
So, lets strip out the 'network', turn it into a 'utility' and pay an annual dividend based on usage out of the resulting 'seignorage'.
The banks will still get a 'big slice of this action' but they will be specialists in what they should know best; risk diversification for those from whom they borrow money through prudent diversified lending.
The whole economy will then be a more secure and stable business environment. It will have at least 2 independent and near universal payment mechanisms ( clearing and credit cards) with PostOffice/Govt 'giros' a possible third (which should be strengthened/expanded).
Most nations have a 'TBTF' problem that the crisis responses have made worse through further concentration. For most economies we need to return to the 1990 numbers of independent banks and either legal or fiscal barriers put in place to prevent a reoccurrence of 'TBTF'. Andrew Haldane of the Bank of England has proved that there are no economies of scale for mega banks so let us get rid of these 'dinosaurs' before they trample us all into penury.
The rule should be that there should be enough banks with enough capital to fully absorb the loss of 1 bank without the others falling below the prescribe capital ratio. Therefore an economy with a 10% fractional reserve rule should have 10 banks operating at 11%. The rule implies that the larger the number of banks the lower fractional reserve allowed and vice versa, which provides a nice competitive pressure against 'TBTF'.
Many will say that this will make banking expensive to which the only response can be "Do you like the current consequences and costs of cheap banking?".
Who is the most important person in a bank? Yes, that's right; it's the depositor, that tender flower who needs a government guarantee before they can be persuaded to part with their money.
The primary function of a bank is to return to the depositor the whole sum of their money plus the promised interest.
The person who lends to the bank so that the bank may on-lend the money does so because they believe that the failure rate of bank loans will be small enough and profits of the successful loans will be big enough to deliver on that promise and perhaps leave a fair return for the bank's shareholders.
The calamitous history of banking means that depositors cannot now be persuaded to part with their mattress stuffing in the absence of a government guarantee. The fact that any such guarantee would have to be met by the "nearly perfectly congruent with the depositors" set of people known as taxpaying citizens is a deliciously vicious irony that until now was hidden from the perception of the underwriters i.e. the citizen/taxpayer/depositor.
This timidity has turned out to be the greatest single source of 'moral hazard' and expense in the world of finance. In the case of Iceland, her citizens refused to be taken for the ride by external risk takers speculating on non-domiciled assets. In the case of Ireland, her citizens proved to be the ultimate 'patsies' who seem content to pay for their politician's mistakes, the politician's developer friend's mistakes and the mistakes of foreign bond fund managers.
The action of the Irish Government in giving a 'blanket guarantee' was the equivalent of being the first to whip out a knife in a fist fight. It required other small states and then practically all states to do the same and only raised the chances of someone getting seriously hurt. It is probably only fair that it turns out to have been the Irish who turned out to be the 'hurt one'.
We can see clearly now that we all want to live in 'nanny states' that protect us from our own follies despite the impossibility of this 'Ouroboros'. It remains to be seen whether these costs will be sufficient to finally break the depositors 'trust' in banking and turn us all into 'Belgian dentists'.
In the absence of governments with the moral courage and business acumen to abandon the state underwritten contingent liabilities known as 'retail deposit guarantees', what can be done to protect depositors.
They have all had a good object lesson in 'caveat emptor' but I fear that most of them and their governments are refusing to see the world in such cold terms. Otherwise why would everyone be happy to see the can still being kicked down the road.
Depositor insurance guarantees were meant to give confidence to retail small depositors so as to enhance credit availability in the economy of the State issuing the guarantee. These schemes were created in the age before globalization, before the mega-banks and before the easing of capital controls.
They can now clearly be seen as a source of 'moral hazard' in banking, perhaps the largest single source.
If we are keeping globalization and free capital movement then the situation where fundmangers in Country Y place funds with a bank in Country X who lend them for asset acquisition in Country Z is clearly anomalous. The people of X are not getting the jobs, cash-flow, properties or taxes generated by the asset in Z. Further, they have no control over the evolution of the economy in Z. Lastly, it is the antithesis of capitalism that the risktakers in Y can seek to evade the consequences of their informed, professional but un-profitable choices.
Deposit guarantees must be limited to covering exposures taken in the economy underwriting the guarantee. A simple ban on foreign lending by any bank claiming guarantees for its deposits will suffice to close this unnecessary risk. The citizens and fund managers seeking higher yields abroad must be exposed to the risks they actively choose to take. They will still be free to move their money where they want but they should not be able to expose the citizens of third party countries to the downside of risks the third party countries have no control over and no gain from. Equally, banks can choose to forego the guarantee in subsidiaries that they set up for the purpose of pursuing higher yielding gains abroad.
I am acutely aware that many bankers will howl at the notion of losing the implied hidden subsidy of the broad guarantee but "hey, life's a bitch" is the only possible answer, given the losses that have been imposed by banker negligence.
I think that gamblers should be free to gamble, speculators to speculate and savers to save. But one should not have recourse to the capital of the other.
With respect to commonly held criticisms of banking structure and practices, I would point out the primary cause of problems was ludicrous valuations on residential property in terms of ratios of price/income, debt/equity and real/reported incomes. There is always much convenience in self-serving after the event analyses. Culturally, everyone wants to avoid blame. What can now clearly be seen to have failed in the boom were things like solicitors due diligence about conveyancing and banker 'prudential lending guidelines'. This patter was echoed in many countries.
The mortgage backed securities and associated embedded derivatives have not failed functionally to a significant degree in their own right. The failures have very largely come from underlying elements such as valuation rather from intrinsic mechanics of the securities themselves. To this end, while I am critical of the manipulative practices of some of the very large institutions in predatory structuring and position-taking I do not see much advantage to abandoning these 'hammers' because the 'carpenters' have abused them in the past.
Secondly, too much has been made of the 'Volcker rule' and the 'Vickers ring-fence' as panaceas. I find the 'ring-fence' to be in-organic, un-wieldy and prone to 'interpretation'. It has already been watered down and delayed considerably and, I expect that given Her Majesty's Governments addiction to the tax take from the City, that it will be further watered down and delayed.
With respect to the Volcker Rule, the gap risk and other exposures inherent in 'plain old banks' implies customers imposing risks that neither management nor shareholders may be happy with so there exists an obligation on the part of the bankers to modulate these risks. Given the new tools and techniques available to hedge risk this can be done more efficiently than ever before. However, this is virtually indistinguishable from 'prop trading' which leaves the 'rule' open to interpretation.
As I said at the start of the article the recipe for better, safer banking is part historical norms and part 'the Tao of Unix' ('system components should do one thing well and interoperate with other parts'). The elements are as follows;
⁃ Breakup TBTF banks to more GNP proportionate size with spare capital to absorb a bank failure under the rule I proposed above.
⁃ Further break up the banks to essentially 'single line of business' entities.
⁃ Put the 'clearing system' into a public utility run as a usage-based-dividend co-operative (and build/strengthen other payment mechanisms).
⁃ Limit deposit guarantees to lending secured on assets within the domicile of the guarantor.
Putting these reforms into place would create a competitive banking industry that could not be a 'tail that wagged the dog'.
Arthur Doohan is an engineer by training, a banker by experience and a ‘Web’ consultant by choice: blog.doohan.org
Loudest amongst the voices 'spinning' and 'shilling' for the deal were those who said that growth and inflation will erode the many billions down to a mere bagatelle.
There was absolutely no guidance given, from people who have screwed up their growth forecasts for the last three years running, as to where 40 years of continuous growth was likely to come from.
Growth comes principally from small businesses. Many of these fail, some do moderately well and some do spectacularly well, generating through 'creative destruction' economic and cultural transformations such as that achieved by Apple.
Small businesses need credit. Credit that they are currently not getting from Ireland's pillar banks.
Ireland's banks have not been 'reformed'. Minister Noonan took various bits of dead banks and cobbled together 2 Frankenstein-ian monsters that are part zombie and part vampire. The zombie part can be seen in the inability to do anything new or to think for themselves. The vampire part can be seen in the suffering of families in negative equity mortgages.
Can banks be reformed? Can anything be done to prevent a re-occurance of a lending boom? Are we stuck with 'Too Big Too Fail' and all the real 'moral hazard' that entails, which is, of course, globally much worse now than before the crisis erupted.
I believe that there is a lot that can be done, without requiring much capital, that would give us safer, simpler and more effective banking. Sadly, none of these suggestions are those being promoted abroad by Messrs Vickers and Volcker.
The recipe is quite simple. Take out the systemic risk from 'clearing banks', make banks smaller and simpler and tweak both 'capital requirements' and 'deposit guarantees' so that they penalize gigantism and speculation.
Financial theory and corporate practice and investor preference has turned away from 'conglomerates' but that is what 'Universal Banks' are. Given the linkages across the whole economy and multipliers inherent in finance, then banks should be actively prevented from running multiple financial operations under a single capital/shareholder structure. An example of a practical implementation of this would mean no creditcard operations alongside deposit taking/lending amongst other divestitures.
On a different tack, 'UB' has a strategic weakness that imperils the whole economy and that is not found anywhere else in finance, is abhorred in the 'real' economy and for which banks are unable to advance a rationale. In equity markets, in futures markets, in commodities markets, and elsewhere, we have exchanges for the transmission of risk. In the real world we separate out energy transmission from generation and we separate making drugs from prescribing drugs.
Why do we allow banks, which advance credit, to have ownership and control of the transmission of credit/liquidity/cash. This is an historical accident whose time of tolerance has passed. From 'This sucker could go down' to 'your ATM's will shut', the loss of the 'clearing system' has been used to frighten the citizens into propping up bankrupt banks.
If the clearing system is so vital why do we allow those who pose the greatest risk to it to be its owners and operators. The existence of the other exchanges and of SWIFT show that it is not a requirement of financial markets.
So, lets strip out the 'network', turn it into a 'utility' and pay an annual dividend based on usage out of the resulting 'seignorage'.
The banks will still get a 'big slice of this action' but they will be specialists in what they should know best; risk diversification for those from whom they borrow money through prudent diversified lending.
The whole economy will then be a more secure and stable business environment. It will have at least 2 independent and near universal payment mechanisms ( clearing and credit cards) with PostOffice/Govt 'giros' a possible third (which should be strengthened/expanded).
Most nations have a 'TBTF' problem that the crisis responses have made worse through further concentration. For most economies we need to return to the 1990 numbers of independent banks and either legal or fiscal barriers put in place to prevent a reoccurrence of 'TBTF'. Andrew Haldane of the Bank of England has proved that there are no economies of scale for mega banks so let us get rid of these 'dinosaurs' before they trample us all into penury.
The rule should be that there should be enough banks with enough capital to fully absorb the loss of 1 bank without the others falling below the prescribe capital ratio. Therefore an economy with a 10% fractional reserve rule should have 10 banks operating at 11%. The rule implies that the larger the number of banks the lower fractional reserve allowed and vice versa, which provides a nice competitive pressure against 'TBTF'.
Many will say that this will make banking expensive to which the only response can be "Do you like the current consequences and costs of cheap banking?".
Who is the most important person in a bank? Yes, that's right; it's the depositor, that tender flower who needs a government guarantee before they can be persuaded to part with their money.
The primary function of a bank is to return to the depositor the whole sum of their money plus the promised interest.
The person who lends to the bank so that the bank may on-lend the money does so because they believe that the failure rate of bank loans will be small enough and profits of the successful loans will be big enough to deliver on that promise and perhaps leave a fair return for the bank's shareholders.
The calamitous history of banking means that depositors cannot now be persuaded to part with their mattress stuffing in the absence of a government guarantee. The fact that any such guarantee would have to be met by the "nearly perfectly congruent with the depositors" set of people known as taxpaying citizens is a deliciously vicious irony that until now was hidden from the perception of the underwriters i.e. the citizen/taxpayer/depositor.
This timidity has turned out to be the greatest single source of 'moral hazard' and expense in the world of finance. In the case of Iceland, her citizens refused to be taken for the ride by external risk takers speculating on non-domiciled assets. In the case of Ireland, her citizens proved to be the ultimate 'patsies' who seem content to pay for their politician's mistakes, the politician's developer friend's mistakes and the mistakes of foreign bond fund managers.
The action of the Irish Government in giving a 'blanket guarantee' was the equivalent of being the first to whip out a knife in a fist fight. It required other small states and then practically all states to do the same and only raised the chances of someone getting seriously hurt. It is probably only fair that it turns out to have been the Irish who turned out to be the 'hurt one'.
We can see clearly now that we all want to live in 'nanny states' that protect us from our own follies despite the impossibility of this 'Ouroboros'. It remains to be seen whether these costs will be sufficient to finally break the depositors 'trust' in banking and turn us all into 'Belgian dentists'.
In the absence of governments with the moral courage and business acumen to abandon the state underwritten contingent liabilities known as 'retail deposit guarantees', what can be done to protect depositors.
They have all had a good object lesson in 'caveat emptor' but I fear that most of them and their governments are refusing to see the world in such cold terms. Otherwise why would everyone be happy to see the can still being kicked down the road.
Depositor insurance guarantees were meant to give confidence to retail small depositors so as to enhance credit availability in the economy of the State issuing the guarantee. These schemes were created in the age before globalization, before the mega-banks and before the easing of capital controls.
They can now clearly be seen as a source of 'moral hazard' in banking, perhaps the largest single source.
If we are keeping globalization and free capital movement then the situation where fundmangers in Country Y place funds with a bank in Country X who lend them for asset acquisition in Country Z is clearly anomalous. The people of X are not getting the jobs, cash-flow, properties or taxes generated by the asset in Z. Further, they have no control over the evolution of the economy in Z. Lastly, it is the antithesis of capitalism that the risktakers in Y can seek to evade the consequences of their informed, professional but un-profitable choices.
Deposit guarantees must be limited to covering exposures taken in the economy underwriting the guarantee. A simple ban on foreign lending by any bank claiming guarantees for its deposits will suffice to close this unnecessary risk. The citizens and fund managers seeking higher yields abroad must be exposed to the risks they actively choose to take. They will still be free to move their money where they want but they should not be able to expose the citizens of third party countries to the downside of risks the third party countries have no control over and no gain from. Equally, banks can choose to forego the guarantee in subsidiaries that they set up for the purpose of pursuing higher yielding gains abroad.
I am acutely aware that many bankers will howl at the notion of losing the implied hidden subsidy of the broad guarantee but "hey, life's a bitch" is the only possible answer, given the losses that have been imposed by banker negligence.
I think that gamblers should be free to gamble, speculators to speculate and savers to save. But one should not have recourse to the capital of the other.
With respect to commonly held criticisms of banking structure and practices, I would point out the primary cause of problems was ludicrous valuations on residential property in terms of ratios of price/income, debt/equity and real/reported incomes. There is always much convenience in self-serving after the event analyses. Culturally, everyone wants to avoid blame. What can now clearly be seen to have failed in the boom were things like solicitors due diligence about conveyancing and banker 'prudential lending guidelines'. This patter was echoed in many countries.
The mortgage backed securities and associated embedded derivatives have not failed functionally to a significant degree in their own right. The failures have very largely come from underlying elements such as valuation rather from intrinsic mechanics of the securities themselves. To this end, while I am critical of the manipulative practices of some of the very large institutions in predatory structuring and position-taking I do not see much advantage to abandoning these 'hammers' because the 'carpenters' have abused them in the past.
Secondly, too much has been made of the 'Volcker rule' and the 'Vickers ring-fence' as panaceas. I find the 'ring-fence' to be in-organic, un-wieldy and prone to 'interpretation'. It has already been watered down and delayed considerably and, I expect that given Her Majesty's Governments addiction to the tax take from the City, that it will be further watered down and delayed.
With respect to the Volcker Rule, the gap risk and other exposures inherent in 'plain old banks' implies customers imposing risks that neither management nor shareholders may be happy with so there exists an obligation on the part of the bankers to modulate these risks. Given the new tools and techniques available to hedge risk this can be done more efficiently than ever before. However, this is virtually indistinguishable from 'prop trading' which leaves the 'rule' open to interpretation.
As I said at the start of the article the recipe for better, safer banking is part historical norms and part 'the Tao of Unix' ('system components should do one thing well and interoperate with other parts'). The elements are as follows;
⁃ Breakup TBTF banks to more GNP proportionate size with spare capital to absorb a bank failure under the rule I proposed above.
⁃ Further break up the banks to essentially 'single line of business' entities.
⁃ Put the 'clearing system' into a public utility run as a usage-based-dividend co-operative (and build/strengthen other payment mechanisms).
⁃ Limit deposit guarantees to lending secured on assets within the domicile of the guarantor.
Putting these reforms into place would create a competitive banking industry that could not be a 'tail that wagged the dog'.
Arthur Doohan is an engineer by training, a banker by experience and a ‘Web’ consultant by choice: blog.doohan.org
ILO Global Wage Report 2012/13
Nat O'Connor: There is a lot of interesting data in the latest ILO report focusing on the declining wage share of labour, and on static or falling earnings in the developed economies in particular.
The report is here (PDF).
The following description is from the ILO website:
"The 2012/13 edition looks at the macroeconomic effects of wages, and in particular at how current trends are linked to equitable growth. The gap between wage growth and labour productivity growth is widening, the difference between the top and bottom earners is increasing, and the labour income share is declining."
"These worrying changes affect the key components of aggregate demand – particularly consumption, investment and net exports – that are necessary for recovery and growth. The report looks at the reasons for these trends, which range from the increasing financial and trade globalization to advances in technology and the decline in union density."
"The report calls for internal and external “rebalancing” to achieve more socially and economically sustainable outcomes within and across countries, proposing policy actions beyond labour markets and national borders."
The report is here (PDF).
The following description is from the ILO website:
"The 2012/13 edition looks at the macroeconomic effects of wages, and in particular at how current trends are linked to equitable growth. The gap between wage growth and labour productivity growth is widening, the difference between the top and bottom earners is increasing, and the labour income share is declining."
"These worrying changes affect the key components of aggregate demand – particularly consumption, investment and net exports – that are necessary for recovery and growth. The report looks at the reasons for these trends, which range from the increasing financial and trade globalization to advances in technology and the decline in union density."
"The report calls for internal and external “rebalancing” to achieve more socially and economically sustainable outcomes within and across countries, proposing policy actions beyond labour markets and national borders."
Wednesday 13 February 2013
'Outing Exclusion’ Conference, Sat 16 Feb 2013
The National Lesbian & Gay Federation (NLGF) - in conjunction with Dublin City Council Social Inclusion Unit and The Community Foundation for Ireland - are holding the first national conference to address poverty and social exclusion in the Lesbian, Gay, Bisexual & Transgendered (LGBT) community. The event will explore how issues relating to poverty, economic inequality and multiple disadvantage impact upon LGBT people. The conference will also act as a platform for LGBT organisations and anti-poverty/community development organisations to discuss solutions to tackle poverty and inequality amongst LGBT people and promote social inclusion.
More information here: http://www.activelink.ie/node/11460
More information here: http://www.activelink.ie/node/11460
Tuesday 12 February 2013
The OECD ramps up plans against corporate tax avoidance
Sheilla Killian:Following yesterday’s primer on the landscape of multinational taxes, this post reviews today’s brand-new OECD report on their plans to address multinational tax avoidance.
What’s in the report?
This report, Addressing Base Erosion and Profit Shifting, is a good contribution to the area in three ways. First, it reviews the existing studies well, pointing to a number of indirect indicators of multinational tax avoidance. As one example, it notes that the top locations for affiliate employment (the UK, Canada, Mexico, China, Germany) barely match the top locations for gross profits (the Netherlands, Luxembourg, Ireland, Canada, Bermuda). Another indirect measure cited is the ratio of profits of US-controlled firms to the GDP of the countries in which those profits are booked. For G-7 countries the ratio ranges from 0.2% to 2.6%. It rises to 4.6% for the Netherlands, 7.6% for Ireland, 18.2% for Luxembourg and up to 35.3% for Jersey. FDI flows are perhaps the clearest sign that something is amiss: In 2010 the British Virgin Islands (with a population of 23,500) were the second largest investor into China (14%) after Hong Kong (45%) and a long way ahead of the United States (4%).
The report is also useful in that it details a number of aggressive tax planning structures involving the use of royalties, debt, hybrid instruments such as convertible bonds and cost-contribution agreements. A simplified example is the use of convertible bonds by, for instance, a French company0. This hybrid instrument is a bond which at the end of its term converts into a share. If a French company invests in a foreign subsidiary using convertible bonds, the return on that investment will generally be regarded as tax-deductible interest in the host country of the subsidiary. However in France, the income will come in as tax-free dividends, creating an obvious motivation to ramp up the interest rate as a way of shifting foreign profits home, tax free.
Most significantly, though, this report is a declaration of intent. It flags a marked change in the way in which the OECD will approach the question of multinational tax avoidance. While it has focused in the past on harmful tax competition, tax havens and transfer pricing, it now intends to look more holistically at aggressive tax planning, taking in a far wider range of practices, and setting about removing the tax advantages associated with them.
So what are the plans?
The aim is essentially to neutralise the aggressive tax schemes by removing their tax advantages. So how might the OECD achieve this? The focus is shifting to corporate practices rather individual countries, reflecting the international nature of the problem. One possibility on the table is to replace the 3,000+ double tax treaties in existence worldwide with a single multi-lateral tax treaty, applying the same rules and the same treatment of income in all countries. This would be effective, for example, against the convertible bond structure highlighted above. It would be a political challenge, however, particularly in a world where not all countries follow the OECD model treaty.
They plan to improve and clarify transfer pricing rules, with a particular focus on the intangibles at the heart of the Double Irish, the Dutch Sandwich and a host of other well-known and well-sold structures being peddled to multinational firms. Rules on financial transactions between related companies and on the location of digital services are being considered. The OECD plans work faster than usual on this, and to report with detailed recommendations within two years.
The new focus is far less on tax havens; they are adamant that they are not targeting particular countries. They do acknowledge that what they diplomatically describe as “conduit countries” - countries through which royalties, interest and other payments are channelled away from the tax net - might not be immediately advantaged by the process. They insist, though that since the ultimate aim is to ensure that large companies will pay more tax overall, there will be more tax to go around. So even if Ireland, for instance, were to get a smaller slice of the tax pie, the pie itself will be larger.
Will this work out in practice? Well it depends on why companies are locating here. If their motivation is commercial, or even primarily to avail of the low corporate tax rate in generating profits here, they (and we) should be fine. Those few companies or divisions of companies which are here to abuse the tax system may find that choice less rewarding in the future, and so may move on. In a way, this will be an acid test of who we are hosting, and should result in more stable FDI for the country in the long term.
The report stops short of overt consideration of unitary tax, country by country reporting, and a host of other recommendations of such NGOs as the Tax Justice Network. However, it is a significant report, and marks a departure from the long-held OECD brief of working to avoid double taxation. They now seem more serious about tackling double non-taxation, the backbone of international tax arbitrage.
That really matters. It's important to remember in all of this that tax "saved" by aggressive corporate tax avoidance comes at a cost to the revenue stream of countries, often in the Global South where such revenue is very badly needed. If these structures were broken, not only might the pie become bigger, but also more equitably distributed, which would be a good thing for millions living in developing countries.
The full OECD report is available here. The next interim report comes in June – well worth keeping an eye on.
Sheila Killian
@islandtotheleft
What’s in the report?
This report, Addressing Base Erosion and Profit Shifting, is a good contribution to the area in three ways. First, it reviews the existing studies well, pointing to a number of indirect indicators of multinational tax avoidance. As one example, it notes that the top locations for affiliate employment (the UK, Canada, Mexico, China, Germany) barely match the top locations for gross profits (the Netherlands, Luxembourg, Ireland, Canada, Bermuda). Another indirect measure cited is the ratio of profits of US-controlled firms to the GDP of the countries in which those profits are booked. For G-7 countries the ratio ranges from 0.2% to 2.6%. It rises to 4.6% for the Netherlands, 7.6% for Ireland, 18.2% for Luxembourg and up to 35.3% for Jersey. FDI flows are perhaps the clearest sign that something is amiss: In 2010 the British Virgin Islands (with a population of 23,500) were the second largest investor into China (14%) after Hong Kong (45%) and a long way ahead of the United States (4%).
The report is also useful in that it details a number of aggressive tax planning structures involving the use of royalties, debt, hybrid instruments such as convertible bonds and cost-contribution agreements. A simplified example is the use of convertible bonds by, for instance, a French company0. This hybrid instrument is a bond which at the end of its term converts into a share. If a French company invests in a foreign subsidiary using convertible bonds, the return on that investment will generally be regarded as tax-deductible interest in the host country of the subsidiary. However in France, the income will come in as tax-free dividends, creating an obvious motivation to ramp up the interest rate as a way of shifting foreign profits home, tax free.
Most significantly, though, this report is a declaration of intent. It flags a marked change in the way in which the OECD will approach the question of multinational tax avoidance. While it has focused in the past on harmful tax competition, tax havens and transfer pricing, it now intends to look more holistically at aggressive tax planning, taking in a far wider range of practices, and setting about removing the tax advantages associated with them.
So what are the plans?
The aim is essentially to neutralise the aggressive tax schemes by removing their tax advantages. So how might the OECD achieve this? The focus is shifting to corporate practices rather individual countries, reflecting the international nature of the problem. One possibility on the table is to replace the 3,000+ double tax treaties in existence worldwide with a single multi-lateral tax treaty, applying the same rules and the same treatment of income in all countries. This would be effective, for example, against the convertible bond structure highlighted above. It would be a political challenge, however, particularly in a world where not all countries follow the OECD model treaty.
They plan to improve and clarify transfer pricing rules, with a particular focus on the intangibles at the heart of the Double Irish, the Dutch Sandwich and a host of other well-known and well-sold structures being peddled to multinational firms. Rules on financial transactions between related companies and on the location of digital services are being considered. The OECD plans work faster than usual on this, and to report with detailed recommendations within two years.
The new focus is far less on tax havens; they are adamant that they are not targeting particular countries. They do acknowledge that what they diplomatically describe as “conduit countries” - countries through which royalties, interest and other payments are channelled away from the tax net - might not be immediately advantaged by the process. They insist, though that since the ultimate aim is to ensure that large companies will pay more tax overall, there will be more tax to go around. So even if Ireland, for instance, were to get a smaller slice of the tax pie, the pie itself will be larger.
Will this work out in practice? Well it depends on why companies are locating here. If their motivation is commercial, or even primarily to avail of the low corporate tax rate in generating profits here, they (and we) should be fine. Those few companies or divisions of companies which are here to abuse the tax system may find that choice less rewarding in the future, and so may move on. In a way, this will be an acid test of who we are hosting, and should result in more stable FDI for the country in the long term.
The report stops short of overt consideration of unitary tax, country by country reporting, and a host of other recommendations of such NGOs as the Tax Justice Network. However, it is a significant report, and marks a departure from the long-held OECD brief of working to avoid double taxation. They now seem more serious about tackling double non-taxation, the backbone of international tax arbitrage.
That really matters. It's important to remember in all of this that tax "saved" by aggressive corporate tax avoidance comes at a cost to the revenue stream of countries, often in the Global South where such revenue is very badly needed. If these structures were broken, not only might the pie become bigger, but also more equitably distributed, which would be a good thing for millions living in developing countries.
The full OECD report is available here. The next interim report comes in June – well worth keeping an eye on.
Sheila Killian
@islandtotheleft
Monday 11 February 2013
Multinational tax avoidance and international responses (1 of 2)
Ahead of tomorrow’s release by the OECD of what promises to be an interesting report on their plans to address multinational tax avoidance, this post is a primer on the issue and on the role of the OECD. I’ll follow up tomorrow with some analysis of the report itself.
What’s the issue
Why is this a problem ?
So who are these international bodies?
What’s the issue
Multinational Corporate Tax avoidance: the perfectly legal but shockingly complex process of arranging special purpose companies and capital flows in artificial ways so that the group as a whole pays as little tax as possible worldwide. It’s a huge problem – the IRS figure for profits offshored by US corporations is 1.7 trillion dollars - and that’s just American firms. The problem is that while taxes are imposed by individual countries, multinational firms roam the world in search of advantage, setting up a management firm here, a registered office there. Individual tax authorities find it difficult to see the whole picture. These days too, most of the value in large companies comes from intangible things like brand and intellectual property, which are far harder to trace than physical sales or factories.
Avoiding tax is a game as old as tax itself, but lately opposition to multinational tax avoidance has gathered momentum and political support.
Why is this a problem ?
That $1.7 trillion kept offshore by American firms is not just a loss to the US exchequer – profits it might reasonably have expected to tax. It also makes an uneven playing pitch for American companies. The bigger multinational ones can avoid tax more easily than smaller, domestically-centred firms. That gives them an immediate advantage that biases against entrepreneurship, growth, and all the things needed to kick-start the economy.
A wider problem is that it’s not just the US that is losing tax: as discussed here, the loss in relative terms to countries in the global south is even greater. A recent Action Aid report details the case of a Zambian sugar company routing interest and dividend payments through Ireland and the Netherlands in order to avoid tax in Zambia; this in a country where 45% of children are undernourished, and 90% of rural dwellers live in poverty. Lives are, quite literally, at stake here.
It’s hardly surprising in this context that US President Obama harks back again and again to the need for corporate tax reform. Indeed, politicians the world over are excited about this issue now. South African leaders have spoken out about this for years. It’s debated in the UK parliament, makes primetime news in France, home of the OECD. This media coverage drives more political debate, which in turn puts pressure on the big international bodies to do something about this.
So who are these international bodies?
In this part of the world, the three international bodies shaping international tax are the European Commission (EC), the UN and the OECD. The EC has been working for the last seven years on the Common Consolidated Corporate Tax Base (CCCTB), of which more here. Basically, this is a way of allocating the taxing rights on profits earned in the EU across the member states, depending on where the company has located its assets, its employees or its sales. It’s an idea that bubbles steadily under the surface, but for now, and as long as unanimity is required for big tax changes like this, it is not an immediate prospect.
The UN is obviously the most representative of the three bodies. It’s also the most focused on the global south, and last October produced a detailed Practical Transfer Pricing Manual for Developing Countries. Like the OECD, its focus is on the tax rules in place between countries – tax treaties and transfer pricing arrangements. The UN models tend to favour developing countries by allowing tax to be withheld on royalty and interest payments of the kind documented in the Action Aid report mentioend above. However, while the UN may have the mandate, and the EU the immediate proximity, the OECD has the resources, and now, spurred on by increased political pressure, is developing new strategies to tackle the issue.
What has the OECD been doing so far?
The OECD is the body behind the dominant model tax treaty, which forms the basis for most bilateral treaties negotiated worldwide. It has fairly standard clauses on who has taxing rights in cross-border transactions, and aims at eliminating double taxation. They started looking at tax havens, or harmful tax competition in the 1990s. They developed a three-part test whereby a country with low or zero tax rates ring-fenced to a subset of companies and with a general lack of transparency would be regarded as a tax haven. The penalty effectively was to lose the benefits of the tax treaty network. Around this time, Ireland’s switch from a 10% rate in Shannon and for manufacturing, to a 12.5% rate for all neatly sidestepped the new rules. We have a low tax rate, but we’re not a tax haven as defined because we have no ring-fencing of the low rate to a particular subgroup of companies.As well as identifying countries with harmful practices, the OECD focuses on transfer pricing, of which more here. Simply out, a transfer price is the price at which goods are sold between sister companies. It can be abused as a way of shifting profit from high-tax to low-tax locations by manipulating the prices or more commonly the level of royalty or management charges paid. Such transactions should be at “arms length”, meaning that the same rates and conditions should apply within a group of companies under common ownership as between unrelated firms. This is straightforward enough to police if you are looking at the selling price of something tangible, like cars or computers. It’s virtually impossible in the case of royalties for which there is no benchmark price outside of the group.
As if this wasn’t challenging enough for taxing authorities, there has been a raft of new and very complex tax structures adopted and mimicked by multinational firms in recent years. The best known locally is The Double Irish. As reported by Bloomberg , this is a now-infamous means used by large US firms to channel royalty payments through Ireland on to Bermuda, reducing their overall tax bill to negligible levels. Ireland is not the only country whose tax system is used in this way. Even without a detailed knowledge of the particular techniques used to shift profit, there are signs plainly to be read: the number of companies now headquartered in The Netherlands, for instance; the levels of investment flowing in and out of Luxembourg. The issue is enormous, complex and difficult to tackle. How do you establish an arms-length price for something which is only sold to one related company? How can you determine where a company has operations if its product or service is as nebulous as the very cloud in which it hosts its files?
The way in which business is done by multinational firms has changed dramatically, and tomorrow the OECD reports on how it will change its approach to multinational tax evasion in response. A blog post here will analyse their new approach, and some of its implications.
Sheila Killian
@islandtotheleft
Tuesday 5 February 2013
Open Budgets: Time for Ireland to join the rest of the world
Today, the World bank is hosting a live blogging event on the results of the International Budget Partnership's 'Open Budget Survey'. The survey, produced every two years by independent experts, measures and compares budget transparency and accountability in one hundred countries across the Global North and South. The 2012 survey found that 77 out of these countries failed to meet "basic standards of budget transparency".
Unfortunately, unlike some of our fellow EU member states, Ireland is not included in this survey. If Ireland was included where would we stand?.
The Department of Public Expenditure and Reform has an impressive reform agenda, from whistleblower protection to the establishment of a system of regulation of lobbyists. Part of this reform agenda includes reform of the budgetary procedures. While much of the commentary on the preparation of the budget has focused on the role of the Economic Management Council and whether or not it weakens the role of the Cabinet, outside of NGOs, relatively little attention has been paid to the decrease in information provided by Budget 2013. Apologies for the repetition, but as Nat O'Connor noted in this blog in December 2013:
"The current Programme for Government agreed by Fine Gael and Labour is full of commitments to openness and transparency. Not least, on page 23, the pledge that “We will open up the Budget process to the full glare of public scrutiny in a way that restores confidence and stability by exposing and cutting failing programmes and pork barrel politics.”
Yet, for the first time in years, we were not given a full break down of spending decisions to the level of expenditure programmes and organisational budgets for a number of Departments. What might have been three or more pages of detail in a previous budget for some of the key departmental blocks of voted expenditure was reduced to just one page per vote block in the Budget 2013 Expenditure Report. The votes affected were: GardaÃ; Prisons; Courts; Justice and Equality; the local government fund under Environment, Community and Local Government; Education and Skills; and Agriculture and Food. Only Social Protection and Health provided the same break down of sub-heads as last year.
What this means in effect is that some publicly-funded organisations are no wiser after the budget about what level of change has occurred in their individual budgets for next year, which begin in a few weeks’ time. It also means that policy analysts and journalists cannot give people in Ireland as full a picture on what promises and policies are implemented or not through the decisions made by each Minister on how his or her budget allocations will be spent".
Minister Howlin has announced his intention to bring proposals to Government on joining the Open Government Initiative established by President Obama in September. Part of this initiative requires a commitment to "Fiscal Transparency". Hopefully Budget 2013's backward step in terms of transparency will be reversed by budget 2014. In the meantime, you can watch the live blog of the Open Budget Survey here, and hopefully by the time of the next Open Budget Survey, Ireland will have joined the rest of the world.
Unfortunately, unlike some of our fellow EU member states, Ireland is not included in this survey. If Ireland was included where would we stand?.
The Department of Public Expenditure and Reform has an impressive reform agenda, from whistleblower protection to the establishment of a system of regulation of lobbyists. Part of this reform agenda includes reform of the budgetary procedures. While much of the commentary on the preparation of the budget has focused on the role of the Economic Management Council and whether or not it weakens the role of the Cabinet, outside of NGOs, relatively little attention has been paid to the decrease in information provided by Budget 2013. Apologies for the repetition, but as Nat O'Connor noted in this blog in December 2013:
"The current Programme for Government agreed by Fine Gael and Labour is full of commitments to openness and transparency. Not least, on page 23, the pledge that “We will open up the Budget process to the full glare of public scrutiny in a way that restores confidence and stability by exposing and cutting failing programmes and pork barrel politics.”
Yet, for the first time in years, we were not given a full break down of spending decisions to the level of expenditure programmes and organisational budgets for a number of Departments. What might have been three or more pages of detail in a previous budget for some of the key departmental blocks of voted expenditure was reduced to just one page per vote block in the Budget 2013 Expenditure Report. The votes affected were: GardaÃ; Prisons; Courts; Justice and Equality; the local government fund under Environment, Community and Local Government; Education and Skills; and Agriculture and Food. Only Social Protection and Health provided the same break down of sub-heads as last year.
What this means in effect is that some publicly-funded organisations are no wiser after the budget about what level of change has occurred in their individual budgets for next year, which begin in a few weeks’ time. It also means that policy analysts and journalists cannot give people in Ireland as full a picture on what promises and policies are implemented or not through the decisions made by each Minister on how his or her budget allocations will be spent".
Minister Howlin has announced his intention to bring proposals to Government on joining the Open Government Initiative established by President Obama in September. Part of this initiative requires a commitment to "Fiscal Transparency". Hopefully Budget 2013's backward step in terms of transparency will be reversed by budget 2014. In the meantime, you can watch the live blog of the Open Budget Survey here, and hopefully by the time of the next Open Budget Survey, Ireland will have joined the rest of the world.
The €64 Billion Question
Nat O'Connor: In 1955, the $64,000 Question was a 'big money' quiz in the early days of American TV (Wikipedia). Six decades later Ireland's bank debt question is one million times bigger! That's €64,000,000,000.
The Congress of Trade Unions has organised a national protest for Saturday (9th February) and Fintan O'Toole discusses a petition website in today's Irish Times. There are already more than 7,000 signatures on an Avaaz petition against the repayment in Match.
For those who would like to know more about the technical detail, the NERI is holding a special seminar on Wednesday (6th February, 10:30) that will propose some options.
More technical detail can be found in the various blog posts on this site by TASC economist Tom McDonnell:
- A powerpoint presentation here: The Promissory Notes
- Link to another briefing papers here: Karl Whelan's briefing paper
- Link to NAMA Wine Lake's analysis on a deal: Any old deal won't do
The Congress of Trade Unions has organised a national protest for Saturday (9th February) and Fintan O'Toole discusses a petition website in today's Irish Times. There are already more than 7,000 signatures on an Avaaz petition against the repayment in Match.
For those who would like to know more about the technical detail, the NERI is holding a special seminar on Wednesday (6th February, 10:30) that will propose some options.
More technical detail can be found in the various blog posts on this site by TASC economist Tom McDonnell:
- A powerpoint presentation here: The Promissory Notes
- Link to another briefing papers here: Karl Whelan's briefing paper
- Link to NAMA Wine Lake's analysis on a deal: Any old deal won't do
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